-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cu4v0SejufUCeu51C3vBgIWQtXftmp4/Z0G3GOSBMQbSoxWg2uxPEb4vLKogDTEi /xBlWt6kY0ojz1mIMKfZ6w== 0001127563-01-000040.txt : 20010308 0001127563-01-000040.hdr.sgml : 20010308 ACCESSION NUMBER: 0001127563-01-000040 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVEST FUNDS TRUST I CENTRAL INDEX KEY: 0000770540 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04323 FILM NUMBER: 1562563 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST I DATE OF NAME CHANGE: 19940614 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND GOVERNMENT SECURITIES FUND DATE OF NAME CHANGE: 19861111 N-30D 1 0001.txt NVEST FUNDS TRUST I ANNUAL REPORT 12/31/00 Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Star Worldwide Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST STAR WORLDWIDE FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Star Worldwide Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged; there are no expenses that affect the results. In addition, few investors could purchase all of the securities necessary to match the index. And, if they could, they would incur transaction costs and other expenses. The MSCI World Index serves as the primary benchmark for the Fund, and as an additional point of reference, the MSCI EAFE Index serves as the secondary benchmark. While no one benchmark is a perfect match for a managed fund, the World Index contains a higher proportion of the markets that could be represented in the Fund than does the EAFE Index, including U.S. and major foreign markets. However, the Fund can invest in emerging markets, which are not represented in the World Index but are represented in the EAFE Index. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/29/01 10000 9425 12/31/96 11667 10996 12/31/97 13146 12390 12/31/98 13673 12887 12/31/99 18819 17736 12/31/00 16519 15569 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST STAR WORLDWIDE FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
Class A (Inception 12/29/95) 1 Year 5 Years Since Inception Net Asset Value(1) -12.22% 10.56% 10.55% With Maximum Sales Charge(2) -17.25 9.26 9.25 - ---------------------------------------------------------------------------------------------- Class B (Inception 12/29/95) 1 Year 5 Years Since Inception Net Asset Value(1) -12.84% 9.77% 9.76% With CDSC(3) -16.41 9.49 9.62 - ---------------------------------------------------------------------------------------------- Class C (Inception 12/29/95) 1 Year 5 Years Since Inception Net Asset Value(1) -12.83% 9.78% 9.77% With Maximum Sales Charge and CDSC(3) -14.39 9.56 9.54 - ---------------------------------------------------------------------------------------------- Comparative Performance 1 Year 5 Years Since Inception MSCI World Index(4) -13.18% 12.12% 12.12% MSCI EAFE Index(5) -14.17 7.13 7.13 Morningstar World Stock Average(6) -10.58 12.53 12.53 Lipper Global Average(7) -10.26 12.84 12.84 - ----------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. (4) Morgan Stanley Capital International World Index (MSCI World) is an unmanaged index of common stocks from the MSCI developed-market countries. You may not invest directly in an index. (5) Morgan Stanley Capital International Europe Australasia and Far East Index (MSCI EAFE) is an unmanaged index of common stocks traded outside the U.S. You may not invest directly in an index. (6) Morningstar World Stock Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. (7) Lipper Global Funds Average is the average performance without sales charges of mutual funds with a similar current investment style or objective as calculated by Lipper Inc. 2 NVEST STAR WORLDWIDE FUND Performance Overview - -------------------------------------------------------------------------------- For the 12 months ended December 31, 2000, Nvest Star Worldwide Fund's Class A shares had a total return of -12.22% based on net asset value, including $3.03 in reinvested capital gains. The Fund's benchmarks, the MSCI World Index and the MSCI EAFE Index, returned -13.18% and -14.17%, respectively, for the same period. The Star concept is designed to broaden diversification Nvest Star Worldwide Fund is composed of four portfolio segments, each managed by a different management team with expertise in specific markets. The extra diversification of employing four Best Minds that don't always think alike is designed to balance out market swings over time. Each shareholder's assets are exposed to different investment styles and strategies, as well as spread among a broad array of individual securities. Uncertainty dominated European markets At the beginning of 2000, many European equity markets produced strong gains, as investors bid up the prices of technology stocks. However, as the year progressed, rising energy prices, higher interest rates and prospects for slower global growth began to dampen the positive market sentiment. Because all of these factors can cut into corporate profits, stock prices declined. Activity in many European equity markets mirrored the United States. A sell-off in technology stocks led to a more broad-based decline. Throughout the year, Europe's stock markets fluctuated broadly, but by the end of the period most of them had declined. The weakness of the euro, Europe's new common currency, also held back returns for much of the year. Japan struggled with global and internal issues The same issues that troubled other world markets affected the Japanese market. Japanese technology stocks sold off early in the year, followed by declines in other sectors. Because Japan is a leading exporting country, investors were concerned that the prospects of a downturn in global economic growth could lead to a decline in corporate sales. Energy prices were also a concern for Japan. Since the country imports almost all of its energy, higher energy prices could significantly elevate the cost of doing business for Japanese companies. 3 NVEST STAR WORLDWIDE FUND - -------------------------------------------------------------------------------- Top 10 Portfolio Holdings -- 12/31/00 % of Company Net Assets 1. Diageo PLC 1.9 2. Somerfield PLC 1.6 3. Nokia OYJ 1.4 4. Metso OYJ 1.4 5. Vestas Wind Systems AS 1.2 6. Tricon Global Restaurants, Inc. 1.1 7. Eaton Corp. 1.1 8. Vodafone Group PLC 1.1 9. Muenchener Rueckversicherungs - Gesellschaft AG 1.1 10. Washington Mutual, Inc. 1.0 Portfolio holdings and asset allocations will vary. Slower U.S. economic growth led to market volatility In the United States, all eyes were on the Federal Reserve Board. After raising interest rates three times through May, the Fed took no further action through the end of the year. The Fed's efforts to rein in economic growth seemed so successful by year end that many observers were concerned that we might be headed into a recession. Concerns about inflation began to be replaced by fears of recession, and in December the Fed began to publicly hint that it might cut interest rates. Emerging markets were in the doldrums In the emerging markets of Asia and Latin America, stock prices generally declined in reaction to the prospects of an economic downturn in developed countries. Many emerging-market countries depend on exports and on foreign capital investment to finance their growth. Therefore, any slowdown in the large industrial countries could significantly hamper economic growth in these fledgling markets. 4 NVEST STAR WORLDWIDE FUND - -------------------------------------------------------------------------------- Country Diversification -- 12/31/00 % of Country Net Assets 1. United States 26.8 2. United Kingdom 13.2 3. France 7.5 4. Japan 6.7 5. Canada 4.2 6. Netherlands 3.9 7. Finland 3.8 8. Switzerland 3.6 9. Germany 3.4 10. Hong Kong 2.8 Portfolio holdings and asset allocations will vary. The Fund's subadvisers use different strategies In managing Nvest Star Worldwide Fund, Loomis Sayles focuses on growth stocks, while Harris/Oakmark emphasizes value in the domestic and overseas markets. Montgomery Asset Management seeks reasonably priced stocks with sustainable earnings growth. Value stocks did better than growth stocks, especially during the latter half of 2000. The Loomis Sayles segment put less emphasis on Japan and Europe than the benchmark, and held roughly 10% of assets in emerging markets and Canada. Good stock selection within the technology and energy sectors benefited performance, but in general, the portfolio's growth orientation detracted from Nvest Star Worldwide Fund's performance this year. In the segment managed by Montgomery, a relatively large position in technology and communications stocks hampered performance relative to the benchmark, but good stock selection in healthcare and capital goods were positives for the Fund. 5 NVEST STAR WORLDWIDE FUND - -------------------------------------------------------------------------------- The Harris/Oakmark international segment avoided technology, communications and media stocks but favored financial services and defensive industries. These strategies and the manager's value approach benefited the Fund. The strongest performance came from selected stocks in Europe, while holdings in emerging Latin American and Asian economies were weaker. The Harris/Oakmark domestic segment had relatively little exposure to technology. This, combined with the manager's emphasis on value and strong performance from the financial-services holdings, were also positives for the Fund. The current outlook Going into 2001, economic growth appears to be slowing in all parts of the world. While slower growth may make the world's equity markets volatile in the short term, there are reasons to be positive when looking at the long term. The rate cut announced by the Federal Reserve Board two business days into 2001 surprised observers by its size (0.5%) and timing (between scheduled meetings). However, it signals the Fed's concern about a possible recession. Many observers now believe that declining stock prices in the U.S., Europe and Japan have eliminated the speculative excesses that were present just a few months ago, which could encourage investors to return to these markets as the year unfolds. Meanwhile, in many Asian countries, continued banking reform and the development of solid fiscal policies should foster a relatively stable environment that should attract investors. We believe that global investing continues to be an important diversification strategy for stock investors and that it has the potential to reward those who stay with their investments over the long term. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Star Worldwide Fund invests in foreign and emerging market securities, which have special risks. These may include political, regulatory and currency risks. Emerging markets may be more subject to these risks than developed markets. The Fund may invest in small-cap companies, which are more volatile than the overall market, lower-rated bonds, which offer a higher yield in return for greater risk and price fluctuations; real estate investment trusts (REITs), which change in price with underlying real estate values and have other mortgage-related risks. The Fund may also invest in derivative securities whose value is based on other securities or indices, which may have significant risk and which may impact the Fund's performance and increase tax liability. These risks affect your investment's value. See the Fund's prospectus for details. Share price and return will vary and you may have a gain or loss when you sell your shares. 6 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 61.6% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Australia -- 2.8% 81,800 Australia & New Zealand Banking Group Ltd. .................................. $ 654,425 304,000 AXA Asia Pacific Holdings Ltd. (c) .................. 506,884 42,240 Commonwealth Bank of Australia (c) .................. 726,251 379,500 Foster's Brewing Group Ltd. ......................... 996,556 395,000 John Fairfax Holdings Ltd. .......................... 860,573 51,680 National Australia Bank, Ltd. (c) (d) ............... 828,350 858,532 Nufarm, Ltd. ........................................ 1,518,908 107,600 QBE Insurance Group Ltd. ............................ 592,048 ----------- 6,683,995 ----------- Austria -- 0.1% 9,200 Flughafen Wien AG ................................... 348,144 ----------- Belgium -- 1.3% 12,620 Dexia ............................................... 2,293,009 26,800 Interbrew (c) ....................................... 934,132 ----------- 3,227,141 ----------- Brazil -- 2.0% 33,100,000 Brazil Telecom Participacoes SA (c) ................. 295,354 2,400 Petroleo Brasileiro SA - Petrobras (sponsored ADR) (c) .................. 60,600 30,000 Tele Norte Leste Participacoes SA (Telemar) 144A (ADR) (d) ............................ 684,375 4,300 Telecomunicacoes Brasileiras (ADR) (c) .............. 313,362 187,200,000 Telemig Celular Participacoes SA .................... 787,200 3,300,000 Unibanco - Uniao de Bancos Brasileiros SA (Units) ... 189,505 83,900 Unibanco - Uniao de Bancos Brasileiros SA (GDR) ......................... 2,469,806 ----------- 4,800,202 ----------- Canada -- 4.2% 49,500 Anderson Exploration Ltd. (c) ....................... 1,123,425 8,400 Ballard Power Systems, Inc. (c) ..................... 530,513 51,800 Bombardier, Inc., Class B ........................... 799,287 40,500 Canadian Pacific, Ltd. (c) .......................... 1,154,019 8,544 Celestica, Inc. (c) ................................. 461,284 27,500 Manulife Financial Corp. ............................ 860,578 30,500 Molson, Inc., Class A ............................... 874,159 4,000 Nortel Networks Corp. (USD) ......................... 128,250 18,780 Nortel Networks Corp. ............................... 603,969 40,300 Petro-Canada ........................................ 1,024,758 20,800 Precision Drilling Corp. (c) ........................ 779,844 22,700 Royal Bank of Canada (c) ............................ 769,376 23,500 Thomson Corp. ....................................... 899,087 ----------- 10,008,549 ----------- Denmark -- 1.7% 19,000 GN Store Nord AS (GN Great Nordic) (c) ............................... 332,505 5,100 Novo Nordisk AS (c) ................................. 914,985 53,340 Vestas Wind Systems AS .............................. 2,887,690 ----------- 4,135,180 ----------- Finland -- 3.8% 28,500 Kone Corp. .......................................... 1,993,731 305,000 Metso OYJ ........................................... 3,408,100 77,740 Nokia OYJ ........................................... 3,467,397 4,900 Sampo-Leonia Insurance, Class A ..................... 264,563 ----------- 9,133,791 ----------- France -- 7.5% 38,752 Alcatel SA (ADR) (d) ................................ 2,167,690 26,100 Aventis SA .......................................... 2,291,488 1,000 Axa ................................................. 144,606 12,500 BNP Paribas SA ...................................... 1,097,456 4,240 Castorama Dubois Investissement SA .................. 1,098,855 34,200 Chargeurs SA ........................................ 2,247,965 6,400 Coflexip SA (c) ..................................... 813,700 51,700 Compagnie Generale des Establissements Michelin, Class B (c) ............... 1,871,459 5,800 Groupe Danone (c) .................................. 874,660 16,000 ISIS ................................................ 1,140,321 14,000 Sanofi-Synthelabo SA ................................ 933,366 9,610 Societe Television Francaise 1 (c) .................. 518,868 15,690 STMicroelectronics, NV (USD) ........................ 671,728 5,395 TotalFinaElf SA ..................................... 802,439 21,016 Vivendi Universal SA (c) ............................ 1,383,355 ----------- 18,057,956 ----------- Germany -- 2.9% 26,000 Adidas-Salomon AG ................................... 1,611,324 25,980 Buderus AG .......................................... 558,406 6,478 D. Logistics AG (c) ................................. 285,893 42,900 Deutsche Post AG (c) ................................ 922,886 7,290 Muenchener Rueckversicherungs- Gesellschaft AG ..................................... 2,608,473 15,900 Schering AG ......................................... 903,271 ----------- 6,890,253 ----------- Greece -- 0.2% 11,800 Alpha Bank AE (c) ................................... 408,068 ----------- Hong Kong -- 2.8% 925,500 Amoy Properties, Ltd. (d) ........................... 1,020,462 163,900 China Mobile (Hong Kong) Ltd. (c) ................... 895,181 3,400 China Mobile Ltd. (ADR)(c)(d) ....................... 92,225 See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Hong Kong -- continued 2,479,951 First Pacific Company, Ltd. (c) ..................... $ 723,347 1,990,000 Giordano International Ltd. (c) ..................... 918,497 37,000 Hutchison Whampoa, Ltd. ............................. 461,332 2,666,000 Mandarin Oriental International, Ltd. (c) ........... 1,732,900 85,000 Sun Hung Kai Properties, Ltd., 144A ................. 847,308 ----------- 6,691,252 ----------- Ireland -- 1.3% 125,000 Bank of Ireland ..................................... 1,253,565 19,800 Elan Corp., PLC (ADR) (c) (d) ....................... 926,887 374,000 Independent News & Media PLC ........................ 1,018,439 ----------- 3,198,891 ----------- Israel -- 1.0% 6,760 Check Point Software Technolgies, Ltd. (c) .......... 902,883 13,380 Comverse Technology, Inc.(c) ........................ 1,453,403 ----------- 2,356,286 ----------- Italy -- 2.1% 120,900 BCA Intesa SpA (c) .................................. 581,248 212,500 Fila Holdings SpA (ADR) ............................. 1,620,313 134,600 Riunione Adriatica di Sicurta SpA (RAS) (c) ......... 2,099,327 153,100 UniCredito Italiano SpA (c) ......................... 800,748 ----------- 5,101,636 ----------- Japan -- 6.7% 30,600 Anritsu Corp. (d) ................................... 722,708 25,800 Credit Saison Co., Ltd. ............................. 551,793 111,000 Daiwa Securities Group, Inc. (d) .................... 1,158,354 4,000 Fast Retailing Co., Ltd. (c) ........................ 783,065 59,100 Fujikura Ltd. ....................................... 442,526 231,000 Ishikawajima Harima-Heavy Industries Co., Ltd. ...... 493,037 154,000 Japan Air Lines Co., Ltd. (c) ....................... 704,531 82,000 JGC Corp. (d) ....................................... 558,765 6,200 Konami Company, Ltd. (c) ............................ 464,783 5,000 Matsushita Communication Industrial, Co., Ltd. ...... 627,624 20,900 Meitec Corp. ........................................ 669,122 57,400 Mitsubishi Estate Company, Ltd. ..................... 612,561 134,000 Mitsubishi Heavy Industries, Ltd. ................... 583,730 59,000 Mitsui Fudosan Co., Ltd. ............................ 585,768 178,000 Nissan Motor Co., Ltd. .............................. 1,024,528 17,100 Nitto Denko Corp. ................................... 463,698 29 NTT DoCoMo, Inc. (c) ................................ 499,738 2,600 Rohm Co., Ltd. ...................................... 493,527 80,900 Sanyo Electric Co., Ltd. ............................ 672,280 28,000 SHIMANO, Inc. ....................................... 549,860 6,000 Sony Corp. (c) ...................................... 414,626 30,000 Takeda Chemical Industries, Ltd. .................... 1,773,968 33,000 The Furukawa Electric Co., Ltd. ..................... 575,883 12,000 Toyo Information Systems Co., Ltd. (c)(d) ........... 596,221 ----------- 16,022,696 ----------- Mexico -- 1.3% 44,700 Fomento Economico Mexicano SA de CV (c) ............................... 1,335,413 20,000 Grupo Aeroportuario del Sureste SA de CV (c) ............................ 332,500 21,785 Grupo Televisa SA de CV (ADR) (c) ................... 978,963 63,000 Kimberly-Clark de Mexico, SA de CV (c) ................................ 174,290 9,235 Telefonos de Mexico SA de CV (Telemar) (ADR) 144A ....................... 416,729 ----------- 3,237,895 ----------- Netherlands -- 3.9% 18,500 Equant NV (c) ....................................... 483,796 15,300 Heineken NV ......................................... 925,934 88,500 Hunter Douglas NV ................................... 2,426,563 26,799 Koninkijke Numico NV ................................ 1,348,804 24,100 Koninklijke Ahold NV ................................ 777,563 17,000 NV Holdingmaatschappij De Telegraaf (c) .................................... 344,801 12,810 Royal Dutch Petroleum Co. ........................... 784,986 5,600 Unilever NV ......................................... 354,416 14,200 VNU NV .............................................. 698,024 50,100 Wolters Kluwer NV (c) ............................... 1,366,154 ----------- 9,511,041 ----------- New Zealand -- 0.1% 158,224 Fletcher Challenge Building ......................... 137,228 ----------- Panama -- 1.0% 67,700 Banco Latinoamericano de Exportaciones, SA, Class E .......................... 2,339,881 ----------- Singapore -- 1.3% 188,000 City Developments, Ltd. ............................. 873,787 127,272 Datacraft Asia, Ltd. ................................ 600,724 557,000 Singapore Technologies Engineering Ltd. ............. 897,246 223,200 Singapore Telecommunications, Ltd. .................. 346,656 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Singapore -- continued 53,616 United Overseas Bank, Ltd. .......................................... $ 402,430 ----------- 3,120,843 ----------- South Africa -- 0.2% 100,100 Standard Bank Investment Corp., Ltd. ................ 403,469 ----------- South Korea -- 1.7% 17,920 Dongah Tire Industry Co. (c) ........................ 339,276 16,470 H&CB ................................................ 373,667 20,000 Kookmin Bank ........................................ 235,573 37,380 Kumkang Koren Chemical Co., Ltd.(c) ................. 1,285,399 7,400 Lotte Chilsung Beverage Co. ......................... 935,969 2,300 Lotte Confectionery Co., Ltd. ....................... 200,909 4,000 SK Telecomm Co., Ltd. ............................... 800,000 ----------- 4,170,793 ----------- Spain -- 0.7% 42,100 Grupo Auxiliar Metalurgico, SA (Gamesa) (c) ......... 1,012,016 44,200 Telefonica SA (ADR) ................................. 730,467 ----------- 1,742,483 ----------- Sweden -- 1.5% 18,000 Autoliv, Inc. ....................................... 282,233 154,400 Nordic Baltic Holding (c) ........................... 1,169,573 130,000 SSAB Svenskt Stal AB (c) ............................ 1,239,538 34,000 Svenska Handelsbanken AB, Class A ................... 581,736 32,852 Telefonaktiebolaget LM Ericsson AB, Class B (c) ......................... 374,149 ----------- 3,647,229 ----------- Switzerland -- 3.6% 5,310 ABB, Ltd. (c) ....................................... 565,922 3,200 Givaudan AG (c) ..................................... 845,950 270 Julius Baer Holding, Ltd., Zurich (c) ............... 1,477,512 620 Nestle SA, 144A ..................................... 1,445,863 710 Novartis AG (c) ..................................... 1,254,951 610 Swiss Re ............................................ 1,462,058 2,830 Zurich Financial Services AG (c) .................... 1,705,787 ----------- 8,758,043 ----------- United Kingdom -- 13.2% 176,000 Allied Domecq PLC (c) ............................... 1,163,224 113,400 Allied Irish Banks PLC (c) .......................... 1,320,384 5,000 Amvescap PLC ........................................ 102,727 38,800 COLT Telecom Group PLC (c) .......................... 835,454 2,600 COLT Telecom Group PLC (ADR) (c) .................... 228,150 408,600 Diageo PLC (c) ...................................... 4,567,073 720,000 Enodis PLC .......................................... 2,298,575 97,865 FKI PLC ............................................. 321,943 53,600 HSBC Holdings PLC ................................... 797,159 421,000 IMI PLC ............................................. 1,491,966 282,000 Morgan Crucible Co., PLC ............................ 1,250,265 68,900 Next PLC ............................................ 829,361 42,318 Pearson PLC ......................................... 1,006,122 47,000 Reckitt Benckiser PLC ............................... 647,973 99,200 Regus PLC (c) ....................................... 538,600 42,500 Reuters Group PLC ................................... 720,024 519,000 Rolls-Royce PLC ..................................... 1,538,541 63,700 Royal Bank of Scotland Group PLC (c) ................ 1,506,865 85,700 ScottishPower PLC ................................... 677,899 77,100 Shire Pharmaceuticals Group PLC (c) ................ 1,216,285 2,690,000 Somerfield PLC ...................................... 3,781,016 112,013 Spirent PLC ......................................... 1,021,708 616,000 Tomkins PLC ......................................... 1,358,630 710,600 Vodafone Group PLC .................................. 2,608,586 ----------- 31,828,530 ----------- United States -- 26.8% 40,366 ACNielsen Corp. (c) ................................. 1,463,268 7,600 Amdocs, Ltd. (c) .................................... 503,500 14,000 America Online, Inc. (c) ............................ 487,200 101,500 American Greetings Corp. ............................ 957,906 6,200 Amgen, Inc. (c) ..................................... 396,413 60,000 Apogent Technologies, Inc. (c) ...................... 1,230,000 76,000 AT&T Corp. .......................................... 1,315,750 59,052 Bank One Corp. ...................................... 2,162,779 61,300 Black & Decker Corp. ................................ 2,406,025 110,000 Brunswick Corp. ..................................... 1,808,125 12,000 Calpine Corp. (c) ................................... 540,750 24,400 Capstone Turbine Corp. (c)(d) ....................... 683,200 20,000 Cisco Systems, Inc. (c) ............................. 765,000 50,000 Cooper Industries, Inc. ............................. 2,296,875 6,700 Corning, Inc. ....................................... 353,844 35,000 Eaton Corp. ......................................... 2,631,562 8,900 EMC Corp. (c) ....................................... 591,850 9,300 Enron Corp. ......................................... 773,063 59,000 Equifax, Inc. ....................................... 1,692,563 50,000 Ford Motor Co. ...................................... 1,171,875 77,000 Fortune Brands, Inc. ................................ 2,310,000 9,200 Freddie Mac ......................................... 633,650 40,000 Galileo International, Inc. ......................... 800,000 See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- United States -- continued 10,700 General Electric Co. ................................ $ 512,931 58,000 H & R Block, Inc. ................................... 2,399,750 40,000 H.J. Heinz Co. ...................................... 1,897,500 40,400 Knight-Ridder, Inc. ................................. 2,297,750 50,000 Lockheed Martin Corp. ............................... 1,697,500 80,000 Masco Corp. ......................................... 2,055,000 170,000 Mattel, Inc. ........................................ 2,454,800 46,200 McLeodUSA, Inc. (c) ................................. 652,575 8,000 Microsoft Corp. (c) ................................. 347,000 62,000 Moody's Corp. ....................................... 1,592,625 43,000 NIKE, Inc., Class B ................................. 2,399,937 20,200 Pfizer, Inc. ........................................ 929,200 16,000 Providian Financial Corp. ........................... 920,000 4,300 QUALCOMM, Inc. (c) .................................. 353,406 5,800 Redback Networks, Inc. (c) .......................... 237,800 57,800 Sara Lee Corp. ...................................... 1,419,713 22,100 Southern Energy, Inc. (c) ........................... 625,706 25,400 Sprint Corp. (PCS Group) ............................ 519,113 65,000 Stanley Works ....................................... 2,027,187 20,000 Sybron Dental Specialties, Inc. (c) ................. 337,500 120,000 The Dial Corp. ...................................... 1,320,000 69,000 The Kroger Co. ...................................... 1,867,312 31,000 The New Dun and Bradstreet Corp. (c) ................ 802,125 3,500 Time Warner Telecom, Inc. (c) ....................... 222,031 80,000 Tricon Global Restaurants, Inc. (c) ................. 2,640,000 8,100 Unilever NV ......................................... 509,794 47,000 Washington Mutual, Inc. ............................. 2,493,937 205,000 Xerox Corp. ......................................... 948,125 ----------- 64,455,515 ----------- Total Common Stock (Identified Cost $219,923,047) ...................... 230,416,990 ----------- Preferred Stock -- 1.2% - -------------------------------------------------------------------------------- Argentina -- 0.7% 191,000 Quilmes Industrial SA (Quinsa) (ADR) ................ 1,719,000 ----------- Germany -- 0.5% 6,020 MLP AG .............................................. 667,028 157 Porsche AG .......................................... 512,295 ----------- 1,179,323 ----------- Total Preferred Stock (Identified Cost $3,156,187) ........................ 2,898,323 ----------- Short Term Investments -- 2.0% Principal Amount Description Value (a) - -------------------------------------------------------------------------------- $ 1,865,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $1,866,088 on 1/02/2001, collateralized by $1,870,000 U.S. Treasury Bond at 5.50% due 8/15/2028 with a value of $1,902,725 .......................... $ 1,865,000 942,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $942,550 on 1/02/2001, collateralized by $845,000 U.S. Treasury Bond at 6.375% due 8/15/2027 with a value of $961,188 ......................................... 942,000 407,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.85% to be repurchased at $407,265 on 1/02/2001, collateralized by $365,000 U.S. Treasury Bond at 10.750% due 2/15/2003 with a value of $419,252 ......................................... 407,000 1,695,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.85% to be repurchased at $1,696,102 on 1/02/2001, collateralized by $1,655,000 U.S. Treasury Note at 6.375% due 6/30/2002 with a value of $1,730,043 ................................. 1,695,000 ------------- Total Short Term Investments (Identified Cost $4,909,000) ........................ 4,909,000 ------------- Total Investments -- 98.9% (Identified Cost $227,988,234) (b) .................. 238,224,313 Other assets less liabilities ....................... 2,681,678 ------------- Total Net Assets -- 100% ............................ $ 240,905,991 ============= 10 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000
Forward Currency Contracts Outstanding Local Aggregate Unrealized Delivery Currency Face Total Appreciation/ Date Amount Value Value (Depreciation) ---------- ----------- ----------- ---------- -------------- Hong Kong Dollar (bought) 5/7/01 $20,800,000 $ 2,668,206 $ 2,671,011 $2,805 Hong Kong Dollar (bought) 5/7/01 1,200,000 150,659 154,097 3,438 Hong Kong Dollar (bought) 5/7/01 500,000 62,814 64,207 1,393 Hong Kong Dollar (sold) 5/7/01 800,000 102,198 102,731 (533) Hong Kong Dollar (sold) 5/7/01 1,400,000 178,877 179,780 (903) Hong Kong Dollar (sold) 5/7/01 600,000 76,692 77,048 (356) Hong Kong Dollar (sold) 5/7/01 1,000,000 128,212 128,414 (202) Hong Kong Dollar (sold) 5/7/01 1,600,000 201,080 205,462 (4,382) Hong Kong Dollar (sold) 5/7/01 1,600,000 200,716 205,462 (4,746) Hong Kong Dollar (sold) 5/7/01 400,000 50,180 51,366 (1,186) Hong Kong Dollar (sold) 5/7/01 1,000,000 125,448 128,414 (2,966) Hong Kong Dollar (sold) 5/7/01 900,000 112,880 115,573 (2,693) Hong Kong Dollar (sold) 5/7/01 100,000 12,554 12,841 (287) Hong Kong Dollar (sold) 5/7/01 800,000 100,528 102,731 (2,203) Hong Kong Dollar (sold) 5/7/01 800,000 100,597 102,731 (2,134) Hong Kong Dollar (sold) 5/7/01 300,000 37,819 38,524 (705) Hong Kong Dollar (sold) 5/7/01 150,000 18,890 19,262 (372) Hong Kong Dollar (sold) 5/7/01 150,000 18,889 19,262 (373) Hong Kong Dollar (sold) 5/7/01 400,000 50,434 51,366 (932) Hong Kong Dollar (sold) 5/7/01 200,000 25,326 25,683 (357) Hong Kong Dollar (sold) 5/7/01 1,000,000 126,831 128,414 (1,583) Hong Kong Dollar (sold) 5/7/01 1,600,000 202,899 205,462 (2,563) Hong Kong Dollar (sold) 5/7/01 1,700,000 215,612 218,304 (2,692) Hong Kong Dollar (sold) 5/7/01 300,000 38,051 38,524 (473) Hong Kong Dollar (sold) 5/7/01 1,700,000 216,346 218,304 (1,958) Hong Kong Dollar (sold) 5/7/01 4,000,000 509,554 513,656 (4,102) Hong Kong Dollar (bought) 5/10/01 14,500,000 1,860,716 1,862,049 1,333 Hong Kong Dollar (sold) 5/10/01 2,000,000 256,575 256,835 (260) Hong Kong Dollar (sold) 5/10/01 6,000,000 769,346 770,503 (1,157) Hong Kong Dollar (sold) 5/10/01 1,000,000 127,071 128,417 (1,346) Hong Kong Dollar (sold) 5/10/01 800,000 101,611 102,734 (1,123) Hong Kong Dollar (sold) 5/10/01 1,400,000 177,895 179,784 (1,889) Hong Kong Dollar (sold) 5/10/01 1,300,000 165,241 166,942 (1,701) Hong Kong Dollar (sold) 5/10/01 2,000,000 254,761 256,834 (2,073) Japanese Yen (sold) 3/19/01 30,000,000 288,240 265,840 22,400 ----------- $ (16,881) ===========
See accompanying notes to financial statements. 11 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized depreciation on investments based on cost of $230,907,942 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 ............................................ $25,890,805 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .......................................... (18,574,434) -------------- Net unrealized depreciation ................................ $ (7,316,371) ============== During the year ended December 31, 2000, the fund distributed $39,917,123 (unaudited) from long-term capital gains. (c) Non-income producing security. (d) All or a portion of this security was on loan to brokers at December 31, 2000. 144A Securities exempt from registration under Rule 144 of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $3,394,275 or 1.4% of net assets. ADR/ GDR An American Depositary Receipt (ADR) or Global Depositary Receipt (GDR) is a certificate issued by a Custodian Bank representing the right to receive securities of the foreign issuer described. The values of ADRs and GDRs are significantly influenced by trading on exchanges not located in the United States. USD United States dollars. Industry Holdings at December 31, 2000 (unaudited) Bank & Thrifts 13.3% Food & Beverages 9.9% Manufacturing-Diversified 9.1% Consumer Goods & Services 7.7% Telecommunications-Equipment 4.8% Financial Services 4.7% Health Care-Drugs 4.2% Telecommunications 3.4% Retail 2.9% Energy 2.6% Insurance 2.6% Computer Software & Services 2.4% Automotive 2.2% Machinery 2.0% Publishing 2.0% Telecommunications-Cellular 1.9% Building & Related 1.9% Real Estate 1.9% Hardware 1.8% Banks-Money Center 1.7% Electronic Components 1.5% Communications Services 1.5% Aerospace/Defense 1.3% Chemicals 1.3% Broadcasting 1.3% Oil-Major Integrated 1.1% Electrical Equipment 0.9% Engineering-Research & Development 0.8% Oil Services 0.8% Diversified Conglomerates 0.8% Hotels & Restaurants 0.7% Medical Products 0.7% Airlines 0.6% Household Products 0.5% Metal & Mining 0.5% Transportation 0.5% Oil & Gas-Exploration & Production 0.5% Computers & Business Equipment 0.4% Apparel & Textiles 0.4% Business Services 0.3% Oil & Gas-Drilling 0.3% Commercial Services 0.2% Paper 0.1% 12 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $227,988,234)................. $ 238,224,313 Cash................................................................ 2,744 Foreign cash at value (Identified cost $1,377,916).................. 1,402,673 Investments held as collateral for loaned securities................ 7,406,975 Receivable for: Fund shares sold................................................. 189,058 Securities sold.................................................. 4,717,940 Dividends and interest........................................... 264,404 Tax reclaims..................................................... 147,452 Securities lending income........................................ 250,000 ------------- 252,605,559 LIABILITIES Payable for: Collateral on securities loaned, at value........................ $ 7,406,975 Securities purchased............................................. 1,644,519 Fund shares redeemed............................................. 2,158,862 Open forward currency contracts - net............................ 16,881 Withholding taxes................................................ 21,659 Accrued expenses: Management fees.................................................. 210,948 Deferred trustees' fees.......................................... 29,282 Accounting and administrative.................................... 7,260 Transfer agent................................................... 93,100 Other............................................................ 110,082 ------------- 11,699,568 ------------- NET ASSETS............................................................. $ 240,905,991 ============= Net Assets consist of: Paid in capital.................................................. $ 238,605,456 Undistributed (overdistributed) net investment income (loss)..... (51,682) Accumulated net realized gain (loss)............................. (7,894,801) Unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions - net...... 10,247,018 ------------- NET ASSETS............................................................. $ 240,905,991 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($102,507,261 / 7,109,350 shares of beneficial interest)......... $ 14.42 ======== Offering price per share (100 / 94.25 of $14.42).................... $ 15.30* ======== Net asset value and offering price of Class B shares ($114,449,521 / 8,332,644 shares of beneficial interest)......... $ 13.74** ======== Net asset value of Class C shares ($23,949,209 / 1,742,212 shares of beneficial interest).......... $ 13.75** ======== Offering price per share (100 / 99.00 of $13.75).................... $ 13.89 ========
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 13 STATEMENT OF ASSETS OF & LIABILITIES Year Ended December 31, 2000
INVESTMENT INCOME Dividends (net of foreign taxes of $357,652)........................ $ 4,068,588 Interest............................................................ 679,671 Securities lending income........................................... 419,417 ------------- 5,167,676 Expenses Management fees.................................................. $ 2,891,302 Service fees - Class A........................................... 294,478 Service and distribution fees - Class B......................... 1,300,089 Service and distribution fees - Class C.......................... 275,237 Trustees' fees and expenses...................................... 12,442 Accounting and administrative.................................... 98,789 Custodian........................................................ 570,510 Transfer agent................................................... 1,002,984 Audit and tax services........................................... 49,840 Legal............................................................ 17,548 Printing......................................................... 135,105 Registration..................................................... 43,178 Amortization of organization expenses............................ 13,529 Miscellaneous.................................................... 13,503 ------------- Total expenses before reductions.................................... 6,718,534 Less reductions..................................................... (11,337) 6,707,197 ------------- ------------- Net investment income (loss)........................................ (1,539,521) ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments - net................................................ 25,575,128 Forward currency contracts - net................................. 1,680,571 Foreign currency transactions - net.............................. (514,732) ------------- Net realized gain (loss) on investments, forward currency contracts and foreign currency transactions...................... 26,740,967 ------------- Unrealized appreciation (depreciation) on: Investments - net................................................ (60,901,040) Forward currency contracts - net................................. (223,442) Foreign currency transactions - net.............................. 38,605 ------------- Net unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions..... (61,085,877) ------------- Net gain (loss) on investment transactions.......................... (34,344,910) ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................. $ (35,884,431) =============
14 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ----------------------------------- 1999 2000 --------------- ---------------- FROM OPERATIONS Net investment income (loss)........................................ $ (2,118,569) $ (1,539,521) Net realized gain (loss) on investments, forward currency contracts and foreign currency transactions...................... 45,115,560 26,740,967 Net unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions..... 40,444,136 (61,085,877) ---------------- ---------------- Increase (decrease) in net assets from operations................... 83,441,127 (35,884,431) ---------------- ---------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net realized gain on investments Class A.......................................................... (12,083,293) (16,575,111) Class B.......................................................... (13,730,866) (19,068,510) Class C.......................................................... (2,796,280) (4,075,550) In excess of net realized gain on investments Class A.......................................................... 0 (2,523,066) Class B.......................................................... 0 (2,902,612) Class C.......................................................... 0 (620,381) ---------------- ---------------- (28,610,439) (45,765,230) ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS............................. (4,457,284) 26,099,328 ---------------- ---------------- Total increase (decrease) in net assets................................ 50,373,404 (55,550,333) NET ASSETS Beginning of the year............................................... 246,082,920 296,456,324 ---------------- ---------------- End of the year..................................................... $ 296,456,324 $ 240,905,991 ================ ================ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year..................................................... $ (248,268) $ (51,682) ================ ================
See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A --------------------------------------------------------- Years Ended December 31, --------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Year ....... $ 12.50 $ 14.40 $ 15.46 $ 16.08 $ 19.90 --------- --------- --------- --------- --------- Income (Loss) From Investment Operations Net Investment Income (Loss) (a).............. (0.03) (0.02) 0.01 (0.07) (0.02) Net Realized and Unrealized Gain (Loss) on Investments.............................. 2.11 1.88 0.61 5.98 (2.43) --------- --------- --------- --------- --------- Total From Investment Operations.............. 2.08 1.86 0.62 5.91 (2.45) --------- --------- --------- --------- --------- Less Distributions Distributions From Net Realized Capital Gains ...................................... (0.18) (0.76) 0.00 (2.09) (2.63) Distributions In Excess of Net Realized Capital Gains ................. 0.00 0.00 0.00 0.00 (0.40) Distributions From Paid in Capital............ 0.00 (0.04) 0.00 0.00 0.00 --------- --------- --------- --------- --------- Total Distributions........................... (0.18) (0.80) 0.00 (2.09) (3.03) --------- --------- --------- --------- --------- Net Asset Value, End of the Year ............. $ 14.40 $ 15.46 $ 16.08 $ 19.90 $ 14.42 ========= ========= ========= ========= ========= Total Return (%) (b).......................... 16.7 12.7 4.0 37.6 (12.2) Ratio of Operating Expenses to Average Net Assets (%) ..................... 2.58 2.07 2.09 2.06 2.01 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) .... 2.58 2.07 2.09 2.06 2.01(c) Ratio of Net Investment Income (Loss) to Average Net Assets (%) .................. (0.21) (0.12) 0.03 (0.42) (0.13) Portfolio Turnover Rate (%)................... 57 80 84 91 175 Net Assets, End of the Year (000)............. $ 68,509 $ 118,381 $106,763 $ 126,415 $102,507
(a) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (b) A sales charge for is not reflected in total return calculations. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 16 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B --------------------------------------------------------- Years Ended December 31, --------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Year........ $ 12.50 $ 14.30 $ 15.23 $ 15.73 $ 19.26 --------- --------- --------- --------- --------- Income (Loss) From Investment Operations Net Investment Income (Loss) (a).............. (0.12) (0.14) (0.11) (0.20) (0.16) Net Realized and Unrealized Gain (Loss) on Investments................................. 2.10 1.87 0.61 5.82 (2.33) --------- --------- --------- --------- --------- Total From Investment Operations....... 1.98 1.73 0.50 5.62 (2.49) --------- --------- --------- --------- --------- Less Distributions Distributions From Net Realized Capital Gains ...................................... (0.18) (0.76) 0.00 (2.09) (2.63) Distributions In Excess of Net Realized Capital Gains .............................. 0.00 0.00 0.00 0.00 (0.40) Distributions From Paid in Capital............ 0.00 (0.04) 0.00 0.00 0.00 --------- --------- --------- --------- --------- Total Distributions........................... (0.18) (0.80) 0.00 (2.09) (3.03) --------- --------- --------- --------- --------- Net Asset Value, End of the Year ............. $ 14.30 $ 15.23 $ 15.73 $ 19.26 $ 13.74 ========= ========= ========= ========= ========= Total Return (%) (b).......................... 15.9 11.9 3.3 36.6 (12.8) Ratio of Operating Expenses to Average Net Assets (%) ..................... 3.33 2.82 2.84 2.81 2.76 Ratio of Operating Expenses to Average Net Assets After Expense Reduction (%) ..... 3.33 2.82 2.84 2.81 2.76(c) Ratio of Net Investment Income (Loss) to Average Net Assets (%)..................... (0.96) (0.87) (0.72) (1.17) (0.88) Portfolio Turnover Rate (%)................... 57 80 84 91 175 Net Assets, End of the Year (000)............. $ 65,367 $ 123,467 $116,305 $141,338 $114,450
(a) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (b) A contingent deferred sales charge is not reflected in total return calculations. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 17 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C --------------------------------------------------------- Years Ended December 31, --------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Year ....... $ 12.50 $ 14.31 $ 15.24 $ 15.75 $ 19.27 --------- --------- --------- --------- --------- Income (Loss) From Investment Operations Net Investment Income (Loss) (a).............. (0.12) (0.13) (0.11) (0.21) (0.16) Net Realized and Unrealized Gain (Loss) on Investments................................. 2.11 1.86 0.62 5.82 (2.33) --------- --------- --------- --------- --------- Total From Investment Operations.............. 1.99 1.73 0.51 5.61 (2.49) --------- --------- --------- --------- --------- Less Distributions Distributions From Net Realized Capital Gains ...................................... (0.18) (0.76) 0.00 (2.09) (2.63) Distributions In Excess of Net Realized Capital Gains .............................. 0.00 0.00 0.00 0.00 (0.40) Distributions From Paid in Capital............ 0.00 (0.04) 0.00 0.00 0.00 --------- --------- --------- --------- --------- Total Distributions........................... (0.18) (0.80) 0.00 (2.09) (3.03) --------- --------- --------- --------- --------- Net Asset Value, End of the Year ............. $ 14.31 $ 15.24 $ 15.75 $ 19.27 $ 13.75 ========= ========= ========= ========= ========= Total Return (%) (b).......................... 15.9 11.8 3.3 36.5 (12.8) Ratio of Operating Expenses to Average Net Assets (%) ..................... 3.33 2.82 2.84 2.81 2.76 Ratio of Operating Expenses to Average Net Assets After Expense Reduction (%) ..... 3.33 2.82 2.84 2.81 2.76(c) Ratio of Net Investment Income (Loss) to Average Net Assets (%)..................... (0.96) (0.87) (0.72) (1.17) (0.88) Portfolio Turnover Rate (%)................... 57 80 84 91 175 Net Assets, End of the Year (000)............. $ 17,980 $ 26,137 $ 23,016 $ 28,703 $ 23,949
(a) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (b) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 18 Seeaccompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Star Worldwide Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act"), as an open-end management investment company. The Fund seeks long-term growth of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, and Class C shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price, except for certain British equities which are valued at the mean between the last bid and last ask prices on the London Stock Exchange. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and the relevant 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 except certain dividends from foreign securities where ex-dividend date may have passed are booked as soon as the fund is informed of the dividend and interest income is recorded on an accrual basis. Investment income is recorded net of foreign taxes withheld when recovery of such taxes is uncertain. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. 19 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 c. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. Since the values of investment securities are presented at the foreign exchange rates prevailing at the end of the period, it is not practical to isolate that portion of the results of operations arising from changes in exchange rates from fluctuations arising from changes in market prices of the investment securities. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities resulting from changes in the exchange rates. d. Forward Foreign Currency Contracts. The Fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the Fund's investments against currency fluctuation. Also, a contract to buy or sell can offset a previous contract. These contracts involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. The U.S. dollar value of the currencies the Fund has committed to buy or sell (if any) is shown in the portfolio composition under the caption "Forward Currency Contracts Outstanding." These amounts represent the aggregate exposure to each currency the Fund has acquired or hedged through currency contracts outstanding at period end. All contracts are "marked-to-market" daily at the applicable exchange rates and any gains or losses are recorded for financial statement purposes as unrealized until settlement date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. e. Federal and Foreign Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. The Fund may be subject to foreign taxes on income and gains on investments which are accrued based upon the Fund's understanding of the tax rules and regulations that exist in the countries in which the Fund invests. Foreign governments may also impose taxes or other payments on investments with respect to foreign securities. The Fund accrues such taxes as applicable. f. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for organization costs, net operating losses, Passive Foreign Investment 20 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Companies ("PFIC") and foreign currency transactions for book and tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. Each of the Fund's subadvisers is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. h. Organization Expense. Costs incurred in connection with the Fund's organization and initial registration, amounting to approximately $64,900 in the aggregate, were paid by the Fund and were fully amortized by the Fund over 60 months. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchase and sales of securities (excluding short-term investments) were $455,498,525 and $467,988,022 respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management"), at the annual rate of 1.05% of the Fund's average daily net assets reduced by the amount of any subadviser fees paid by the Fund to its subadvisers as follows: Harris Associates, L.P. and Loomis, Sayles & Company, L.P. at the annual rate of 0.65% of the first $50 million of the average daily net assets of the segment of the Fund which that subadviser manages, 0.60% of the next $50 million of such assets and 0.55% of such assets in excess of $100 million and Montgomery Asset Management, LLC at the annual rate of 0.85% of the first $25 million of the average daily net assets of the segment of the Fund that Montgomery Asset Management, LLC manages, 0.65% of the next $25 million of such assets and 0.55% of such assets in excess of $50 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management, Loomis, Sayles & Company, L.P., and Harris Associates, L.P. are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Loomis, Sayles & Company, L.P. replaced Janus Capital Corp. as a subadviser on February 28, 2000. Fees earned by Nvest Management and the subadvisers under the management and subadvisery agreements in effect during the year ended December 31, 2000, are as follows: Fees Earned ----------- Nvest Management $ 1,114,073 Harris Associates, L.P. 724,802 Loomis, Sayles & Company, L.P. 496,709 Montgomery Asset Management, LLC 439,778 Janus Capital Corp. 115,940 ---------------- $ 2,891,302 ================ The effective management fee for the year ended December 31, 2000 was 1.05%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a 21 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $98,789 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $760,145 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $294,478 in service fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $325,022 and $68,809 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $975,067 and $206,428 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $595,611. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of 22 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class A Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 17,418,778 $ 308,405,361 11,169,165 $ 204,236,025 Shares issued in connection with the reinvestment of: Distributions from net realized gain............... 625,286 11,630,312 1,248,452 18,555,461 ----------- --------------- ----------- ------------- 18,044,064 320,035,673 12,417,617 222,791,486 Shares repurchased................................. (18,330,936) (325,330,531) (11,660,151) (213,733,340) ----------- --------------- ----------- ------------- Net increase (decrease)............................ (286,872) $ (5,294,858) 757,466 $ 9,058,146 ----------- --------------- ----------- ------------- Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class B Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 938,431 $ 16,521,040 1,047,575 $ 18,681,009 Shares issued in connection with the reinvestment of: Distributions from net realized gain............... 706,524 12,724,497 1,444,753 20,488,058 ----------- --------------- ----------- ------------- 1,644,955 29,245,537 2,492,328 39,169,067 Shares repurchased................................. (1,700,021) (29,067,473) (1,497,656) (25,902,342) ----------- --------------- ----------- ------------- Net increase (decrease)............................ (55,066) $ 178,064 994,672 $ 13,266,725 ----------- --------------- ----------- ------------- Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class C Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 1,341,499 $ 23,365,742 640,499 $ 11,425,930 Shares issued in connection with the reinvestment of: Distributions from net realized gain............... 150,031 2,703,557 317,323 4,514,587 ----------- --------------- ----------- ------------- 1,491,530 26,069,299 957,822 15,940,517 Shares repurchased................................. (1,463,990) (25,409,789) (704,804) (12,166,060) ----------- --------------- ----------- ------------- Net increase (decrease)............................ 27,540 $ 659,510 253,018 $ 3,774,457 ----------- --------------- ----------- ------------- Increase (decrease) derived from capital shares transactions..................... (314,398) $ (4,457,284) 2,005,156 $ 26,099,328 =========== =============== =========== =============
23 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 5. Line of Credit. The Fund along with the other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 3, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund loaned securities having a market value of $6,922,986 and collateralized by United States Treasury Bonds with a market value of $7,406,975. 7. Concentration of Risk. The Fund had the following geographic concentrations in excess of 10% of its total net assets at December 31, 2000: United Kingdom 13.2% and United States 26.8%. The Fund pursues its objectives by investing in foreign securities. There are certain risks involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. These risks include those resulting from future adverse political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 8. Expense Reductions. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $11,337 under these agreements. 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Star Worldwide Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Star Worldwide Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 25 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 8,550,448.824 75,594.470 152,565.952 8,778,609.246 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and: Harris Associates L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 8,532,753.693 87,906.168 157,949.385 8,778,609.246 Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 8,538,383.871 80,796.832 159,428.543 8,778,609.246 Montgomery Asset Management, LLC Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 8,548,395.982 83,308.110 146,905.154 8,778,609.246 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 26 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 27 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return -- The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions -- Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions -- Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Market Capitalization -- The value of a company's issued and outstanding common stock, as priced by the market: Number of outstanding shares X current market price of a share = market capitalization. Price/Earnings Ratio -- Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different stocks. Growth Investing -- An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. Value Investing -- A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks tend to have a lower price/earnings ratio than that of growth stocks. Standard & Poor's 500(R) (S&P 500) -- Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. It is not possible to invest directly in an index. 28 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs SW56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Fund(SM) Where The Best Minds Meet(R) Nvest Star Small Cap Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC~name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST STAR SMALL CAP FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Star Small Cap Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown 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; there are no expenses that affect the results. In addition, few investors could purchase all of the securities necessary to match the index. And, if they could, they would incur transaction costs and other expenses. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/96 10000 9425 12/31/97 12697 11967 12/31/98 12958 12212 12/31/99 21428 20196 12/31/00 18810 17729 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST STAR SMALL CAP FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------ Class A (Inception 12/31/96) 1 Year Since Inception Net Asset Value1 -12.22% 17.11% With Maximum Sales Charge2 -17.27 15.40 - ------------------------------------------------------------------------------------------------------ Class B (Inception 12/31/96) 1 Year Since Inception Net Asset Value1 -12.89% 16.24% With CDSC3 -16.36 15.76 - ------------------------------------------------------------------------------------------------------ Class C (Inception 12/31/96) 1 Year Since Inception Net Asset Value1 -12.89% 16.25% With Maximum Sales Charge and CDSC3 -14.44 15.95 - ------------------------------------------------------------------------------------------------------ Since Fund's Class A, B, C Comparative Performance 1 Year Inception Russell 2000 Index4 -3.02% 8.82% Morningstar Small-Cap Growth Average5 -5.71 16.55 Lipper Small-Cap Growth Average6 -10.01 17.72 - ------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. 4 Russell 2000 Index is an unmanaged index measuring the stock price performance of the 2,000 smallest companies within the Russell 3000 Index. The performance of the index has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. You may not invest directly in an index. 5 Morningstar Small-Cap Growth Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. 6 Lipper Small-Cap Growth Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. 2 NVEST STAR SMALL CAP FUND Performance Overview - -------------------------------------------------------------------------------- For the 12 months ended December 31, 2000, Nvest Star Small Cap Fund Class A shares had a total return of -12.22% at net asset value, including $4.33 in reinvested capital gains. The Fund's benchmark, the Russell 2000 Index, returned - -3.02% for the same period, while Lipper's Small-Cap Growth Average had a - -10.01% return. The past 12 months were volatile for investors across the board, with sharp increases followed by steep downturns in stock prices. However, small-cap stocks declined less than large-cap stocks, and small-cap value stocks out-performed small-cap growth stocks. The Star concept is designed to broaden diversification Nvest Star Small Cap Fund is composed of four portfolio segments, each managed by a different investment management team. This multi-manager approach provides a means to diversify among the investment styles and strategies of several established management firms as well as among individual securities. The extra diversification of employing four Best Minds that don't always think alike is designed to balance out market swings over time. The investment environment for small caps was volatile When the year began, small caps were riding a positive investment trend, as growth stocks -- particularly those in the technology area -- were in demand. Small-cap stocks benefited in this environment because many small companies are rapid growers, engaged in developing products that will be used to expand Internet and telecommunications services. As the year progressed, however, the mood of the market changed. Higher interest rates, prospects for a slowdown in the rate of economic growth, and concerns that stock valuations had reached unsustainable levels triggered a sell-off in the stock market, starting with tech-nology and expanding to other sectors. While stocks declined across the board, many small-cap stocks declined less than larger-cap issues. Small-cap value stocks returned to favor During the year, there were individual small-cap companies in every sector that performed well, but technology stocks were hard hit, especially during the fourth quarter. Stocks in the consumer-discretionary sector -- such as radio, telephone, advertising and restaurant companies -- also did poorly. On the other hand, certain healthcare and financial stocks were relatively strong. 3 NVEST STAR SMALL CAP FUND - -------------------------------------------------------------------------------- As for investment style, small-cap value stocks had the edge over small-cap growth stocks. While all investors would like to buy low and sell high, value-~oriented investors are bargain hunters, focusing on low-priced stocks for their appreciation potential rather than putting top priority on potential earnings growth. Value investing had been out of favor for several years, but prospects for slower economic growth prompted investors to focus on opportunities for price appreciation more than on earnings momentum. The Fund's investment managers use different strategies In seeking long-term growth from stocks of small-cap companies, Nvest Star Small Cap Fund's managers use a variety of investment styles and strategies, investing in different economic sectors and industries. RS Investment Management looks for companies with catalysts that may spur growth. Montgomery uses a three-step selection process to search for reasonably priced companies with rapid earnings growth. Loomis Sayles looks for dynamic young companies that dominate their industry niche. Harris/Oakmark uses bottom-up stock selection to seek undervalued companies. The energy investments RS Investment Management selected produced relatively strong returns this year, but not strong enough to offset disappointments from the technology, utility and healthcare stocks in this portfolio segment. The Montgomery portfolio segment benefited from the relatively good perfor-~mance of its technology, healthcare, financial services and energy investments. However, negative results from the segment's consumer discretionary holdings detracted from performance. In the Loomis Sayles portfolio segment, strong performance from its financial services holdings offset poor results from its investments in technology, health-care, and producer durables (including industrial equipment, manufacturing and machinery). The Harris/Oakmark segment benefited from successful stock picks in financial services, as well as from the return to favor of the value approach. Auto parts and some technology selections were disappointing. Short-term challenges provide opportunities As we move into 2001, interest rates are higher than they were at the beginning of last year, economic growth has slowed, and more and more companies are trimming their earnings projections. While this is a difficult investment environ- 4 NVEST STAR SMALL CAP FUND - -------------------------------------------------------------------------------- Top 10 Portfolio Holdings -- 12/31/00 % of Sector Net Assets 1. UTI Energy Corp. 2.0 2. Golden State Bancorp, Inc. 1.9 3. ITT Educational Services, Inc. 1.3 4. First Health Group Corp. 1.2 5. Oxford Health Plans, Inc. 1.1 6. National Data Corp. 1.1 7. Macrovision Corp. 0.9 8. Radian Group, Inc. 0.9 9. Elan Corp., PLC (ADR) 0.9 10. Department 56, Inc. 0.9 Portfolio holdings and asset allocations will vary. ment for small-cap stocks, market downturns are a normal and necessary part of the investment cycle. They serve to wring out the speculative excesses in the market and re-establish more realistic stock valuations. Moreover, the Federal Reserve Board's decision to cut interest rates by 50 basis points (0.5%), which came in a surprise announcement just after the end of the year, indicates that the Fed is willing to take action to avoid a recession. Many investors look upon market downturns as opportunities to purchase attractive companies at lower prices. Although small-cap stocks are typically more volatile than stocks of larger, more established companies, the potential for long-term growth may be superior for investors who understand the risks. We believe small-cap stocks continue to be an important part of a diversified equity portfolio for investors who maintain a long-term perspective. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Star Small Cap Fund invests in small-cap and emerging growth companies, which are more volatile than the overall market. It may also invest in foreign and emerging market securities, which have special risks; lower-rated bonds, which offer higher yields in return for more risk; real estate investment trusts (REITs), which change in price with underlying real estate values and have other mortgage-related risks; and derivative securities, whose value is based on other securities or indices, which may have significant risk, impact the Fund's performance and increase tax liability. Frequent portfolio turnover may increase your risk of tax liability and lower your total return from this Fund. These risks affect your investment's value. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 61.6% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Aerospace -- 1.3% 45,400 Aeroflex, Inc. (c).................................. $ 1,308,797 25,500 Alliant Techsystems, Inc. (c) ...................... 1,702,125 ------------- 3,010,922 ------------- Automotive -- 0.7% 37,500 Dollar Thrifty Automotive Group, Inc. .............. 703,125 20,000 Fleetwood Enterprises, Inc. ........................ 210,000 30,000 Monaco Coach Corp. (c) ............................. 530,625 22,500 Standard Motor Products, Inc. ...................... 165,938 ------------ 1,609,688 ------------ Banks & Thrifts -- 6.2% 10,000 Astoria Financial Corp. ............................ 543,125 28,650 Bank United Corp. .................................. 1,953,572 70,000 BankAtlantic Bancorp, Inc. (d) ..................... 262,500 13,200 Commerce Bancorp, Inc. ............................. 902,550 35,000 Dime Bancorp, Inc. ................................. 1,034,687 135,000 Golden State Bancorp, Inc. ......................... 4,244,062 25,100 Greater Bay Bancorp ................................ 1,029,100 30,000 People's Bank ...................................... 776,250 18,300 Silicon Valley Bancshares .......................... 632,494 35,000 U.S. Bancorp ....................................... 1,021,563 11,500 Wilmington Trust Corp. ............................. 713,719 11,900 Zions Bancorp ...................................... 743,006 ------------ 13,856,628 ------------ Biotechnology -- 1.2% 4,300 Affymetrix, Inc. (c) (d) ........................... 320,081 13,150 Aurora Bioscience Corp. (c) ........................ 413,403 72,650 Harvard Bioscience, Inc. (c) ....................... 717,419 16,300 Myriad Genetics, Inc. (c) .......................... 1,348,825 ------------ 2,799,728 ------------ Broadcasting -- 1.4% 19,500 Adelphia Communications Corp. (c) .................. 1,006,687 60,000 LodgeNet Entertainment Corp. (c) ................... 1,057,500 52,000 Westwood One, Inc. (c) ............................. 1,004,250 ------------ 3,068,437 ------------ Building & Related -- 1.2% 27,300 D.R.Horton ......................................... 667,144 68,000 Intergrated Electrical Services (c) ................ 403,750 36,200 Pulte Corp. ........................................ 1,527,187 ------------ 2,598,081 ------------ Business Services -- 3.7% 32,600 Administaff, Inc. (c) .............................. 886,720 10,600 Catalina Marketing Corp. (c) ....................... 412,737 15,600 Corinthian Colleges, Inc. (c) ...................... 591,825 Business Services -- continued 13,700 Learning Tree International, Inc. (c) .............. $ 678,150 28,600 Macrovision Corp. (c) .............................. 2,116,847 46,525 Metris Co. ......................................... 1,224,189 20,000 NCO Group, Inc. (c) ................................ 607,500 43,100 On Assignment, Inc. (c) ............................ 1,228,350 20,000 Tetra Tech, Inc. (c) ............................... 637,500 ---------- 8,383,818 ---------- Chemicals -- 1.0% 33,700 Arqule, Inc.. (c) .................................. 1,078,400 25,000 Georgia Gulf Corp. ................................. 426,562 20,650 Symyx Technologies, Inc. (c) ....................... 743,400 ------------ 2,248,362 ------------ Communication Equipment -- 0.2% 25,000 Cable Design Technologies Corp. (c) ................ 420,313 ------------ Communication Services -- 0.4% 6,400 Illuminet Holdings, Inc. (c) ....................... 146,800 90,000 Mpower Communications Corp. (c) .................... 461,250 25,000 Ventiv Health, Inc. (c) ............................ 314,063 ------------ 922,113 ------------ Computer Hardware -- 1.2% 20,000 Adept Technology, Inc. (c) ......................... 290,000 14,400 Extreme Networks, Inc. (c) ......................... 563,400 6,500 Juniper Networks, Inc. (c) ......................... 819,406 250,000 Micron Electronics, Inc. (c) ....................... 976,563 ------------ 2,649,369 ------------ Computer - Networking -- 0.4% 130,000 Auspex Systems, Inc. (c) ........................... 910,000 12,700 Turnstone Systems, Inc. ............................ 94,456 ------------ 1,004,456 ------------ Computer Software & Services -- 8.7% 24,400 Acxiom Corp. (c) ................................... 950,075 25,200 Aspen Technology (c) ............................... 837,900 23,600 Bisys Group, Inc. (c) .............................. 1,230,150 26,800 Cadence Design Systems, Inc. (c) ................... 737,000 17,950 ChoicePoint, Inc. (c) .............................. 1,176,847 135,000 CIBER, Inc. (c) .................................... 658,125 17,150 IntraNet Solutions, Inc. (c) ....................... 874,650 14,600 Macromedia, Inc. (c) ............................... 886,950 21,650 Manhattan Assocs, Inc. ............................. 922,831 23,200 Manugistics Group, Inc. (c) (d) .................... 1,322,400 70,000 Maxtor Corp. (c) ................................... 391,563 14,100 Mercury Interactive Corp. (c) ...................... 1,272,525 6,200 Micromuse, Inc. (c) ................................ 374,228 6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Computer Software & Services -- continued 100,000 MSC.Software Corp. ................................. $ 785,000 70,000 National Data Corp. ................................ 2,563,750 14,500 Natural Microsystems Corp. (c) ..................... 143,188 16,000 Packeteer, Inc. (c) ................................ 198,000 29,000 PeopleSoft, Inc. (c) ............................... 1,078,437 87,700 Pilot Network Services, Inc. (c) ................... 71,256 20,000 Retek, Inc. (c) .................................... 487,500 15,600 SeaChange International, Inc. (c) .................. 316,875 181,000 Stamps.com, Inc. (c) (d) ........................... 503,406 40,000 Symantec Corp. (c) ................................. 1,335,000 19,500 Verity, Inc. (c) ................................... 469,219 ---------- 19,586,875 ------------ Computers & Business Equipment -- 4.3% 26,500 Advanced Digital Information Corp. (c) .............................. 609,500 3,000 Ceragon Networks, Ltd. (c) ......................... 36,187 15,650 Computer Network Technology Corp. (c) ............................... 450,916 181,400 Concurrent Computer Corp. (c) ...................... 975,025 30,000 DMC Stratex Networks, Inc. (c) ..................... 450,000 65,000 Intergraph Corp. (c) ............................... 390,000 10,000 L-3 Communications Holding, Inc. (c) .................................. 770,000 28,300 Mercury Computer Systems, Inc. (c) ................. 1,314,181 10,600 New Focus, Inc. (c) ................................ 368,350 182,100 Pinnacle Systems, Inc. (c) ......................... 1,342,987 75,000 Read-Rite Corp. (c) (d) ............................ 302,344 25,400 SonicWALL, Inc. (c) ................................ 412,750 12,500 Sonus Networks, Inc. (c) ........................... 315,625 44,750 Ulticom, Inc. (c) .................................. 1,524,297 190,000 United Shipping and Technology, Inc. (c) ............................... 332,500 25,000 United Shipping and Technology, Inc., 144A ............................. 43,750 ------------ 9,638,412 ------------ Construction -- 0.4% 21,700 Cal Dive International, Inc (c) .................... 577,763 60,000 Parker Drilling Co. (c) ............................ 303,750 ------------ 881,513 ------------ Consumer Goods & Services -- 0.9% 150,000 American Greetings Corp. ........................... 1,415,625 50,000 R.G. Barry Corp. ................................... 118,750 Consumer Goods & Services -- continued 35,500 ValueVision International, Inc. (c) ................ $ 448,188 ------------ 1,982,563 ------------ Diversified Conglomerates -- 0.2% 50,000 U.S. Industries, Inc. .............................. 400,000 ------------ Domestic Oil -- 0.3% 7,500 Equitable Resources, Inc. .......................... 500,625 37,500 Grey Wolf, Inc. (c) ................................ 220,313 ------------ 720,938 ------------ Drugs & Healthcare -- 10.0% 19,200 Abgenix, Inc. (c) .................................. 1,134,000 8,000 Accredo Health, Inc. (c) ........................... 401,500 12,400 Advance Paradigm, Inc. ............................. 564,200 19,900 Albany Molecular Research, Inc. (c) ................ 1,226,337 13,700 Alkermes, Inc. (c) ................................. 429,838 12,500 Applera Corp.--Celera Genomics Group (c) ................................. 449,219 42,500 Aradigm Corp. (c) .................................. 621,563 17,500 Atrix Labs, Inc. (c) (d) ........................... 298,594 18,250 Barr Labs, Inc. (c) ................................ 1,331,109 93,500 Caremark Rx, Inc. (c) .............................. 1,268,094 50,000 Covance, Inc. (c) .................................. 537,500 4,400 CV Therapeutics, Inc. (c) .......................... 311,300 40,000 Davita, Inc. (c) ................................... 685,000 35,200 Duane Reade, Inc. (c) (d) .......................... 1,075,800 25,000 Esperion Therapeutics (c) .......................... 271,875 2,700 Gilead Sciences, Inc. (c) .......................... 223,931 12,950 Impath, Inc. (c) ................................... 861,175 4,300 Inhale Therapeutic Systems (c) ..................... 217,150 200,900 Insmed, Inc. (c) ................................... 696,872 25,300 LifePoint Hospitals, Inc. (c) ...................... 1,268,162 46,500 Novavax, Inc. (c) .................................. 395,250 26,100 Noven Pharmaceuticals, Inc. (c) .................... 975,487 44,600 Priority Healthcare Corp. (c) ...................... 1,820,237 68,000 Quintiles Transnational Corp. (c) .................. 1,423,750 51,030 Quorum Health Group (c) ............................ 803,722 10,000 Respironics, Inc. (c) .............................. 285,000 15,000 Scott Technologies, Inc. ........................... 335,625 25,000 Sicor, Inc. (c) .................................... 360,938 8,000 Tanox, Inc. (c) .................................... 313,500 16,600 Techne Corp. (c). .................................. 598,638 49,400 Thoratec Labs Corp. (c) ............................ 543,400 26,100 Triad Hospitals, Inc. (c) .......................... 849,881 ------------ 22,578,647 ------------ See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Electric -- 0.1% 9,062 Catalytica Energy Systems, Inc. (c) ................ $ 156,320 ------------ Electrical Equipment -- 0.4% 25,100 Alpha Industries ................................... 928,700 ------------ Electric Components -- 1.4% 35,600 C-Cube Microsystems, Inc. (c) ...................... 438,325 28,200 Emcore Corp. (c) ................................... 1,325,400 36,300 Plexus Corp. (c) ................................... 1,103,180 13,800 Zygo Corp. (c) ..................................... 390,281 ------------ 3,257,186 ------------ Electronics -- 3.3% 13,000 3D Systems Corp. (c) ............................... 157,625 13,000 Anaren Microwave, Inc. (c) ......................... 873,437 19,300 Cymer, Inc. (c) .................................... 496,673 7,300 DuPont Photomasks, Inc. (c) ........................ 385,759 6,300 Fuelcell Energy, Inc. (c) .......................... 431,944 15,850 Molecular Devices Corp. (c) ........................ 1,084,734 15,650 Newport Corp. ...................................... 1,230,237 41,800 Photon Dynamics, Inc. (c) .......................... 940,500 10,600 Tektronix, Inc. (c) ................................ 357,088 14,100 Teledyne Technologies, Inc. (c) .................... 333,113 30,400 TranSwitch Corp. (c) ............................... 1,189,400 ------------ 7,480,510 ------------ Entertainment -- 0.2% 16,000 CEC Entertainment, Inc. (c) ........................ 546,000 ------------ Exchange Traded Funds -- 0.3% 10,000 Nasdaq 100 Trust (c) ............................... 583,750 ------------ Financial Services -- 1.2% 13,500 Ambac Financial Group, Inc. ........................ 787,219 29,700 AmeriCredit Corp. (c) .............................. 809,325 33,150 Raymond James Financial, Inc. ...................... 1,156,106 ------------ 2,752,650 ------------ Food & Beverages -- 1.3% 165,000 Del Monte Foods Co. (c) ............................ 1,196,250 50,000 M&F Worldwide Corp. (c) ............................ 193,750 100,000 Ralcorp Holdings, Inc. (c) ......................... 1,637,500 ------------ 3,027,500 ------------ Gas & Pipeline Utilities -- 0.9% 23,000 Atmos Energy Corp. ................................. 560,625 12,500 El Paso Energy Corp. ............................... 895,313 17,600 Western Gas Resources, Inc. ........................ 592,900 ------------ 2,048,838 ------------ Health Care - Drugs -- 0.9% 42,500 Elan Corp., PLC (ADR) (c) (d) ...................... $ 1,989,531 ------------ Health Care - Medical Technology -- 2.1% 18,700 Cerus Corp. (c) .................................... 1,407,175 60,000 Conmed Corp. (c) ................................... 1,027,500 62,500 Endocardial Solutions, Inc. (c) .................... 191,406 20,650 Exelixis, Inc. (c) ................................. 302,006 200,000 Hanger Orthopedic Group, Inc. ...................... 262,500 20,800 MiniMed, Inc. (c) .................................. 874,250 11,500 Trimeris, Inc. (c) ................................. 631,063 ------------ 4,695,900 ------------ Health Care - Services -- 3.1% 13,500 Community Health Systems, Inc. (c) ................. 472,500 57,900 First Health Group Corp. ........................... 2,695,969 35,600 Orthodontic Centers of America (c) ................. 1,112,500 65,300 Oxford Health Plans, Inc. (c) ...................... 2,579,350 ------------ 6,860,319 ------------ Household Appliances & Home Furnishings -- 0.2% 16,800 Mohawk Industries, Inc. (c) ........................ 459,900 ------------ Hotels & Restaurants -- 1.0% 26,800 Cheesecake Factory, Inc. (c) ....................... 1,028,450 60,000 Prime Hospitality Corp. (c) ........................ 697,500 12,000 Speedway Motorsports, Inc. (c) ..................... 288,000 95,000 Steakhouse Partners, Inc. (c) ...................... 326,562 ------------ 2,340,512 ------------ Household Products -- 0.2% 25,000 Oakley, Inc. (c) ................................... 337,500 ------------ Industrial Goods & Services -- 2.0% 30,750 C&D Technologies, Inc. ............................. 1,328,016 60,000 Columbus McKinnon Corp. ............................ 532,500 25,000 HB Fuller Co. ...................................... 986,328 15,000 PerkinElmer, Inc. .................................. 1,575,000 ------------ 4,421,844 ------------ Industrial Machinery -- 0.3% 20,000 Flowserve Corp. (c) ................................ 427,500 10,000 Gardner Denver Machinery, Inc. (c) ................. 213,000 ------------ 640,500 ------------ Insurance -- 2.4% 27,500 PMI Group, Inc. .................................... 1,861,406 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Insurance -- continued 26,792 Radian Group, Inc. ................................. $ 2,011,075 3,600 RenaissanceRe Holdings, Ltd. ....................... 281,925 23,800 StanCorp Financial Group, Inc. ..................... 1,136,450 ------------ 5,290,856 ------------ Internet Content -- 2.2% 330,700 billserv.com, Inc. (c) ............................. 847,419 105,900 C Bridge Internet Solutions, Inc. (c) .............. 413,672 42,900 Earthlink, Inc. (c) ................................ 215,840 49,000 IndyMac Mortgage Holdings, Inc. (c) ................................. 1,445,500 67,000 PurchasePro.com, Inc. (c) (d) ...................... 1,172,500 160,000 Viewpoint Corp. (c) ................................ 870,000 ------------ 4,964,931 ------------ Investment Companies -- 0.5% 31,650 Waddell & Reed Financial, Inc. ..................... 1,190,831 ------------ Leisure -- 0.3% 25,000 Royal Caribbean Cruises, Ltd. ...................... 661,250 ------------ Machinery -- 1.0% 31,600 APW, Ltd. (c) ...................................... 1,066,500 40,000 Imation Corp. (c) .................................. 620,000 47,300 Sames Corp. (c) .................................... 514,388 ------------ 2,200,888 ------------ Manufacturing -- 0.2% 16,000 Diebold, Inc. ...................................... 534,000 ------------ Medical Services -- 0.5% 6,900 Laboratory Corp. (c) ............................... 1,214,400 ------------ Network Systems -- 0.2% 74,800 Legato Systems, Inc. (c) ........................... 556,325 ------------ Oil & Gas -- 0.7% 24,700 Stone Energy Corp. (c) ............................. 1,594,385 ------------ Oil & Gas - Drilling Equipment -- 2.0% 30,100 Hanover Compressor Co. (c) (d) ..................... 1,341,331 26,100 Marine Drilling Companies, Inc. (c) ................ 698,175 50,500 National-Oilwell, Inc. (c) ......................... 1,953,719 11,000 Precision Drilling Corp. (c) ....................... 413,187 ------------ 4,406,412 ------------ Oil & Gas - Exploration Production -- 1.5% 24,700 Barrett Resources Corp. (c) ........................ 1,403,269 15,000 EOG Resources, Inc. ................................ 820,313 24,600 Newfield Exploration Co. (c) ....................... 1,166,962 ------------ 3,390,544 ------------ Petroleum Services -- 4.2% 25,000 Cross Timbers Oil .................................. $ 693,750 70,000 Key Energy Group (c) ............................... 730,625 20,000 Newpark Resources, Inc. (c) ........................ 191,250 8,500 Noble Affiliates, Inc. ............................. 391,000 30,200 Pride International, Inc. (c) ...................... 743,675 32,700 R&B Falcon Corp. (c) ............................... 750,056 10,300 Spinnaker Exploration Co. (c) ...................... 437,750 25,000 Teekay Shipping Corp. .............................. 950,000 138,400 UTI Energy Corp. (c) ............................... 4,549,900 ------------ 9,438,006 ------------ Real Estate Investment Trusts -- 1.0% 100,000 Catellus Development Corp. (c) ..................... 1,750,000 35,000 Trammell Crow Co. (c) .............................. 472,500 ------------ 2,222,500 ------------ Retail -- 4.6% 12,500 1-800 Contacts, Inc. (c) ........................... 357,813 32,800 Abercrombie & Fitch Co. (c) ........................ 656,000 8,500 AnnTaylor Stores Corp. (c) ......................... 211,969 170,000 Department 56, Inc. (c) ............................ 1,955,000 8,000 Footstar, Inc. (c) ................................. 396,000 23,000 Hot Topic, Inc. (c) ................................ 378,063 20,300 Linens'n Things, Inc. (c) .......................... 560,787 24,300 O'Reilly Automotive, Inc. (c) ...................... 650,025 158,600 Shopko Stores, Inc. ................................ 793,000 34,700 Talbots, Inc. ...................................... 1,583,187 40,650 The Men's Wearhouse, Inc. (c) ...................... 1,107,712 150,000 Ugly Duckling Corp. (c) ............................ 590,625 20,300 Ultimate Electronics, Inc. (c) ..................... 445,331 37,000 Williams-Sonoma, Inc. (c) .......................... 740,000 ------------ 10,425,512 ------------ Retail - Food & Drug -- 0.4% 13,500 Whole Foods Market, Inc. (c) (d) ................... 825,188 ------------ Retail-Specialty -- 0.1% 100,000 Cyberian Outpost, Inc. (c) (d) ..................... 118,750 137,400 SkyMall, Inc. (c) .................................. 154,575 ------------ 273,325 ------------ Semiconductors -- 0.8% 14,400 Exar Corp. (c) ..................................... 446,175 12,500 Marvell Technology Group, Ltd. (c) ................. 274,219 119,500 Oak Technology, Inc. (c) ........................... 1,038,156 ------------ 1,758,550 ------------ Services -- 3.4% 20,300 American Superconductor Corp. (c) .................. 579,819 See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Services -- continued 100,000 Checkpoint Systems, Inc. (c) ....................... $ 743,750 32,600 Corporate Executive Board Co. (c) .................. 1,296,359 38,250 DeVry, Inc (c) ..................................... 1,443,938 15,750 Forrester Research, Inc. (c) ....................... 788,484 1 30,000 ITT Educational Services, Inc. ..................... 2,860,000 ------------ 7,712,350 ------------ Shipbuilding -- 0.1% 10,000 Frontline, Ltd. .................................... 142,500 ------------ Software -- 2.6% 38,000 Actuate Corp. (c) .................................. 726,750 27,050 Documentum, Inc. (c) ............................... 1,344,047 173,500 Imanage, Inc. (c) .................................. 791,594 7,800 Nuance Communications (c) .......................... 336,375 70,000 Parametric Technology Corp. (c) .................... 940,625 40,000 Red Hat, Inc. (c) .................................. 250,000 14,800 Smartforce PLC (c) ................................. 555,925 6,100 Speechworks International, Inc. (c) ................ 299,281 20,000 THQ, Inc. (c) ...................................... 487,500 ------------ 5,732,097 ------------ Steel -- 0.2% 10,000 Carpenter Technology ............................... 350,000 ------------ Telecommunications -- 2.2% 189,800 Latitude Communications, Inc. (c) .................. 735,475 375,000 Motient Corp. (c) .................................. 1,500,000 100,000 Netro Corp. (c) .................................... 693,750 552,900 Primus Telecomm Group, Inc. (c) (d) ................ 1,278,581 175,000 Startec Global Communications Corp. (c) ........................... 678,125 46,100 Worldquest Networks, Inc. (c) ...................... 123,894 ------------ 5,009,825 ------------ Telecommunications - Equipment -- 1.1% 16,100 Comverse Technology, Inc. (c) ...................... 1,748,862 16,000 Plantronics, Inc. (c) .............................. 752,000 ------------ 2,500,862 ------------ Transportation -- 0.3% 7,500 Landstar Systems, Inc. (c) ......................... 415,781 42,500 OMI Corp. (c) ...................................... 273,594 ------------ 689,375 ------------ Total Common Stock (Identified Cost $206,176,750) ..................... 213,973,235 ------------ $3,426,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.85% to be repurchased at $3,428,227 on 1/02/2001, collateralized by $2,175,000 U.S. Treasury Bond,11.250%, due 2/15/2015 valued at $3,499,062 ......................................... $ 3,426,000 9,181,000 Repurchase Agreement with State Street Bank and Trust Co.dated 12/29/2000 at 5.25% to be repurchased at $9,186,356 on 1/02/2001, collateralized by $9,230,000 U.S. Treasury Bond, 6.250%, due 10/31/2001 valued at $9,368,727 ......................................... 9,181,000 3,661,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $3,663,136 on 1/02/2001, collateralized by $3,680,000 U.S. Treasury Bond, 6.250%, due 10/31/2001 valued at $3,735,310 ......................................... 3,661,000 732,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $732,427 on 1/02/2001, collateralized by $575,000 U.S. Treasury Bond, 8.000%, due 11/15/2021 valued at $752,552 ...................... 732,000 ------------ Total Short Term Investments (Identified Cost $17,000,000) ...................... 17,000,000 ------------ Total Investments -- 102.7% (Identified Cost $223,176,750) (b) ................. 230,973,235 Other assets less liabilities ...................... (6,086,873) ------------ Total Net Assets -- 100% ........................... $224,886,362 ============ 10 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 (a) See Note 1a of Notes to Financial Statements (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost of $228,367,652 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 $ 39,885,434 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (37,279,851) -------------- Net unrealized appreciation $ 2,605,583 ============== During the year ended December 31, 2000, the Fund distributed $25,239,448 (unaudited) of long-term capital gains. (c) Non-income producing security. (d) All or a portion of this security was on loan to brokers at December 31, 2000. ADR An American Depositary Receipt (ADR) is a cetificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described. The values of ADRs are significantly influenced by trading on exchanges not located in the United States. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2000, the value of those securities amounted to $43,750 or 0.02% of net assets. See accompanying notes to financial statements. 11 STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS ASSETS Investments at value (Identified cost $223,176,750)............. $ 230,973,235 Cash............................................................ 16,491 Foreign cash at value (Identified cost $181,770)................ 188,900 Investments held as collateral for loaned securities............ 8,811,509 Receivable for: Fund shares sold............................................. 398,322 Securities sold.............................................. 4,296,653 Dividends and interest....................................... 26,589 Securities lending income.................................... 37,500 Unamortized organization expenses............................... 8,176 ------------- 244,757,375 LIABILITIES Payable for: Collateral on securities loaned, at value.................... $ 8,811,509 Securities purchased......................................... 9,439,824 Fund shares redeemed......................................... 1,198,897 Accrued expenses: Management fees.............................................. 196,547 Deferred trustees' fees...................................... 34,397 Accounting and administrative................................ 6,764 Other........................................................ 183,075 ----------- 19,871,013 ------------- NET ASSETS......................................................... $ 224,886,362 ============= Net Assets consist of: Paid in capital.............................................. $ 230,129,523 Undistributed (overdistributed) net investment income (loss). (34,397) Accumulated net realized gain (loss)......................... (13,012,379) Unrealized appreciation (depreciation) on investments and foreign currency transactions........... 7,803,615 ------------- NET ASSETS......................................................... $ 224,886,362 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($89,713,566 / 5,434,650 shares of beneficial interest)...... $ 16.51 ============= Offering price per share (100 / 94.25 of $16.51)................ 17.52* ============= Net asset value and offering price of Class B shares ($107,082,648 / 6,752,163 shares of beneficial interest)..... $ 15.86** ============= Net asset value of Class C shares ($28,090,148 / 1,771,382 shares of beneficial interest)...... $ 15.86** ============= Offering price per share (100 / 99.00 of $15.86)................ $ 16.02 =============
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 12 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends.................................................. $ 545,414 Interest................................................... 1,060,043 Securities lending income.................................. 135,298 -------------- 1,740,755 Expenses Management fees......................................... $ 2,642,369 Service fees - Class A.................................. 251,222 Service and distribution fees - Class B................ 1,193,111 Service and distribution fees - Class C................. 318,545 Trustees' fees and expenses............................. 17,228 Accounting and administrative........................... 90,439 Custodian............................................... 308,489 Transfer agent.......................................... 842,438 Audit and tax services.................................. 48,059 Legal................................................... 12,826 Printing................................................ 73,555 Registration............................................ 55,567 Amortization of organization expense.................... 8,931 Miscellaneous........................................... 12,065 ------------ Total expenses before reductions........................... 5,874,844 Less reductions............................................ (9,837) 5,865,007 ------------ ------------ Net investment income (loss)............................... (4,124,252) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on investments - net.................. 22,602,507 Unrealized appreciation (depreciation) on: Investments - net....................................... (55,781,872) Foreign currency transactions - net..................... 7,110 ------------ Total unrealized appreciation (depreciation) on investments and foreign currency transactions......... (55,774,762) ------------ Net gain (loss) on investment transactions................. (33,172,255) -------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......... $ (37,296,507) ==============
See accompanying notes to financial statements. 13 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income (loss)............................... $ (2,815,368) $ (4,124,252) Net realized gain (loss) on investments.................... 40,096,152 22,602,507 Unrealized appreciation (depreciation) on investments and foreign currency transactions....................... 45,299,689 (55,774,762) ------------- -------------- Increase (decrease) in net assets from operations.......... 82,580,473 (37,296,507) ------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net realized gain on investments Class A................................................. (7,389,591) (16,889,157) Class B................................................. (8,795,407) (20,755,405) Class C................................................. (2,189,940) (5,518,272) In excess of net realized gain on investments Class A................................................. 0 (2,952,150) Class B................................................. 0 (3,627,954) Class C................................................. 0 (964,570) ------------- -------------- (18,374,938) (50,707,508) ------------- -------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS.................... 15,593,441 100,109,343 ------------- -------------- Total increase (decrease) in net assets....................... 79,798,976 12,105,328 NET ASSETS Beginning of the year...................................... 132,982,058 212,781,034 ------------- -------------- End of the year............................................ $ 212,781,034 $ 224,886,362 ============= ============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year............................................ $ (25,759) $ (34,397) ============= ==============
14 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------- Year Ended December 31, ----------------------------------------------------- 1997 1998 1999 2000 --------- -------- -------- -------- Net asset value, beginning of year (c)........ $ 12.50 $ 15.37 $ 15.66 $ 23.42 --------- -------- -------- -------- Income (loss) from investment operations Net investment income (loss) (a).............. (0.20) (0.23) (0.27) (0.28) Net realized and unrealized gain (loss) on investments................................ 3.55 0.54 10.22 (2.30) --------- -------- -------- -------- Total from investment operations.............. 3.35 0.31 9.95 (2.58) --------- -------- -------- -------- Less distributions Distributions from net realized capital gains. (0.48) (0.02) (2.19) (3.69) Distributions in excess of net realized gains. 0.00 0.00 0.00 (0.64) --------- -------- -------- -------- Total distributions........................... (0.48) (0.02) (2.19) (4.33) --------- -------- -------- -------- Net asset value, end of year.................. $ 15.37 $ 15.66 $ 23.42 $ 16.51 ========= ======== ======== ======== Total return (%) (b).......................... 27.0 2.1 65.4 (12.2) Ratio of operating expenses to average net assets (%)............................. 2.20 2.07 2.06 1.88 Ratio of operating expenses to average net assets after expense reduction (%) .... 2.20 2.07 2.06 1.88(d) Ratio of net investment income (loss) to average net assets (%).................. (1.44) (1.52) (1.54) (1.19) Portfolio turnover rate (%)................... 140 182 263 216 Net assets, end of year (000)................. $ 52,066 $ 56,161 $ 84,725 $ 89,714
(a) Per share net investment loss has been calculated using the average shares outstanding during the period. (b) A sales charge is not reflected in total return calculations. (c) Fund commenced operations on December 31, 1996. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ----------------------------------------------------- Year Ended December 31, ----------------------------------------------------- 1997 1998 1999 2000 --------- -------- -------- -------- Net asset value, beginning of year (c)........ $ 12.50 $ 15.26 $ 15.43 $ 22.85 --------- -------- -------- -------- Income (loss) from investment operations Net investment income (loss) (a).............. (0.30) (0.33) (0.39) (0.44) Net realized and unrealized gain (loss) on investments................................ 3.54 0.52 10.00 (2.22) --------- -------- -------- -------- Total from investment operations.............. 3.24 0.19 9.61 (2.66) --------- -------- -------- -------- Less distributions Distributions from net realized capital gains. (0.48) (0.02) (2.19) (3.69) Distributions in excess of net realized gains. 0.00 0.00 0.00 (0.64) --------- -------- -------- -------- Total distributions........................... (0.48) (0.02) (2.19) (4.33) --------- -------- -------- -------- Net asset value, end of year.................. $ 15.26 $ 15.43 $ 22.85 $ 15.86 ========= ======== ======== ======== Total return (%) (b).......................... 26.1 1.3 64.1 (12.9) Ratio of operating expenses to average net assets (%)............................. 2.95 2.82 2.81 2.63 Ratio of operating expenses to average net assets after expense reduction (%) .... 2.95 2.82 2.81 2.63(d) Ratio of net investment income (loss) to average net assets (%).................. (2.19) (2.27) (2.29) (1.94) Portfolio turnover rate (%)................... 140 182 263 216 Net assets, end of year (000)................. $ 52,616 $ 61,409 $102,029 $ 107,083
(a) Per share net investment loss has been calculated using the average shares outstanding during the period. (b) A sales charge is not reflected in total return calculations. (c) Fund commenced operations on December 31, 1996. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. ~ The rebated commissions are used to reduce operating expenses of the Fund. 16 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C ----------------------------------------------------- Year Ended December 31, ----------------------------------------------------- 1997 1998 1999 2000 --------- -------- -------- -------- Net asset value, beginning of year (c). $ 12.50 $ 15.26 $ 15.43 $ 22.85 --------- -------- -------- -------- Income (loss) from investment operations Net investment income (loss) (a)....... (0.30) (0.33) (0.39) (0.44) Net realized and unrealized gain (loss) on investments......................... 3.54 0.52 10.00 (2.22) --------- -------- -------- -------- Total from investment operations....... 3.24 0.19 9.61 (2.66) --------- -------- -------- -------- Less distributions Distributions from net realized capital gains (0.48) (0.02) (2.19) (3.69) Distributions in excess of net realized gains 0.00 0.00 0.00 (0.64) --------- -------- -------- -------- Total distributions.................... (0.48) (0.02) (2.19) (4.33) --------- -------- -------- -------- Net asset value, end of year........... $ 15.26 $ 15.43 $ 22.85 $ 15.86 ========= ======== ======== ======== Total return (%) (b)................... 26.1 1.3 64.1 (12.9) Ratio of operating expenses to average net assets (%)...................... 2.95 2.82 2.81 2.63 Ratio of operating expenses to average net assets after expense reduction (%) 2.95 2.82 2.81 2.63(d) Ratio of net investment income (loss) to average net assets (%)........... (2.19) (2.27) (2.29) (1.94) Portfolio turnover rate (%)............ 140 182 263 216 Net assets, end of year (000).......... $ 13,970 $ 15,412 $ 26,027 $ 28,090
(a) Per share net investment loss has been calculated using the average shares outstanding during the period. (b) A sales charge is not reflected in total return calculations. (c) Fund commenced operations on December 31, 1996. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 17 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Star Small Cap Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks capital appreciation. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class C shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and the relevant subadvisers 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 or when the Fund first learns of the dividend, and interest income is recorded on an accrual basis. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. c. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. Since the values of investment securities are presented at the foreign exchange rates prevailing at the end of the period, it is not practical to isolate that portion of the results of operations arising from changes in exchange rates from fluctuations arising from changes in market prices of the investment securities. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities resulting from changes in the exchange rate. d. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. e. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for organization costs and net operating loss. Permanent book and tax basis differences will result in reclassification to capital accounts. f. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. Each 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 counter party including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. g. Organization Expense. Costs incurred in connection with the Fund's organization and initial registration, amounting to approximately $41,674 in the aggregate, were paid by the Fund and are being amortized over 60 months. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $547,292,195 and $500,448,312 respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 1.05% of the Fund's average daily net assets reduced by the amount of any subadviser fees paid by the Fund to its subadvisers as follows: Harris Associates, L.P., at the annual rate of 0.70% of the average daily net assets of its segment of the Fund, Loomis, Sayles & Company, L.P. and RS Investment Management, L.P. at the annual rate of 0.55% of the first 19 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 $50 million of the average daily net assets of the segment of the Fund which that sub-adviser manages, and 0.50% of such assets in excess of $50 million, and Montgomery Asset Management, LLC at the annual rate of 0.65% of the first $50 million of the average daily net assets of the segment of the Fund which that subadviser manages, and 0.50% of such assets in excess of $50 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management, Harris Associates, L.P. and Loomis, Sayles & Company, L.P. are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and the subadvisers under the management and subadvisery agreements in effect during the year ended December 31, 2000, are as follows: Fees Earned ------------- Nvest Management $ 1,192,667 Harris Associates, L.P. 253,574 Loomis, Sayles & Company, L.P. 404,152 Montgomery Asset Management, LLC 306,063 RS Investment Management, L.P. 485,913 ------------- $ 2,642,369 ============= The effective management fee for the year ended December 31, 2000 was 1.05% b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $90,439 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services (BFDS) serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $602,280 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $251,222 in fees under the Class A Plan. 20 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $298,278 and $79,636 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $894,833 and $238,909 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the year ended December 31, 2000 amounted to $672,084. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class A Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 12,987,079 $ 223,593,397 3,632,351 $ 87,884,595 Shares issued in connection with the reinvestment of: Distributions from net realized gain............ 338,833 7,092,084 1,034,597 19,061,808 ----------- --------------- ----------- ------------- 13,325,912 230,685,481 4,666,948 106,946,403 Shares repurchased................................. (13,293,729) (229,357,906) (2,849,940) (67,561,240) ----------- --------------- ----------- ------------- Net increase (decrease)............................ 32,183 $ 1,327,575 1,817,008 $ 39,385,163 ----------- --------------- ----------- -------------
21 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class B Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 997,712 $ 17,773,867 1,747,478 $ 40,700,957 Shares issued in connection with the reinvestment of: Distributions from net realized gain............ 395,509 8,078,038 1,270,416 22,548,271 ----------- --------------- ----------- ------------- 1,393,221 25,851,905 3,017,894 63,249,228 Shares repurchased................................. (908,070) (14,947,215) (730,484) (15,881,202) ----------- --------------- ----------- ------------- Net increase (decrease)............................ 485,151 $ 10,904,690 2,287,410 $ 47,368,026 ----------- --------------- ----------- ------------- Year Ended December 31, ----------------------------------------------------------- 1999 2000 ------------------------------ -------------------------- Class C Shares Amount Shares Amount -------- ----------- --------------- ----------- ------------- Shares sold........................................ 432,575 $ 7,736,382 705,111 $ 16,522,872 Shares issued in connection with the reinvestment of: Distributions from net realized gain............ 94,832 1,937,150 290,382 5,172,529 ----------- --------------- ----------- ------------- 527,407 9,673,532 995,493 21,695,401 Shares repurchased................................. (386,906) (6,312,356) (363,176) (8,339,247) ----------- --------------- ----------- ------------- Net increase (decrease)............................ 140,501 $ 3,361,176 632,317 $ 13,356,154 ----------- --------------- ----------- ------------- Increase (decrease) derived from capital shares transactions..................... 657,835 $ 15,593,441 4,736,735 $ 100,109,343 =========== =============== =========== =============
5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund had securities on loan with a market value of $8,638,437 collateralized by United States Treasury Bonds with a market value of $8,811,509. 7. Expense Reduction. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $9,837 under these agreements. 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Star Small Cap Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Star Small Cap Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 23 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the Meeting) shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 6,314,212.029 58,111.377 131,017.141 6,503,340.547 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and: Harris Associates L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 6,303,676.835 68,984.354 130,679.358 6,503,340.547 Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 6,304,777.222 69,253.540 129,309.785 6,503,340.547 Montgomery Asset Management, LLC Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 6,309,814.916 64,435.329 129,090.302 6,503,340.547 RS Investment Management, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- ------------- 6,306,879.796 64,854.449 131,606.302 6,503,340.547 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds - -------------------------------------------------------------------------------- For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Fund(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: Drowning in paper? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs SC56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Government Securities Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST GOVERNMENT SECURITIES FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Government Securities Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and has no expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9550 12/31/91 11486 10969 12/31/92 12268 11716 12/31/93 13373 12771 12/31/94 12645 12076 12/31/95 15178 14495 12/31/96 15296 14608 12/31/97 16874 16115 12/31/98 18396 17568 12/31/99 17215 16440 12/31/00 19432 18558 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST GOVERNMENT SECURITIES FUND
Average Annual Total Returns -- 12/31/00 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Class A (Inception 9/16/85) 1 Year 5 Years 10 Years Net Asset Value(1) 12.89% 5.07% 6.87% With Maximum Sales Charge(2) 7.85 4.11 6.38 - ----------------------------------------------------------------------------------- Class B (Inception 9/23/93) 1 Year 5 Years Since Inception Net Asset Value(1) 12.07% 4.27% 4.37% With CDSC3 7.07 3.95 4.37 - ----------------------------------------------------------------------------------- Class Y (Inception 3/31/94) 1 Year 5 Years Since Inception Net Asset Value(1) 13.50% 5.38% 6.52% - -----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ Fund's Fund's Class B Class Y Since Since Comparative Performance 1 Year 5 Years 10 Years Inception Inception Lehman Brothers Government Bond Index(4) 13.24% 6.49% 7.92% 6.33% 6.67% Morningstar Long Government Average(5) 15.04 5.72 8.38 5.76 7.19 Lipper General Government Average(6) 11.77 5.40 6.99 5.35 6.32 - ------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. (4) Lehman Brothers Government Bond Index is an unmanaged index of public debt of the U.S. Treasury, government agencies, and their obligations. You may not invest directly in an index. Class B since inception return is calculated from 9/30/93. (5) Morningstar Long Government Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (6) Lipper General Government Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. 2 NVEST GOVERNMENT SECURITIES FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Scott Nicholson, James Welch Members of the investment management team, Back Bay Advisors, L.P. Q. How did Nvest Government Securities Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Government Securities Fund Class A shares had a total return of 12.89% based on net asset value, including $0.60 in reinvested dividends. The Fund's benchmark, the Lehman Brothers Government Bond Index, returned 13.24% for the same period. U.S. Treasury securities out-performed the stock market in 2000 for the first time in years, and did significantly better than most other sectors of the fixed-income market. Q. What was the investment environment like during the year? During the first half of the year, the Federal Reserve Board continued a program of raising interest rates in an effort to slow economic growth and avoid potential inflation. In spite of three rate hikes during this period, which caused prices of short-term bonds to decline, long-term Treasury bonds did well. Meanwhile, in January, the U.S. Treasury announced that it would use $30 billion of the federal budget surplus to buy back long-term debt to pay down the deficit. Demand for these issues rose sharply, sending yields down and prices up in this sector. The combination of rising short-term rates and falling long-term yields caused the yield curve to invert - short-term rates rose higher than those on the longer end of the yield curve. After the Fed's last increase in short-term interest rates in May, the tide began to turn. It typically takes about six to nine months before the economy starts to feel the effect of the Fed's intervention, so the economic slowdown that became evident this summer reflected tightening activity begun in 1999. As concern about inflation and further Fed rate increases subsided, short-term interest rates began to ease. By the end of the year, as concern about a potential recession began to grow, the Fed began to hint that it might lower rates to avoid too abrupt a slowdown in the economy. 3 NVEST GOVERNMENT SECURITIES FUND - -------------------------------------------------------------------------------- Q. What was your strategy with the Fund? We were able to shift gears, successfully altering our strategy in order to perform well within the two different investment environments we experienced last year. During the first part of the year, Nvest Government Securities Fund put strong emphasis on longer term Treasury bonds, seeking high total return in this sector. By mid year, the average effective maturity of the portfolio was almost 16 years. Once the economy started to slow, we shifted the Fund's maturity concentration to intermediate- and short-term government securities, where potential returns seemed strongest. By the end of 2000, the Fund's average maturity was 13 years. With these shifts, we were able to position the Fund to take advantage of those areas of the market offering the best potential at different times. As for sector weightings, we maintained a focus on the asset that continued to perform the best in 2000: U.S. Treasury securities. Nvest Government Securities Fund maintained a lower weighting in both agency and mortgage-backed securities than its benchmark last year. We believed this was in the Fund's best interest because credit risk in the bond market heightened during 2000 as increased default risks in a slowing economy caused banks to tighten their lending standards. The non-Treasury sectors tend to be somewhat higher risk than government securities. However, we did maintain some assets in mortgage-backed securities issued by Ginnie Mae (GNMA, the Government National Mortgage Association) and Fannie Mae (FNMA, the Federal National Mortgage Association). Like Treasuries, these securities are backed by the full faith and credit of the U.S. government. Over the course of the year, the Fund's mortgage-backed investments provided generous yields and performed well during an uncertain environment in the fixed-income markets. 4 NVEST GOVERNMENT SECURITIES FUND - -------------------------------------------------------------------------------- Portfolio Mix -- 12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] U.S. Government Securities 63.9% Mortgage-Backed Securities 33.9% Short Term & Other Investments 2.2% Portfolio holdings and asset allocation will vary. Q. What is your current outlook? We believe the investment environment for fixed-income securities should be positive going forward, especially in light of continued volatility in the stock market and the Federal Reserve's move early in January to cut rates by 0.5%. Slower economic growth means that inflation is more likely to be kept at bay, and with inflation less of a threat, it's likely that the Fed will continue to accommodate economic growth at stable levels that are neither inflationary nor recessionary. With the 2000 election resolved, fixed-income investors are waiting to see how the new administration and the new Congress address the federal budget surplus, and whether or not that surplus will be used to pay down debt further. We will continue to focus on economic fundamentals. As 2001 progresses, we believe conditions generally favor the bond market, which should translate into another good year for Nvest Government Securities Fund. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Government Securities Fund invests primarily in U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. It may also invest a portion of assets in mortgage-backed securities that are subject to prepayment risk. These risks affect the value of your investment. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 97.8% of Total Net Assets
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - -------------------------------------------------------------------------------------------------------------------- Mortgage Backed-- 33.9% $ 1,732,896 Federal Home Loan Mortgage Corp., 7.500%, 4/1/2012 ............ Aaa AAA $ 1,773,324 4,975,897 Federal National Mortgage Association, 7.000%, 11/1/2030 ...... Aaa AAA 4,983,659 10,000,000 Federal National Mortgage Association, 7.250%, 1/15/2010 ..... Aaa AAA 10,859,400 2,500,000 Federal National Mortgage Association, 7.500%, 12/1/2030 ...... Aaa AAA 2,536,700 1,475,567 Government National Mortgage Association, 7.500%, 4/15/2027 ... Aaa AAA 1,502,320 6,551,938 Government National Mortgage Association, 8.000%, 9/15/2029 ... Aaa AAA 6,723,926 147,109 Government National Mortgage Association, 8.500%, 2/15/2006 ... Aaa AAA 150,885 288,394 Government National Mortgage Association, 9.000%, with various maturities to 2016 (d) ........................... Aaa AAA 300,980 87,404 Government National Mortgage Association, 9.500%, with various maturities to 2009 (d) ........................... Aaa AAA 91,757 115,264 Government National Mortgage Association, 10.000%, with various maturities to 2016 (d) ........................... Aaa AAA 125,493 18,827 Government National Mortgage Association, 12.500%, with various maturities to 2014 (d) ........................... Aaa AAA 21,564 ----------- 29,070,008 ----------- U.S. Government-- 63.9% 6,500,000 United States Treasury Bonds, 6.250%, 5/15/2030 ............... Aaa AAA 7,251,530 17,000,000 United States Treasury Bonds, 8.125%, 8/15/2021 ............... Aaa AAA 22,230,220 5,000,000 United States Treasury Bonds, 8.750%, 8/15/2020 ............... Aaa AAA 6,867,200 7,500,000 United States Treasury Notes, 5.750%, 8/15/2010 ............... Aaa AAA 7,859,775 10,000,000 United States Treasury Notes, 6.750%, 5/15/2005 ............... Aaa AAA 10,653,100 ----------- 54,861,825 ----------- Total Bonds and Notes (Identified Cost $82,087,267) ........... 83,931,833 ----------- Short Term Investment-- 0.6% - ------------------------------------------------------------------------------- 540,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $540,315 on 1/02/2001, collateralized by $485,000 U.S. Treasury Bond 6.500% due 11/15/2026, valued at $550,896 ............................................. 540,000 ----------- Total Short Term Investment (Identified Cost $540,000) ......... 540,000 ----------- Total Investments--98.4% (Identified Cost $82,627,267)(b) ...... 84,471,833 Other assets less liabilities................................... 1,373,967 ----------- Total Net Assets 100%........................................... $85,845,800 ===========
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized appreciation on investments based on cost for federal income tax purposes of $82,633,986 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost........................................... $ 1,854,748 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value......................................... (16,901) ----------- Net unrealized appreciation............................. $ 1,837,847 =========== At December 31, 2000, the Fund had a net tax basis capital loss carryover of approximately $13,920,897 of which $4,040,060 expires on December 31, 2002, $3,530,050 expires on December 31, 2004, $5,687,678 expires on December 31, 2007 and $663,109 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) The Fund's investment in mortgage backed securities of the Government National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of these issuers which have the same coupon rate have been aggregated for the purpose of presentation in the portfolio composition. See accompanying notes to financial statements. 7 STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $82,627,267) 84,471,833 Cash............................................. 622 Receivable for: Fund shares sold............................... 336,234 Accrued interest............................... 1,438,227 ---------- 86,246,916 LIABILITIES Payable for: Fund shares redeemed........................... $ 184,599 Dividends declared............................. 47,404 Accrued expenses: Transfer agent................................. 18,040 Management fees................................ 46,902 Deferred trustees' fees........................ 51,664 Accounting and administrative.................. 2,607 Other.......................................... 49,900 ---------- 401,116 ---------- NET ASSETS.......................................... $85,845,800 =========== Net Assets consist of: Paid in capital................................ $97,892,414 Undistributed net investment income............ 39,740 Accumulated net realized gain (loss)........... (13,930,920) Unrealized appreciation (depreciation) on investments - net .......................... 1,844,566 ----------- NET ASSETS.......................................... $85,845,800 =========== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($70,909,301 / 6,341,377 shares of beneficial interest) $ 11.18 ======= Offering price per share (100 / 95.50 of $11.18).... $ 11.71* ======= Net asset value and offering price of Class B shares ($10,343,134 / 925,000 shares of beneficial interest) $ 11.18** ======= Net asset value, offering and redemption price of Class Y shares ($4,593,365 / 411,283 shares of beneficial interest) $ 11.17 ======= * Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION Year Ended December 31, 2000 INVESTMENT INCOME Interest......................................... $ 6,163,795 ----------- Expenses Management fees................................ $ 564,715 Service fees - Class A......................... 187,097 Service and distribution fees - Class B....... 88,844 Trustees' fees and expenses.................... 8,739 Accounting and administrative.................. 29,718 Custodian...................................... 77,883 Transfer agent - Class A, Class B.............. 209,962 Transfer agent - Class Y....................... 3,156 Audit and tax services......................... 34,505 Legal.......................................... 1,220 Printing....................................... 36,084 Registration................................... 33,371 Miscellaneous.................................. 3,426 --------- Total expenses................................... 1,278,720 ----------- Net investment income............................ 4,885,075 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments - net.............................. 370,880 Written options - net.......................... (335,684) Futures contracts - net........................ (308,233) --------- Net realized gain (loss) on investments, written options and futures contracts (273,037) Unrealized appreciation (depreciation) on: Investments - net.............................. 5,818,695 --------- Net gain (loss) on investment transactions....... 5,545,658 ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $10,430,733 =========== See accompanying notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ----------------------------- 1999 2000 ------------- ------------ FROM OPERATIONS Net investment income ............................ $ 6,345,756 $ 4,885,075 Net realized gain (loss) on investments, written options and futures contracts .......... (5,908,703) (273,037) Net unrealized appreciation (depreciation) on investments ................................. (7,738,435) 5,818,695 ------------- ------------ Increase (decrease) in net assets from operations (7,301,382) 10,430,733 ------------- ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ........................................ (5,749,722) (4,191,119) Class B ........................................ (537,791) (430,843) Class Y ........................................ (182,001) (188,421) ------------- ------------ (6,469,514) (4,810,383) ------------- ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ......... (5,234,472) (16,862,002) ------------- ------------ Total increase (decrease) in net assets ............. (19,005,368) (11,241,652) NET ASSETS Beginning of the year ............................ 116,092,820 97,087,452 ------------- ------------ End of the year .................................. $ 97,087,452 $ 85,845,800 ============= ============ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year .................................. $ (35,145) $ 39,740 ============= ============
10 See accompanying notes to financial statements. For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year .................. $ 11.73 $ 11.08 $ 11.56 $ 11.90 $ 10.47 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.71 0.62 0.68 0.67 0.62 Net Realized and Unrealized Gain (Loss) on Investments ... (0.64) 0.48 0.33 (1.42) 0.69 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations .................... 0.07 1.10 1.01 (0.75) 1.31 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........................ (0.72) (0.62) (0.67) (0.68) (0.60) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.72) (0.62) (0.67) (0.68) (0.60) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year $ 11.08 $ 11.56 $ 11.90 $ 10.47 $ 11.18 =========== =========== =========== =========== =========== Total Return (%) (a) ............ 0.8 10.3 9.0 (6.4) 12.9 Ratio of Operating Expenses to Average Net Assets (%) ..... 1.32 1.36 1.38 1.36 1.41 Ratio of Net Investment Income to Average Net Assets (%) ....... 6.45 5.63 5.80 6.00 5.69 Portfolio Turnover Rate (%) ..... 462 391 106 313 622 Class B ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Assets, End of the Year (000) $ 120,607 $ 103,583 $ 103,032 $ 84,904 $ 70,909 Net Asset Value, Beginning of the Year ................... $ 11.74 $ 11.08 $ 11.56 $ 11.90 $ 10.47 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.63 0.54 0.58 0.59 0.54 Net Realized and Unrealized Gain (Loss) on Investments ........... (0.65) 0.48 0.34 (1.42) 0.69 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations (0.02) 1.02 0.92 (0.83) 1.23 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........................ (0.64) (0.54) (0.58) (0.60) (0.52) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.64) (0.54) (0.58) (0.60) (0.52) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year $ 11.08 $ 11.56 $ 11.90 $ 10.47 $ 11.18 =========== =========== =========== =========== =========== Total Return (%) (b) ............ (0.1) 9.5 8.2 (7.1) 12.1 Ratio of Operating Expenses to Average Net Assets (%) ....... 2.07 2.11 2.13 2.11 2.16 Ratio of Net Investment Income to Average Net Assets (%) ....... 5.70 4.88 5.05 5.25 4.94 Portfolio Turnover Rate (%) ..... 462 391 106 313 622 Net Assets, End of the Year (000) $ 5,385 $ 5,654 $ 9,657 $ 9,430 $ 10,343
(a) A sales charge is not reflected in total return calculations. (b) A contingent deferred sales charge is not reflected in total return calculations. See accompanying notes to financial statements. 11 For a share outstanding throughout each period.
Class Y ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ................... $ 11.71 $ 11.07 $ 11.54 $ 11.88 $ 10.44 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.74 0.65 0.72 0.70 0.65 Net Realized and Unrealized Gain (Loss) on Investments .... (0.63) 0.47 0.32 (1.43) 0.71 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations 0.11 1.12 1.04 (0.73) 1.36 ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions from Net Investment Income ........................ (0.75) (0.65) (0.70) (0.71) (0.63) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.75) (0.65) (0.70) (0.71) (0.63) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year $ 11.07 $ 11.54 $ 11.88 $ 10.44 $ 11.17 =========== =========== =========== =========== =========== Total Return (%) ................ 1.1 10.5 9.3 (6.3) 13.5 Ratio of Operating Expenses to Average Net Assets (%) ........ 1.07 1.11 1.13 1.11 1.01 Ratio of Net Investment Income to Average Net Assets (%) ..... 6.70 5.88 6.05 6.25 6.09 Portfolio Turnover Rate (%) ..... 462 391 106 313 622 Net Assets, End of the Year (000) $ 6,384 $ 6,658 $ 3,404 $ 2,754 $ 4,593
12 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Government Securities Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income consistent with safety of principal by investing in U.S. Government securities. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class Y shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro rata by the holders of all classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and the subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income is increased by the accretion of original issue discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. 13 NOTES TO FINANCIAL STATEMENT For the Year Ended December 31, 2000 In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of the adoption of this principle will not be material to the financial statements. c. Options. The Fund may use options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to the premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. d. Interest Rate Futures Contracts. The Fund may purchase or sell interest rate futures contracts to hedge against changes in the values of securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 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. 14 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains at least annually. Accordingly, no provision for federal income tax has been made. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatment for mortgage-backed securities for book and tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to the capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. h. Delayed Delivery Transactions. The Fund may purchase securities on a forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. At December 31, 2000 the Fund held no delayed delivery securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ------------------------------- ------------------------------- U.S. Government Other U.S. Government Other --------------- ------------ --------------- ------------ $532,914,917 $5,428,843 $551,419,054 $5,409,300 Transactions in written options for the year ended December 31, 2000 are summarized as follows: Written Options ---------------------- Number of Premiums Contracts Received --------- --------- Open at December 31, 1999...................... 0 $ 0 Contracts opened............................... (1,400) (474,694) Contracts closed............................... 1,400 474,694 --------- --------- Open at December 31, 2000...................... 0 $ 0 ========= ========= 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.65% of the first $200 million of the Fund's average daily net assets, 0.625% of the next $300 million and 0.60% of such assets in excess of $500 million, reduced by the payment to the Fund's investment subadviser, Back Bay Advisors, L.P., ("Back Bay") at the rate of 0.325% of the first $200 million of the Fund's average daily net assets, 0.3125% of the next $300 million and 0.30% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P., ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ------------ Nvest Management $ 282,357 Back Bay 282,358 ------------ $ 564,715 ============ The effective management fee for the year ended December 31, 2000 was 0.65%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $29,718, and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A and Class B shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $160,390 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A and Class B. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A Shares (the "Class A Plan") and a Service and Distribution Plan relating to the Fund's Class B shares (the "Class B Plan"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor, (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $187,097 in service fees under the Class A Plan. Prior to September 24, 1993 to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000 is $1,583,658. Under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $22,211 in service fees under the Class B Plan. Also under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $66,633 in distribution fees under the Class B Plan. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $183,690. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, --------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class A Shares Amount Shares Amount ------- ------------ ------------ ------------ ------------ Shares sold.................. 2,132,834 $23,656,205 1,404,259 $ 15,121,192 Shares issued in connection with the reinvestment of: Dividends from net investment income .................... 461,816 5,100,959 347,841 3,727,503 ------------ ------------- ------------ ------------ 2,594,650 28,757,164 1,752,100 18,848,695 Shares repurchased .......... (3,141,142) (34,765,081) (3,523,641) (37,613,974) ------------ ------------- ------------ ------------ Net increase (decrease) ..... (546,492) $ (6,007,917) (1,771,541) $(18,765,279) ------------ ------------- ------------ ------------
Year Ended December 31, --------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class B Shares Amount Shares Amount ------- ------------ ------------ ------------ ------------ Shares sold.................. 378,984 $ 4,266,989 302,365 $ 3,270,971 Shares issued in connection with the reinvestment of: Dividends from net investment income .................... 33,386 368,048 29,227 313,755 ----------- ----------- ----------- ----------- 412,370 4,635,037 331,592 3,584,726 Shares repurchased .......... (322,881) (3,584,575) (307,592) ----------- ----------- ----------- ----------- Net increase (decrease) ..... 89,489 $ 1,050,462 24,000 $ 300,978 ----------- ----------- ----------- -----------
Year Ended December 31, --------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class Y Shares Amount Shares Amount ------- ------------ ------------ ------------ ------------ Shares sold ................. 71,052 $ 788,905 182,156 $ 1,963,176 Shares issued in connection with the reinvestment of: Dividends from net investment income .................... 16,199 178,666 17,534 188,421 ------------ ------------ ---------- ------------ 87,251 967,571 199,690 2,151,597 Shares repurchased .......... (110,237) (1,244,588) (52,065) (549,298) ------------ ------------ ---------- ------------ Net increase (decrease) ..... (22,986) $ (277,017) 147,625 $ 1,602,299 ------------ ------------ ---------- ------------ Increase (decrease) derived from capital shares transactions .............. (479,989) $ (5,234,472) (1,599,916) $(16,862,002) ============ ============ =========== ============
5. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. For the year ended December 31, 2000, the Fund did not enter into any securities lending transactions. 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Government Securities Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Government Securities Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 19 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 4,199,596.769 68,781.007 187,107.650 4,455,485.426 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 4,182,026.214 83,653.432 189,805.780 4,455,485.426 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------ --------------- Graham T. Allison, Jr 231,271,092.89 7,321,155.65 238,592,248.547 Daniel M. Cain 231,282,396.66 7,309,851.88 238,592,248.547 Kenneth J. Cowan 231,302,361.35 7,289,887.19 238,592,248.547 Richard Darman 231,295,499.27 7,296,749.27 238,592,248.547 Sandra O. Moose 231,298,397.96 7,293,850.58 238,592,248.547 John A. Shane 231,356,664.46 7,235,584.08 238,592,248.547 Peter S. Voss 231,288,476.71 7,303,771.83 238,592,248.547 Pendleton P. White 231,230,527.40 7,361,721.14 238,592,248.547 John T. Hailer 231,453,185.05 7,139,063.49 238,592,248.547 For the Year Ended December 31, 2000 20 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Fund(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs GV56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Municipal Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST MUNICIPAL INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing 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 special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9550 12/31/91 11166 10663 12/31/92 12136 11590 12/31/93 13613 13000 12/31/94 12521 11957 12/31/95 14678 14017 12/31/96 15357 14666 12/31/97 16674 15924 12/31/98 17562 16772 12/31/99 17080 16311 12/31/00 18574 17738 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST MUNICIPAL INCOME FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- Class A (Inception 5/9/77) 1 Year 5 Years 10 Years Net Asset Value(1) 8.76% 4.82% 6.38% With Maximum Sales Charge(2) 3.83 3.86 5.90 - ----------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1) 7.96% 4.04% 3.74% With CDSC(3) 2.96 3.71 3.74 - ----------------------------------------------------------------------------------------------- Since Fund's Class B Comparative Performance 1 Year 5 Years 10 Years Incept. Lehman Brothers Muncipal Bond Index(4) 11.68% 5.84% 7.32% 5.75% Morningstar Muni National Long Average(5) 10.17 4.51 6.60 4.53 Lipper General Municipal Debt Average(6) 10.83 4.65 6.67 4.69
These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Yields as of 12/31/00 - -------------------------------------------------------------------------------- Class A Class B SEC 30-Day Yield(7) 4.96% 4.43% Taxable Equivalent Yield(8) 8.21 7.33 - -------------------------------------------------------------------------------- Notes to Charts (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. (4) Lehman Brothers Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. You may not invest directly in an index. Class B since inception return is calculated from 9/30/93. (5) Morningstar Muni National Long Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (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. Class B since-inception return is calculated from 9/30/93. (7) SEC 30-Day Yield is based on the Fund's net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. (8) Taxable equivalent yield is based on the maximum federal income tax bracket of 39.6%. 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. 2 NVEST MUNICIPAL INCOME FUND Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] James Welch Back Bay Advisors, L.P. Q. How did Nvest Municipal Income Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Municipal Income Fund Class A shares had a total return of 8.76% at net asset value, including $0.39 in reinvested dividends. For the same period, the Fund's benchmark, Lehman Brothers Municipal Bond Index, returned 11.68%. An overall flight to quality in 2000 meant that top-rated bonds outperformed lower rated securities during the year. Since Nvest Municipal Income Fund had a greater emphasis on higher yielding bonds than its benchmark and peer groups during the balance of the year, the Fund's performance was not as strong as it might have been for this period. The 30-day SEC yield for Nvest Municipal Income Fund Class A shares was 4.96%, which is equivalent to a taxable equivalent yield of 8.21%, based on the maximum federal income tax rate of 39.6%. Q. What was the investment environment for municipal bonds in 2000? The year split almost evenly into two contrasting investment environments. During the first half, the Federal Reserve Board continued a series of short-term interest rate hikes that began in 1999. The Fed's program was designed to prevent the economy from overheating. Although rising rates typically mean falling bond prices, the overall environment for fixed-income investments remained surprisingly favorable. Inflation - a key determinant of bond market performance - remained under control as a result of the Fed's actions. During the second half of the year, however, it became clear that the economy was slowing, concern about potential inflation began to be replaced by fears of a possible recession, and the Federal Reserve began to hint that it might ease its restrictive monetary policy. In spite of these market crosscurrents, the municipal bond market came through the year well. Municipal bonds continued to benefit from solid - yet slowing - economic growth. Tax revenue continued to climb, increasing the cash flow of many state and local governments and improving the fiscal health and creditworthiness of many municipalities. 3 Q. Did supply and demand impact the tax-exempt market? Yes. In addition to interest rates, the supply and demand dynamic is one of the biggest influences on the municipal market. Throughout the period, the supply of high-quality, tax-exempt issues fell short of demand, which helped support bond prices. This imbalance occurred for several reasons. Despite market and economic uncertainty, many state and local governments continued to enjoy record budget surpluses. Because so many municipalities were able to use cash to finance projects, there was less need for them to issue new debt, reducing the supply of new bonds available to investors. At the same time, the wealth-creation mentality that dominated the markets for the past several years shifted to a concern for wealth preservation. This shift in investor attitude kept demand for municipal bonds strong, as many investors turned to high-quality municipal securities seeking tax-free income, total-return potential and relative stability. Q. What strategies did you use in managing the Fund? Early in 2000, when the Federal Reserve was actively raising rates, we adopted a defensive strategy, gradually shortening the Fund's duration to about six years by mid year. (Duration is a measure of a bond's price sensitivity to changes in interest rates. A shorter duration makes a Fund less volatile, helping to preserve principal when prices are falling, but a longer duration is beneficial during periods of rising bond prices.) Consequently, during the second half of the year, when we believed further interest rate hikes were unlikely, we extended the Fund's duration to just over seven years and extended its average maturity, concentrating new investments in bonds with longer maturity dates Credit quality also continued to play a major role in our strategy in 2000. As we added new positions during the year, we emphasized higher quality bonds, raising the Fund's concentration in bonds rated A to AAA from 63% of assets at mid year to more than 69% as of the end of December. Especially in a slower growth environment, we believe higher quality bonds offer better relative value because of the superior creditworthiness of the issuers. As always, we are mindful of Nvest Municipal Income Fund's primary goal - to generate high current income free from federal income taxes. 4 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Average Credit Quality = AA Average Portfolio Maturity = 15.7 Years Quality is based on ratings provided by Standard & Poor's. Portfolio holdings and asset allocation will vary. As far as sectors are concerned, through mid-year we emphasized such cyclical industries as airlines, paper companies and utilities, which tend to perform well in a robust economic environment. However, as the investment climate changed in the summer and concerns about a rapidly slowing economy began to surface, we gradually shifted assets into less economically sensitive sectors as a defensive measure. Q. What is your current outlook for municipal bonds? We expect a relatively favorable climate for municipal bonds in the coming months, with measured economic growth and low inflation. However, we believe the performance of the equity markets will have a major influence on the future course of municipal bond prices. Because we expect continued stock market volatility over the next several quarters, we believe investors will continue to seek the relative safety and strong after-tax yields of municipal securities. This should keep demand steady and support bond prices, creating a favorable environment for Nvest Municipal Income Fund. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Municipal Income Fund may invest a portion of assets in lower rated bonds that offer higher yields in return for more risk. Some income may be subject to federal and state taxes. Capital gains are fully taxable. Investors may be subject to the Alternative Minimum Tax (AMT). This portfolio may also include U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. These risks affect your investment's value. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Tax Exempt Obligations -- 98.0% of Total Net Assets
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------- Alaska -- 0.3% $ 460,000 Alaska State Housing Finance Corp. Revenue Bond, 6.500%, 6/01/2034, (MBIA insured)....................................... Aaa AAA $ 470,815 ------------ Arizona -- 1.6% 2,300,000 University of Arizona Revenue Bond, 6.350%, 6/01/2014................... A1 AA 2,494,557 California -- 14.4% 2,000,000 California Pollution Control Finance Authority Revenue Bond, 7.150%, 2/01/2011................................................. Ba1 BBB 2,048,400 5,000,000 California State General Obligation Bond, 4.250%, 10/01/2026............ Aaa AAA 4,311,300 1,500,000 Foothill/Eastern Transportation Corridor Agency Revenue Bond, 5.800%, 1/15/2020, (d).................................... Baa3 BBB- 906,345 4,300,000 Foothill/Eastern Transportation Corridor Agency Pre-Refunded Revenue Bond, 6.500%, 1/01/2032......................................... Aaa AAA 4,853,066 2,000,000 Los Angeles Convention & Exhibition Center Authority Pre-Refunded Certificate of Participation, 9.000%, 12/01/2020........... Aaa AAA 2,435,560 2,750,000 Los Angeles Regional Airport Revenue Bond, 6.350%,. 11/01/2025.............................................................. Baa3 BBB- 2,752,887 2,000,000 Sacramento Co-generation Authority Pre-Refunded Revenue Bond, 6.500%, 7/01/2021......................................... -- AAA 2,240,700 3,000,000 Sacramento Power Authority Revenue Bond, 6.000%, 7/01/2022.............. -- BBB- 3,087,360 ------------ 22,635,618 ------------ Colorado -- 4.8% 1,500,000 Denver City & County Airport Pre-Refunded Revenue Bond, 7.500%, 11/15/2012................................................ A2 AAA 1,619,745 1,655,000 Denver City & County Airport Revenue Bond, 7.500%, 11/15/2023........... A2 A 1,822,883 3,960,000 Denver City & County Airport Revenue Bond, 7.750%, 11/15/2021........... A2 A 4,132,696 ------------ 7,575,324 ------------ Florida -- 2.0% 3,000,000 Escambia County Pollution Control Revenue Bond, 6.900%, 8/01/2022....... Baa1 BBB+ 3,090,420 ------------ Georgia -- 4.9% 5,000,000 Alanta Water Revenue Bond, 5.000%, 11/01/2038........................... Aaa AAA 4,818,900 3,000,000 Fulton County Water & Sewage Revenue Bond, 4.750%, 1/01/2028............ Aaa AAA 2,809,440 ------------ 7,628,340 ------------ Illinois -- 3.3% 2,500,000 Illinois Development Finance Authority Pollution Control Revenue Bond, 7.375%, 7/01/2021................................. Baa1 BBB+ 2,723,150 2,250,000 O'Hare International Airport Revenue Bond, 8.200%, 12/01/2024........... Baa1 BBB- 2,498,963 ------------ 5,222,113 ------------
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------- Indiana -- 4.7% $ 3,500,000 Indiana Development Finance Authority Pollution Control Revenue Bond, 6.850%, 12/01/2012................................ B1 BB- $ 2,642,570 4,500,000 Indianapolis Independent Airport Authority Revenue Bond, 7.100%, 1/15/2017................................................. Baa2 BBB 4,708,440 ------------ 7,351,010 ------------ Kansas -- 0.9% 1,350,000 Kansas City Utility Systems Pre-Refunded Revenue Bond, 6.375%, 9/01/2023....................................................... Aaa AAA 1,445,040 ------------ Massachusetts -- 9.9% 2,415,000 Massachusetts State Health & Education Facility Authority Revenue Bond, 6.250%, 4/01/2020............................... Aaa AAA 2,814,682 3,845,000 Massachusetts State Housing Finance Agency Revenue Bond, 6.600%, 12/1/2026................................................. Aa A+ 3,992,879 2,500,000 Massachusetts State Housing Finance Agency Revenue Bond, 6.300%, 10/01/2013................................................ A1 A+ 2,603,425 2,500,000 Massachusetts State Turnpike Authority Revenue Bond, 4.750%, 1/01/2034................................................. Aaa AAA 2,297,650 4,000,000 Massachusetts State Turnpike Authority Revenue Bond, 5.000%, 1/01/2039................................................. Aaa AAA 3,823,440 ------------ 15,532,076 ------------ Mississippi -- 1.4% 2,000,000 Lowndes County Mississippi Solid Waste Disposal Revenue Bond, 6.700%, 4/01/2022................................................. A3 A- 2,212,760 ------------ New Jersey -- 3.2% 5,000,000 New Jersey Economic Development Authority Revenue Bond, 6.625%, 9/15/2012................................................. Ba2 BB 5,041,850 ------------ New York -- 15.6% 1,900,000 New York City General Obligation Bond, 7.500%, 2/01/2005................ A2 A 1,994,050 2,040,000 New York State Dormitory Authority Revenue Bond, 5.375%, 5/15/2016....................................................... A3 AA- 2,066,336 4,000,000 New York State Dormitory Authority Revenue Bond, 5.500%, 5/15/2013....................................................... A3 AA- 4,281,720 2,740,000 New York State Dormitory Authority Revenue Bond, 5.750%, 7/01/2013....................................................... A3 AA- 2,993,203 3,000,000 New York State Dormitory Authority Revenue Bond, 5.750%, 7/01/2027....................................................... Aaa AAA 3,295,560 1,880,000 New York State Dormitory Authority Revenue Bond, 7.500%, 5/15/2013....................................................... A3 AA- 2,361,130 4,150,000 New York State Medical Care Facilities Finance Agency Revenue Bond, 5.250%, 8/15/2014......................................... A3 AA- 4,212,914
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------- New York-- continued $ 1,000,000 Onondaga County Industrial Development Agency Revenue Bond, 9.000%, 10/01/2007................................................ A3 A- $ 1,223,840 2,000,000 Port Authority of New York & New Jersey Special Obligation Revenue Bond, 7.000%, 10/01/2007............................. -- -- 2,122,960 ------------ 24,551,713 ------------ Ohio -- 2.1% 3,000,000 Cleveland Public Power Systems Pre-Refunded Revenue Bond, 7.000%, 11/15/2024................................................ Aaa AAA 3,357,900 ------------ Oregon -- 2.7% 4,000,000 Western Generation Agency Revenue Bond, 7.400%, 1/01/16................. -- -- 4,180,000 ------------ Pennsylvania -- 11.6% 3,000,000 Delaware County Industrial Development Authority Revenue Bond, 7.375%, 4/01/2021......................................... Baa1 A 3,077,490 2,725,000 Pennsylvania Convention Center Revenue Bond, 6.700%, 9/01/2014....................................................... Baa2 BBB 2,830,948 2,000,000 Pennsylvania Convention Center Revenue Bond, 6.750%, 9/01/2019....................................................... Baa2 BBB 2,082,520 3,000,000 Pennsylvania Economic Development Financing Authority Revenue Bond, 6.600%, 1/01/2019......................................... -- BBB- 2,920,050 4,000,000 Pennsylvania Economic Development Financing Authority Revenue Bond, 7.150%, 12/01/2018........................................ -- BBB- 4,109,800 3,000,000 Pennsylvania Economic Development Financing Authority Revenue Bond, 7.600%, 12/01/2024........................................ Baa2 BBB 3,236,370 ------------ 18,257,178 ------------ Puerto Rico -- 7.5% 3,000,000 Commonwealth Highway & Transportation Authority Revenue Bond, 5.000%, 7/01/2038......................................... Baa1 A 2,906,250 4,000,000 Puerto Rico Commonwealth Revenue Bond, 4.750%, 7/01/2023................ Aaa AAA 3,865,840 5,000,000 Puerto Rico Electric Power Authority Power Revenue Bond, 5.250%, 7/01/2029....................................................... Aaa AAA 5,064,400 ------------ 11,836,490 ------------ Tennessee -- 1.7% 2,500,000 Maury County Industrial Development Board Revenue Bond, 6.500%, 9/01/2024................................................. A2 A 2,600,225 ------------ Texas -- 1.3% 2,000,000 Alliance Airport Authority Revenue Bond, 6.375%, 4/01/2021.............. Baa2 BBB 1,994,120 ------------ US Virgin Islands -- 2.1% 3,000,000 US Virgin Islands Public Finance Authority Pre-Refunded Revenue Bond, Series A, 7.250%, 10/01/2018................. -- AAA 3,220,830 ------------
8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------- Wyoming -- 2.0% $ 3,000,000 Wyoming Student Loan Corp. Revenue Bond, 6.200%, 6/01/2024.............. -- AA $ 3,165,780 ------------ Total Tax Exempt Obligations (Identified Cost $143,932,784)............. 153,864,159 ------------ Short Term Investment -- 0.4% - ------------------------------------------------------------------------------- 640,000 Household Finance Corp., 6.500%, 1/02/2001 639,884 ------------ Total Short Term Investment (Identified Cost $639,884).................. 639,884 ------------ Total Investments -- 98.4% (Identified Cost $144,572,668)(b)............ 154,504,043 Other assets less liabilities........................................... 2,554,805 ------------ Total Net Assets -- 100%................................................ $157,058,848 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized appreciation on investments based on cost of $144,662,448 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..................................... $ 10,904,612 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value..................................... (1,063,017) ------------ Net unrealized appreciation...................................................... $ 9,841,595 ============
At December 31, 2000, the Fund had a capital loss carryover of approximately $7,173,655 of which $4,332,920 expires on December 31, 2002 and $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. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Multi Coupon: Coupon rate is zero or below market for an initial period and then increases to a higher coupon rate at a specified date and rate. MBIA Municipal Bond Investors Assurance Corp. See accompanying notes to financial statements. 9 STATEMENT OF ASSETS AND LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $144,572,668) ............... $ 154,504,043 Cash .............................................................. 3,999 Receivable for: Fund shares sold ................................................ 175,195 Accrued interest ................................................ 2,764,538 ------------- 157,447,775 LIABILITIES Payable for: Fund shares redeemed ............................................ $ 143,558 Dividends declared .............................................. 64,111 Accrued expenses: Transfer agent .................................................. 11,200 Management fees ................................................. 60,132 Deferred trustees' fees ......................................... 55,003 Accounting and administrative ................................... 4,774 Other ........................................................... 50,149 ------------- 388,927 ------------- NET ASSETS ........................................................... $ 157,058,848 ============= Net Assets consist of: Paid in capital ................................................. $ 155,482,455 Undistributed net investment income ............................. 97,636 Accumulated net realized gain (loss) ............................ (8,452,618 Unrealized appreciation (depreciation) on investments - net ..... 9,931,375 ------------- NET ASSETS ........................................................... $ 157,058,848 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($142,539,134 / 19,292,672 shares of beneficial interest) $ 7.39 ============= Offering price per share (100 / 95.50 of $7.39) ...................... $ 7.74* ============= Net asset value and offering price of Class B shares ($14,519,714 / 1,964,914 shares of beneficial interest) ........... $ 7.39** =============
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 10 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000
INVESTMENT INCOME Interest ........................................................................ $ 10,061,800 ------------ Expenses Management fees ............................................................... $ 720,304 Service fees - Class A ........................................................ 360,102 Service and distribution fees - Class B ...................................... 147,075 Trustees' fees and expenses ................................................... 12,983 Accounting and administrative ................................................. 55,603 Custodian ..................................................................... 88,628 Transfer agent ................................................................ 132,864 Audit and tax services ........................................................ 38,758 Legal ......................................................................... 2,020 Printing ...................................................................... 28,405 Registration .................................................................. 31,688 Miscellaneous ................................................................. 4,561 ------------ Total expenses .................................................................. 1,622,991 ------------ Net investment income ........................................................... 8,438,809 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ............................................................. 935,650 Written options - net ......................................................... (111,443) Futures contracts - net ....................................................... (4,344) ------------ Net realized gain (loss) on investments, written options and futures contracts 819,863 Unrealized appreciation (depreciation) on investments ........................... 3,914,616 ------------ Net gain (loss) on investment transactions, written options and futures contracts 4,734,479 ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .............................. $ 13,173,288 ============
See accompanying notes to financial statements. 11 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ................................... $ 9,149,672 $ 8,438,809 Net realized gain (loss) on investments, written options and futures contracts ................................. (2,126,562) 819,863 Net unrealized appreciation (depreciation) on investments (12,111,760) 3,914,616 ------------- ------------- Increase (decrease) in net assets from operations ....... (5,088,650) 13,173,288 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................... (8,416,716) (7,750,121) Class B ............................................... (706,615) (680,002) ------------- ------------- (9,123,331) ------------- ------------- Increase (decrease) in net assets DERIVED FROM CAPITAL SHARE TRANSACTIONS ................. (5,835,275) (16,157,951) ------------- ------------- Total increase (decrease) in net assets .................... (20,047,256) (11,414,786) NET ASSETS Beginning of the year ................................... 188,520,890 168,473,634 ------------- ------------- End of the year ......................................... $ 168,473,634 $ 157,058,848 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ......................................... $ (11,294) $ 97,636 ============= =============
12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ............ $ 7.60 $ 7.53 $ 7.75 $ 7.76 $ 7.17 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............................. 0.41 0.40 0.39 0.39 0.40 Net Realized and Unrealized Gain (Loss) on Investments ........................... (0.07) 0.23 0.01 (0.59) 0.21 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations .................. 0.34 0.63 0.40 (0.20) 0.61 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income .............. (0.41) (0.41) (0.39) (0.39) (0.39) ----------- ----------- ----------- ----------- ----------- Total Distributions ............................... (0.41) (0.41) (0.39) (0.39) (0.39) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year .................. $ 7.53 $ 7.75 $ 7.76 $ 7.17 $ 7.39 =========== =========== =========== =========== =========== Total Return (%) (a) .............................. 4.6 8.6 5.3 (2.8) 8.8 Ratio of Operating Expenses to Average Net Assets (%) .......................... 0.92 0.93 0.93 0.93 0.95 Ratio of Net Investment Income to Average Net Assets (%) .......................... 5.46 5.19 5.03 5.13 5.39 Portfolio Turnover Rate (%) ....................... 24 14 26 137 156 Net Assets, End of the Year (000) ................. $ 180,983 $ 177,099 $ 172,643 $ 152,829 $ 142,539 (a) A sales charge is not reflected in total return calculations
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ...... $ 7.60 $ 7.53 $ 7.75 $ 7.76 $ 7.17 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ....................... 0.35 0.34 0.33 0.33 0.35 Net Realized and Unrealized Gain (Loss) on Investments ..................... (0.07) 0.23 0.01 (0.59) 0.21 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............ 0.28 0.57 0.34 (0.26) 0.56 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........ (0.35) (0.35) (0.33) (0.33) (0.34) ---------- ---------- ---------- ---------- ---------- Total Distributions ......................... (0.35) (0.35) (0.33) (0.33) (0.34) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............ $ 7.53 $ 7.75 $ 7.76 $ 7.17 $ 7.39 ========== ========== ========== ========== ========== Total Return (%) (a) ........................ 3.9 7.8 4.5 (3.5) 8.0 Ratio of Operating Expenses to Average Net Assets (%) .................... 1.67 1.68 1.68 1.68 1.70 Ratio of Net Investment Income to Average Net Assets (%) .................... 4.71 4.44 4.28 4.38 4.64 Portfolio Turnover Rate (%) ................. 24 14 26 137 156 Net Assets, End of the Year (000) ........... $ 12,568 $ 13,356 $ 15,878 $ 15,644 $ 14,520 (a) A contingent deferred sales charge is not reflected in total return calculations.
14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Municipal Income Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks as high a level of current income exempt from federal income taxes as is consistent with reasonable risk and protection of shareholders' capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers both Class A and Class B shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Expenses of the Fund are borne pro rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service determines valuations for normal institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income is increased by the accretion of original issue discount and decreased for amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize 15 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not effect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of adoption of this principle will not be material to the financial statements. c. Options. The Fund may use options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. d. Interest Rate Futures Contracts. The Fund may purchase or sell interest rate futures contracts to hedge against changes in the values of securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 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. 16 e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains at least annually. Accordingly, no provision for federal income tax has been made. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations, which may differ from accounting principles generally accepted in the United State of America. These differences primarily relate to differing treatments of market discount. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to the capital accounts. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $244,706,506 and $263,228,030 respectively. Transactions in written options for the year ended December 31, 2000 are summarized as follows: Written Options ---------------------- Number of Premiums Contracts Received --------- --------- Open at December 31, 1999................... 0 $ 0 Contracts opened............................ (200) (5,450) Contracts closed............................ 200 5,450 --------- --------- Open at December 31, 2000................... 0 $ 0 ========= ========= 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.50% of the first $100 million of the Fund's average daily net assets and 0.375% of such assets in excess of $100 million, reduced by the payment to the Fund's investment subadviser, Back Bay Advisors, L.P., ("Back Bay") at the rate of 0.25% of the first $100 million of the Fund's average daily net assets and 0.1875% of such assets in excess of $100 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay Advisors are wholly owned subsidiaries of Nvest Companies, L.P., ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay Advisors under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned --------- Nvest Management $ 360,152 Back Bay 360,152 --------- $ 720,304 ========= The effective management fee for the year ended December 31, 2000 was 0.45%. 17 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $55,603 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035% c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $101,060 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A and Class B. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and a Service and Distribution Plan relating to the Fund's Class B shares (the "Class B Plan"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor, (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $360,102 in service fees under the Class A Plan. Prior to September 13, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000 is $1,700,600. Under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $36,769 in service fees under the Class B Plan. Also under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $110,306 in distribution fees under the Class B Plan. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors of shares of the Fund during the year ended December 31, 2000 amounted to $161,431. 18 e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Concentration of Credit. At December 31, 2000, the Fund had the following concentrations by revenue source in excess of 10% as a percentage of the Fund's total net assets: Industrial/Pollution 19.0%, State Housing Authorities 14.0%, Airports 12.4 and Medical Products & Supplies 11.5%. The Fund also had more than 10% of its total net assets invested in: New York 15.6%, California 14.4% and Pennsylvania 11.6% at December 31, 2000. Certain risks arise from concentrating investments in any state. 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. 5. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B. Transactions in capital shares were as follows:
Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class A Shares Amount Shares Amount ------- ----------- ------------ ----------- ------------ Shares sold ......................................... 1,990,350 $ 15,053,406 914,212 $ 6,619,134 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 757,810 5,703,292 730,138 5,295,697 ----------- ------------ ----------- ------------ 2,748,160 20,756,698 1,644,350 11,914,831 Shares repurchased .................................. (3,669,760) (27,649,417) (3,677,160) (26,511,156) ----------- ------------ ----------- ------------ Net increase (decrease) ................................ (921,600) $ (6,892,719) (2,032,810) $(14,596,325) ----------- ------------ ----------- ------------ Year Ended December 31, -------------------------------------------------------- 1999 2000 -------------------------- -------------------------- Class B Shares Amount Shares Amount ------- ----------- ----------- ----------- ----------- Shares sold ................................................ 655,245 $ 4,900,420 287,955 $ 2,090,539 Shares issued in connection with the reinvestment of: Dividends from net investment income ..................... 50,159 377,387 50,401 365,704 ---------- ----------- ---------- ------------ 705,404 5,277,807 338,356 2,456,243 Shares repurchased ......................................... (568,649) (4,220,363) (556,033) ---------- ----------- ---------- ------------ Net increase (decrease) .................................... 136,755 $ 1,057,444 (217,677) $ (1,561,626) ---------- ----------- ---------- ------------ Increase (decrease) derived from capital shares transactions (784,845) $(5,835,275) (2,250,487) $ (16,157,951) ========== =========== ========== ============
19 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Municipal Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Municipal Income Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 20 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 12,150,746.202 302,981.517 613,892.216 13,067,619.935 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 12,162,345.828 331,416.770 573,857.337 13,067,619.935 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 21 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 22 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 23 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Yield - The rate at which a fund pays income. Yield calculations for 30-day ~periods are standardized among mutual funds, based on a formula developed ~by the Securities and Exchange Commission. Maturity - Refers to the period of time before principal repayment on a bond ~is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. Duration - A measure, stated in years, of a bond's sensitivity to interest rates. Duration allows you to compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a bond is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a bond with a duration of 4 years should rise in value 4%. Conversely, the bond should decline 4% in value if interest rates rise 1%. Treasuries - Negotiable debt obligations of the U.S. government, secured by its ~full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). Municipal Bond - A debt security issued by a state or municipality to finance ~public expenditures. Interest payments are exempt from federal taxes and, in ~most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. A small portion of income may be subject to federal and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs MU56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest International Equity Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDCname to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST INTERNATIONAL EQUITY FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest International Equity Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 5/21/92 10000 9425 12/31/92 9503 8956 12/31/93 12295 11588 12/31/94 13286 12522 12/31/95 14054 13246 12/31/96 14513 13679 12/31/97 13415 12644 12/31/98 14313 13490 12/31/99 26849 25305 12/31/00 19194 18090 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST INTERNATIONAL EQUITY FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Class A (Inception 11/28/95) 1 Year(7) 5 Years(7) Since Inception(7) Net Asset Value(1),(7) -28.56% 6.42% 7.86% With Maximum Sales Charge(2) -32.67 5.17 7.12 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1),(7) -29.15% 5.66% 5.61% With CDSC3 -32.38 5.34 5.61 - -------------------------------------------------------------------------------- Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1),(7) -29.11% 5.69% 5.61% With Maximum Sales Charge and CDSC(3) -30.45 5.48 5.42 - -------------------------------------------------------------------------------- Class Y (Inception 9/9/93) 1 Year 5 Years Since Inception Net Asset Value(1),(7) -28.16% 7.10% 7.07% - --------------------------------------------------------------------------------
Since Since Since Since Fund's Fund's Fund's Fund's Class A Class B Class C Class Y Comparative Performance 1 Year 5 Years Incept. Incept. Incept. Incept. MSCI EAFE4 -14.17% 7.13% 8.94% 7.65% 7.80% 7.65% Morningstar Foreign Stock Average(5) -15.66 9.43 9.87 9.82 10.13 9.82 Lipper International Average(6) -15.60 9.09 9.32 8.80 9.01 8.80 - --------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to a 1.00% sales charge. C share accounts established prior to December 1, 2000, are not subject to the additional sales charge. (4) The Morgan Stanley Capital International (MSCI) Europe Australasia Far East Index (EAFE) is an unmanaged index of common stocks traded outside the U.S. You may not invest directly in an index. (5) Morningstar Foreign Stock Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class A since-inception return is calculated from 5/31/92. Class B and Y since-inception returns are calculated from 9/30/93. Class C since-inception returns are calculated from 12/31/94. (6) Lipper International Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class A since-inception return is calculated from 5/28/92. Class B and Y since-inception returns are calculated from 9/30/93. Class C since-inception returns are calculated from 12/31/94. (7) Fund performance may have been increased by voluntary expense waivers, without which performance would have been lower. 2 NNEST INTERNATIONAL EQUITY FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Alexander Muromcew, John Tribolet and Eswar Menon Loomis, Sayles & Company, L.P. Q. How did Nvest International Equity Fund perform during the year? For the 12 months ended December 31, 2000, the total return on Nvest International Equity Fund's Class A shares was -28.56% based on net asset value, including $1.65 in reinvested distributions. The Fund did not do as well as its benchmark, MSCI EAFE, which had a total return of -14.17% for the year. Lipper International Funds Average, which tracks performance of comparable international stock funds, had a return of -15.60% for the same period. The Fund's emphasis on technology and its weighting in Japan - both of which contributed to its strong results last year - were negatives in 2000. Q. What was the investment environment like during the year? Worldwide enthusiasm for technology stocks, which domin-ated the markets in 1999, carried over into the first quarter of 2000. However, in March some of the world's most widely held stocks began to retreat, following the tech-heavy Nasdaq. Both the technology sector and the Fund regained some ground in the third quarter. However, in the fourth quarter, stock markets around the world began to react to prospects of a slower growth rate in the United States. Events in this country have a strong influence on international markets for several reasons. The U.S. dollar has long been considered the currency for international business. The U.S. is also a major market for companies throughout the world and a major center for investors worldwide. However, international markets can also move independently, as they did in the fourth quarter, when slowing growth in the U.S. helped restore strength to the euro, Europe's common currency. Q. How did the Fund respond to these developments? Nvest International Equity Fund entered March with a strong emphasis on some of the world's leading technology companies, and with a major portion of assets 3 NVEST INTERNATIONAL EQUITY FUND - -------------------------------------------------------------------------------- Top 10 Countries -- 12/31/00 % of Country Net Assets 1. United Kingdom 14.8 2. Japan 13.4 3. Canada 11.1 4. France 8.1 5. Switzerland 5.4 6. Netherlands 4.3 7. Australia 4.3 8. Germany 4.0 9. Denmark 3.9 10. Singapore 3.5 Portfolio holdings and asset allocations will vary. in Japan. Both these positions were positives in the first quarter, but negatives for 2000 as a whole. In the course of the year, we shifted assets into finance, energy and healthcare, trimming technology down to a relatively few companies from which we expect powerful results. We also moved assets out of Japan in the course of 2000, creating a more broadly diversified portfolio. Although we use what we call a "macro-environment overlay" to view individual companies in a context of broad economic and political trends, we are first and foremost stock pickers. The types of companies we look at are as diversified as the countries and industries. One of the fund's largest holdings is Nokia, the world's leader in mobile communications. Headquartered in Finland, Nokia is one of the most widely held companies in Europe. With over 5,000 employees in China, the company is well positioned for growth in this vast new market. A less well-known northern European company we like is Vestas Wind Systems. From the relative obscurity of a small village in Denmark, Vestas has become the world's largest producer of wind turbines, focusing on quality products that produce low-cost energy. The huge megawatt turbines it designs and builds put Vestas among the world leaders in the development of offshore "wind farms." 4 NVEST INTERNATION EQUITY FUND - -------------------------------------------------------------------------------- 10 Largest Holdings-- 12/31/00 % of Company Net Assets 1. Nokia Oyj 3.0 2. Vodafone Group PLC 2.5 3. Vestas Wind Systems AS 2.3 4. Royal Bank of Scotland Group PLC 1.9 5. Swiss Re 1.9 6. Nestle SA 1.9 7. Allied Irish Banks PLC 1.7 8. Muenchener Rueckversicherungs- Gesellschaft AG 1.6 9. Novartis AG 1.6 10. Nordic Baltic Holding 1.5 Portfolio holdings and asset allocations will vary. Allied Irish Banks, PLC (AIB) is an interesting example of the diversified financial-service companies we like. It is Ireland's leading banking firm, with operations in Great Britain, the United States, Poland and Asia, and is active in e-business as well as brokerage services. We believe Ireland itself is a fertile environment for business today, primarily as a result of its economic policies and an environment that is encouraging many U.S. businesses to locate facilities within its borders. AIB is one of several rapidly growing Irish businesses that are reaching around the world. Q. How have developments in other emerging markets affected the Fund? Risks considered, we continue to favor emerging markets because, on average, they trade at about 13 times last year's earnings, and at more than 11 times forecast 2001 earnings - well below the average trading levels of U.S. stocks. However, the political environment in Israel and Mexico hurt the Fund in 2000. The Fund's investments in Israel had done well until fighting between Israelis and Palestinians began to intensify during the year. Political turmoil that had unsettled Mexico during the year seems to be on the mend after the opposition party won the presidency for the first time in 100 years. Mexico's new president, Vicente Fox, is determined to reform the government, and the country is shifting the focus of its economy from resources toward increased productivity. 5 NVEST INTERNATION EQUITY FUND - -------------------------------------------------------------------------------- Q. What is your current outlook for the international markets in 2001? Falling stock prices in 2000 wiped out much of the excess valuation in the markets and investors finally seemed to recognize that the U.S. is entering a period of slower growth. Even though we believe the Federal Reserve Board is likely to ease monetary policy in an effort to avert a recession, the economic cycle in the U.S. is in a mature phase. In 2001, we expect growth rates to be higher in other countries that are at a less advanced stage in the cycle, and this should benefit investors with internationally diversified portfolios. It is also likely to be a stock-picker's market because there are no major trends to follow. Investors will need to research their choices carefully and diversify as judiciously as possible. Although there is little likelihood of a repeat of 1999's stellar marketplace, we're bullish for 2001 and we're expecting a good year for Nvest International Equity Fund. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest International Equity Fund invests in foreign and emerging market securities -- strategies that have special risks, including political, economic, regulatory and currency risks. Emerging markets may be more subject to these risks than developed markets. The Fund emphasizes growth stocks, which are generally more sensitive to market movements because their stock prices are based on future expectations. It also invests in stocks of small-cap and emerging-growth companies, which are also more volatile than the overall market. These risks effect the value of your investment. See the Fund's prospectus for details. This actively managed Fund tends to have a high portfolio turnover, which may increase your risk of greater tax liability and lower your return. 6 PROTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 94.4% of Total Net Assets Shares Description Value (a) - ------------------------------------------------------------------------------- Australia-- 4.3% 398,100 AXA Asia Pacific Holdings, Ltd. ...................... $ 663,784 55,010 Commonwealth Bank of Australia (d) ................... 945,811 495,600 Foster's Brewing Group, Ltd. ......................... 1,301,432 41,440 National Australia Bank, Ltd. ........................ 664,219 141,900 QBE Insurance Group, Ltd. (d) ........................ 780,776 ---------- 4,356,022 ---------- Belgium-- 2.7% 8,460 Dexia (d) ............................................ 1,537,152 35,100 Interbrew ............................................ 1,223,434 ---------- 2,760,586 ---------- Brazil-- 2.3% 3,200 Petroleo Brasileiro SA - Petrobras (sponsored ADR) ... 80,800 38,400 Tele Norte Leste Participacoes SA (Telemar) 144A (sponsored ADR) (d) .................................. 876,000 5,700 Telecomunicacoes Brasileiras (sponsored ADR) (d) ..... 415,387 34,000 Unibanco - Uniao de Bancos Brasileiros SA (GDR) ...... 1,000,875 ---------- 2,373,062 ---------- Canada-- 11.1% 64,800 Anderson Exploration, Ltd. ........................... 1,470,666 68,000 Bombardier, Inc., Class B ............................ 1,049,257 11,172 Celestica, Inc. ...................................... 603,167 36,200 Manulife Financial Corp. ............................. 1,132,833 40,200 Molson, Inc. ......................................... 1,152,170 5,300 Nortel Networks Corp. (d) ............................ 169,931 24,500 Nortel Networks Corp. ................................ 787,926 52,700 Petro-Canada ......................................... 1,340,069 36,200 Precision Drilling Corp. ............................. 1,357,229 29,800 Royal Bank of Canada ................................. 1,010,018 30,100 Thomson Corp. ........................................ 1,151,596 ---------- 11,224,862 ---------- Denmark-- 3.9% 24,500 GN Store Nord AS (GN Great Nordic) ................... 428,756 6,700 Novo Nordisk AS ...................................... 1,202,039 42,700 Vestas Wind Systems AS ............................... 2,311,668 ---------- 3,942,463 ---------- Finland-- 3.0% 67,900 Nokia OYJ ............................................ 3,028,509 ---------- France-- 8.1% 17,100 Aventis SA ........................................... 1,501,320 1,300 Axa .................................................. 187,988 8,400 Coflexip SA (d) ...................................... 1,067,981 7,500 Groupe Danone ........................................ 1,131,025 18,400 Sanofi-Synthelabo SA ................................. 1,226,709 20,700 STMicroelectronics NV (d) ............................ 886,219 7,040 TotalFinaElf SA ...................................... 1,047,112 See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - ------------------------------------------------------------------------------- France-- continued 18,500 Vivendi Universal SA ................................. $1,217,742 ---------- 8,266,096 ---------- Germany-- 4.0% 8,335 D. Logistics AG ...................................... 367,849 56,000 Deutsche Post AG ..................................... 1,204,699 7,660 MLP AG ............................................... 848,743 4,600 Muenchener Rueckversicherungs-Gesellschaft AG ........ 1,645,950 ---------- 4,067,241 ---------- Greece-- 0.5% 14,600 Alpha Bank AE ........................................ 504,898 ---------- Hong Kong-- 3.0% 1,197,500 Amoy Properties, Ltd. (d) ............................ 1,320,371 87,600 China Mobile, Ltd. ................................... 478,449 4,500 China Mobile, Ltd. (sponsored ADR) (d) ............... 122,063 111,000 Sun Hung Kai Properties, Ltd., 144A .................. 1,106,485 ---------- 3,027,368 ---------- Ireland-- 1.2% 25,000 Elan Corp., PLC (ADR) (c)(d) ......................... 1,170,312 ---------- Israel-- 1.7% 4,100 Check Point Software Technolgies, Ltd. (d) ........... 547,606 11,200 Comverse Technology, Inc. (c)(d) ..................... 1,216,600 ---------- 1,764,206 ---------- Italy-- 2.4% 158,200 Banca Intesa SpA ..................................... 760,575 38,900 Riunione Adriatica di Sicurta SpA (d) ................ 606,715 200,100 UniCredito Italiano SpA (c) .......................... 1,046,569 ---------- 2,413,859 ---------- Japan-- 13.4% 40,100 Anritsu Corp. (d) .................................... 947,078 33,400 Credit Saison Co., Ltd. (d) .......................... 714,337 55,000 Daiwa Securities Group, Inc. (d) ..................... 573,959 77,100 Fujikura, Ltd. (d) ................................... 577,306 302,000 Ishikawajima Harima-Heavy Industries Co., Ltd. ....... 644,576 205,000 Japan Air Lines Co., Ltd. ............................ 937,850 107,000 JGC Corp. (d) ........................................ 729,120 6,400 Matsushita Communication Industries .................. 803,359 26,000 Meitec Corp. (d) ..................................... 832,400 75,000 Mitsubishi Estate Company, Ltd. (d) .................. 800,385 175,000 Mitsubishi Heavy Industries, Ltd. .................... 762,334 77,000 Mitsui Fudosan Co., Ltd. ............................. 764,477 21,800 Nitto Denko Corp. (d) ................................ 591,148 42 NTT DoCoMo, Inc. ..................................... 723,758 3,500 Rohm Co., Ltd. ....................................... 664,363 104,400 Sanyo Electric Co., Ltd. ............................. 867,565 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - ------------------------------------------------------------------------------- Japan-- continued 15,000 Takeda Chemical Industries, Ltd. ..................... $ 886,984 16,000 Toyo Information Systems Co., Ltd. (d) ............... 794,961 ---------- 13,615,960 ---------- Mexico-- 0.9% 8,000 Grupo Televisa SA de CV (sponsored ADR) .............. 359,500 11,800 Telefonos de Mexico SA de CV (Telemar) (sponsored ADR) 144A ................................. 532,475 ---------- 891,975 ---------- Netherlands-- 4.3% 20,300 Heineken NV .......................................... 1,228,526 31,500 Koninklijke Ahold NV ................................. 1,016,317 16,660 Royal Dutch Petroleum Co. ............................ 1,020,910 7,300 Unilever NV .......................................... 462,007 10,500 Unilever NV (USD) .................................... 660,844 ---------- 4,388,604 ---------- Singapore-- 3.5% 243,000 City Developments, Ltd. .............................. 1,129,417 159,980 Datacraft Asia, Ltd. ................................. 755,106 740,000 Singapore Technologies Engineering, Ltd. ............. 1,192,032 288,100 Singapore Telecommunications, Ltd. ................... 447,453 ---------- 3,524,008 ---------- South Africa-- 0.5% 127,400 Standard Bank Investment Corp., Ltd. ................. 513,506 ---------- South Korea-- 0.5% 21,410 Housing and Comm Bank ................................ 485,745 ---------- Spain-- 0.9% 58,000 Telefonica SA (ADR) .................................. 958,531 ---------- Sweden-- 2.0% 203,200 Nordic Baltic Holding ................................ 1,539,231 42,900 Telefonaktiebolaget LM Ericsson AB Series B .......... 488,584 ---------- 2,027,815 ---------- Switzerland-- 5.4% 810 Nestle SA, 144A ...................................... 1,888,951 930 Novartis AG .......................................... 1,643,809 800 Swiss Re ............................................. 1,917,453 ---------- 5,450,213 ---------- United Kingdom-- 14.8% 232,100 Allied Domecq PLC .................................... 1,534,002 149,200 Allied Irish Banks PLC ............................... 1,737,225 51,200 COLT Telecom Group PLC ............................... 1,102,455 105,100 Diageo PLC ........................................... 1,178,670 70,100 HSBC Holdings PLC (d) ................................ 1,042,553 127,800 Regus PLC ............................................ 693,882 56,100 Reuters Group PLC .................................... 950,432 See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - ------------------------------------------------------------------------------- United Kingdom-- continued 81,100 Royal Bank of Scotland Group PLC ..................... $1,918,473 63,500 Shire Pharmaceuticals Group PLC ...................... 1,001,739 145,604 Spirent PLC .......................................... 1,328,102 681,700 Vodafone Group PLC ................................... 2,502,495 ---------- 14,990,028 ---------- Total Common Stock (Identified Cost $93,761,660) ..... 95,745,869 ---------- Short Term Investment 4.4% Principal Amount - ------------------------------------------------------------------------------- $ 4,475,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $4,477,610 on 1/02/2001, collateralized by $4,500,000 U.S. Treasury Bond, 6.250%, due 10/31/2001 valued at $4,567,635 ........................................... 4,475,000 ---------- Total Short Term Investment (Identified Cost $4,475,000) .......................................... 4,475,000 ---------- Total Investments-- 98.8% (Identified Cost $98,236,660) (b) ..................................... 100,220,869 Other assets less liabilities ........................ 1,214,394 ---------- Total Net Assets-- 100% ..............................$101,435,263 ========== (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost of $99,001,544 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost.........$ 6,924,438 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ........ (5,705,113) ----------- Net unrealized appreciation .............................. $1,219,325 =========== During the year ended December 31, 2000, the fund distributed $3,058,548 (unaudited) from long-term capital gains. (c) Non-income producing security. (d) All or a portion of this security was on loan to brokers at December 31, 2000. ADR/GDR An American Depositary Receipt (ADR) or Global Depositary Receipt (GDR) is a certificate issued by a custodian bank representing the right to receive securities of the foreign issuer described. The values of ADRs and GDRs are significantly influenced by trading on exchanges not located in the United States. USD United States dollars 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $4,403,911 or 4.3% of net assets. Industry Holdings at December 31, 2000 (unaudited). Banks 11.8% Health Care-Drugs 5.4% Food & Beverages 10.3 Telecommunications-Cellular 3.7 Computers Software & Services 8.8 Electric 3.4 Telecommunications 7.5 Electronics 3.1 Insurance 6.1 Banks & Thrifts 2.7 Oil & Gas-Exploration & Production 5.9 Financial Services 2.2 Real Estate Management 5.7 Other, less than 2.0% each 23.4 10 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $98,236,660) .............. $ 100,220,869 Cash ............................................................ 868 Foreign currency at value (Identified cost $2,307,997) .......... 2,348,655 Investments held as collateral for loaned securities ............ 15,935,522 Receivable for: Fund shares sold .............................................. 363,039 Securities sold ............................................... 1,545,508 Dividends and interest ........................................ 80,251 Tax reclaims .................................................. 38,866 ------------- 120,533,578 LIABILITIES Payable for: Collateral on securities loaned, at value ..................... $ 15,935,522 Fund shares purchased ......................................... 2,088,459 Securities redeemed ........................................... 840,158 Withholding taxes ............................................. 11,397 Accrued expenses: Management fees ............................................... 77,051 Transfer agent ................................................ 40,970 Deferred trustees' fees ....................................... 29,010 Accounting and administrative ................................. 3,094 Other ......................................................... 72,654 ------------- 19,098,315 ------------- NET ASSETS $ 101,435,263 ============= Net Assets consist of: Paid in capital ............................................... $ 102,504,628 Undistributed net investment income (loss) .................... (29,010) Accumulated net realized gain (loss) .......................... (3,061,109) Unrealized appreciation (depreciation) on investments and foreign currency transactions - net ...... 2,020,754 ------------- NET ASSETS $ 101,435,263 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($54,825,807 / 3,298,640 shares of beneficial interest) ........ $ 16.62 ============= Offering price per share (100 / 94.25 of $16.62) ................... $ 17.63* ============= Net asset value and offering price of Class B shares ($29,012,933 / 1,814,717 shares of beneficial interest) ......... $ 15.99** ============= Net asset value of Class C shares ($5,656,039 / 352,403 shares of beneficial interest) ............ $ 16.05** ============= Offering price per share (100 / 99.00 of $16.05) ................... $ 16.21* ============= Net asset value, offering and redemption price of Class Y shares ($11,940,484 / 701,496 shares of beneficial interest) ........... $ 17.02 =============
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. Year Ended December 31, 2000 See accompanying notes to financial statements. 11 STATEMENT OF OPERATIONS Year Ended December 31, 2000
INVESTMENT INCOME Dividends (net of foreign taxes of $115,936)..................... $ 728,416 Interest......................................................... 304,157 Securities lending income........................................ 109,118 ------------- 1,141,691 Expenses Management fees................................................ $ 1,076,376 Service fees - Class A......................................... 170,959 Service and distribution fees - Class B....................... 330,652 Service and distribution fees - Class C........................ 37,710 Trustees' fees and expenses.................................... 11,165 Accounting and administrative.................................. 42,639 Custodian...................................................... 241,655 Transfer agent - Class A, Class B, Class C..................... 437,521 Transfer agent - Class Y....................................... 14,378 Audit and tax services......................................... 57,305 Legal.......................................................... 4,519 Printing....................................................... 53,731 Registration................................................... 56,505 Miscellaneous.................................................. 3,385 ------------- Total expenses................................................... 2,538,500 ------------- Net investment income (loss)..................................... (1,396,809) ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments - net.............................................. 3,590,520 Foreign currency transactions - net............................ (183,655) ------------- Net realized gain (loss) on investments and foreign currency transactions .......................... 3,406,865 ------------- Unrealized appreciation (depreciation) on: Investments - net.............................................. (42,540,077) Foreign currency transactions - net............................ 44,448 ------------- Net unrealized appreciation (depreciation) on investments and foreign currency transactions.................................. (42,495,629) ------------- Net gain (loss) on investment transactions....................... (39,088,764) ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .............. $ (40,485,573) =============
12 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, -------------------------------------- 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income (loss) ........................... $ (229,671) $ (1,396,809) Net realized gain (loss) on investments and foreign currency transactions ................. 11,756,432 3,406,865 Net unrealized appreciation (depreciation) on investments And foreign currency transactions ............................. 41,051,584 (42,495,629) ------------- ------------- Increase (decrease) in net assets from operations ...... 52,578,345 (40,485,573) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A .............................................. (49,375) (558,378) Class B .............................................. 0 (292,183) Class C .............................................. 0 (40,426) Class Y .............................................. (30,949) (115,432) Net realized gain on investments Class A .............................................. (2,895,169) (4,370,530) Class B .............................................. (1,259,652) (2,325,819) Class C .............................................. (58,452) (341,473) Class Y .............................................. (573,138) (903,746) In excess of net realized gain on investments Class A .............................................. 0 (406,191) Class B .............................................. 0 (216,159) Class C .............................................. 0 (31,736) Class Y .............................................. 0 (83,993) ------------- ------------- (4,866,735) (9,686,066) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................. (9,414,479) 39,656,764 ------------- ------------- Total increase (decrease) in net assets ................... 38,297,131 (10,514,875) NET ASSETS Beginning of the year .................................. 73,653,007 111,950,138 ------------- ------------- End of the year ........................................ $ 111,950,138 $ 101,435,263 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year......................................... $ 26,821 $ (29,010) ============= =============
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class A ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ......... $ 16.13 $ 16.31 $ 14.06 $ 14.26 $ 25.39 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) (b) ............... 0.02 0.09 0.15 (0.03) (0.22) Net Realized and Unrealized Gain (Loss) on Investments..... .................. 0.51 (1.25) 0.77 12.31 (6.90) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.53 (1.16) 0.92 12.28 (7.12) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... (0.02) 0.00 (0.23) (0.02) (0.17) Dividends in Excess of Net Investment Income ... 0.00 0.00 (0.21) 0.00 0.00 Distributions From Net Realized Capital Gains .. (0.33) (1.05) (0.19) (1.13) (1.35) Distributions in Excess of Net Realized Gains .. 0.00 (0.04) (0.09) 0.00 (0.13) ---------- ---------- ---------- ---------- ---------- Total Distributions............................. (0.35) (1.09) (0.72) (1.15) (1.65) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 16.31 $ 14.06 $ 14.26 $ 25.39 $ 16.62 ========== ========== ========== ========== ========== Total Return (%) (a)......... .................. 3.3 (7.6) 6.7 87.6 (28.6) Ratio of Operating Expenses to Average Net Assets (%) (c) .................. 1.75 1.75 1.91 2.00 1.96 Ratio of Net Investment Income to Average Net Assets (%).... .................. 0.14 0.62 1.04 (0.15) (1.01) Portfolio Turnover Rate (%).. .................. 59 154 105 229 212 Net Assets, End of the Year (000) .............. $ 109,773 $ 57,845 $ 47,444 $ 67,197 $ 54,826
The Subadviser to the Fund prior to February 15, 1997 was Draycott Partners, Ltd. Effective February 15, 1997 Loomis, Sayles & Company,L.P. became the subadviser to the Fund. (a) A sales charge is not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. 14 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class B ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year $ 15.93 $ 16.00 $ 13.71 $ 13.98 $ 24.71 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) (b) ............... (0.10) (0.03) 0.04 (0.15) (0.37) Net Realized and Unrealized Gain (Loss) on Investments ....................... 0.50 (1.17) 0.75 12.01 (6.70) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.40 (1.20) 0.79 11.86 (7.07) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... 0.00 0.00 (0.12) 0.00 (0.17) Dividends in Excess of Net Investment Income ... 0.00 0.00 (0.12) 0.00 0.00 Distributions From Net Realized Capital Gains .. (0.33) (1.05) (0.19) (1.13) (1.35) Distributions in Excess of Net Realized Gains .. 0.00 (0.04) (0.09) 0.00 (0.13) ---------- ---------- ---------- ---------- ---------- Total Distributions ............................ (0.33) (1.09) (0.52) (1.13) (1.65) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 16.00 $ 13.71 $ 13.98 $ 24.71 $ 15.99 ---------- ---------- ---------- ---------- ---------- Total Return (%) (a) ........................... 2.5 (8.0) 5.8 86.3 (29.2) Ratio of Operating Expenses to Average Net Assets (%) (c) .................. 2.50 2.50 2.66 2.75 2.71 Ratio of Net Investment Income (Loss) to Average Net Assets (%) ................... (0.61) (0.13) 0.29 (0.90) (1.76) Portfolio Turnover Rate (%) .................... 59 154 105 229 212 Net Assets, End of the Year (000) .............. $45,974 $ 25,216 $ 19,797 $ 29,045 $ 29,013
The Subadviser to the Fund prior to February 15, 1997 was Draycott Partners, Ltd. Effective February 15, 1997 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class C ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ......... $ 15.96 $ 16.03 $ 13.74 $ 14.02 $ 24.78 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) (b) ............... (0.10) (0.03) 0.05 (0.15) (0.34) Net Realized and Unrealized Gain (Loss) on Investments ......................... 0.50 (1.17) 0.75 12.04 (6.74) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.40 (1.20) 0.80 11.89 (7.08) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... 0.00 0.00 (0.12) 0.00 (0.17) Dividends in Excess of Net Investment Income ... 0.00 0.00 (0.12) 0.00 0.00 Distributions From Net Realized Capital Gains .. (0.33) (1.05) (0.19) (1.13) (1.35) Distributions in Excess of Net Realized Gains .. 0.00 (0.04) (0.09) 0.00 (0.13) ---------- ---------- ---------- ---------- ---------- Total Distributions ............................ (0.33) (1.09) (0.52) (1.13) (1.65) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 16.03 $ 13.74 $ 14.02 $ 24.78 $ 16.05 ========== ========== ========== ========== ========== Total Return (%) (a) ........................... 2.5 (8.0) 5.9 86.2 (29.1) Ratio of Operating Expenses to Average Net Assets(%)(c) ............ 2.50 2.50 2.66 2.75 2.71 Ratio of Net Investment Income (Loss) to Average Net Assets (%) .............. (0.61) (0.13) 0.29 (0.90) (1.76) Portfolio Turnover Rate (%) .................... 59 154 105 229 212 Net Assets, End of the Year (000) .............. $ 850 $ 843 $ 860 $ 1,267 $ 5,656
The Subadviser to the Fund prior to February 15, 1997 was Draycott Partners, Ltd. Effective February 15, 1997 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. 16 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class C ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ......... $ 16.25 $ 16.48 $ 14.35 $ 14.45 $ 25.81 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) (a) ............... 0.11 0.19 0.25 0.02 (0.10) Net Realized and Unrealized Gain (Loss) on Investments ........................ 0.54 (1.23) 0.77 12.54 (7.04) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.65 (1.04) 1.02 12.56 (7.14) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... (0.09) 0.00 (0.33) (0.07) (0.17) Dividends in Excess of Net Investment Income ... 0.00 0.00 (0.31) 0.00 0.00 Distributions From Net Realized Capital Gains .. (0.33) (1.05) (0.19) (1.13) (1.35) Distributions in Excess of Net Realized Gains .. 0.00 (0.04) (0.09) 0.00 (0.13) ---------- ---------- ---------- ---------- ---------- Total Distributions ............................ (0.42) (1.09) (0.92) (1.20) (1.65) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 16.48 $ 14.35 $ 14.45 $ 25.81 $ 17.02 ========== ========== ========== ========== ========== Total Return (%) ............................... 4.0 (6.7) 7.3 88.6 (28.2) Ratio of Operating Expenses to Average Net Assets (%) (b) ................... 1.00 1.15 1.31 1.55 1.39 Ratio of Net Investment Income to Average Net Assets (%) ....................... 0.89 1.22 1.64 0.10 (0.44) Portfolio Turnover Rate (%) .................... 59 154 105 229 212 Net Assets, End of the Year (000) .............. $ 52,161 $ 4,752 $ 5,552 $ 14,441 $ 11,940
The Subadviser to the Fund prior to February 15, 1997 was Draycott Partners, Ltd. Effective February 15, 1997 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) Per share net investment income has been calculated using the average shares outstanding during the period. (b) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. See accompanying notes to financial statements. 17 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest International Equity Fund (the "Fund") is a Series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks total return from long-term growth of capital and dividend income, primarily through investments in international equity securities. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years (or five years if purchased prior to May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. 18 NOTES TO FINANCIAL STATEMENTS -- continued b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date or when the Fund first learns of the dividend, and interest income is recorded on an accrual basis. Investment income is recorded net of foreign taxes withheld when recovery of such taxes is uncertain. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. c. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Foreign exchange gains or losses included in realized net gain or loss on foreign currency transactions arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, resulting from changes in exchange rates. d. Forward Foreign Currency Contracts. The Fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the Fund's investments against currency fluctuation. Also, a contract to buy or sell can offset a previous contract. These contracts involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. The U.S. dollar value of the currencies the Fund has committed to buy or sell (if any) is shown in the schedule of investments under the caption "Forward Foreign Currency Contracts Outstanding." This amount represents the aggregate exposure to each currency the Fund has acquired or hedged through currency contracts outstanding at period end. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. All contracts are "marked-to-market" daily at the applicable translation rates and any gains or losses are recorded for financial statement purposes as unrealized until settlement date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. 19 NOTES TO FINANCIAL STATEMENTS -- continued f. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for net operating loss, foreign currency transactions and passive foreign investment companies for book and tax purposes. Permanent book and tax basis differences will result in reclassification to capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $263,911,373 and $231,781,684, respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.90% of the first $200 million of the Fund's average daily net assets, 0.85% of the next $300 million and 0.80% of such assets in excess of $500 million, reduced by the payment to Loomis Sayles & Company, L.P. ("Loomis Sayles") at the rate of 0.40% of the first $200 million of the Fund's average daily net assets and 0.35% of such assets in excess of $200 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Loomis Sayles under the management and subadvisery agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ------------ Nvest Management $ 597,986 Loomis Sayles 478,390 --------- $1,076,376 ========= The effective management fee for the year ended December 31, 2000 was 0.90%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest 20 Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $42,639 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $335,057 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor, (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $170,959 in fees under the Class A Plan. Prior to September 13, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000, is $514,256. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $82,663 and $9,428 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $247,989 and $28,282 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors of shares of the Fund during the year ended December 31, 2000 amounted to $375,028. 21 e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Concentration of Risk. The Fund had the following geographic concentrations in excess of 10% of its total net assets at December 31, 2000: United Kingdom 14.8%, Japan 13.4% and Canada 11.1%. The Fund pursues its objectives by investing in foreign securities. There are certain risks involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. These risks include those resulting from future adverse political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 5. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, -------------------------------------------------------- 1999 2000 -------------------------- -------------------------- Class A Shares Amount Shares Amount - ------- ----------- ----------- ----------- ----------- Shares sold.......................... 8,948,596 $133,717,101 6,041,069 $130,410,637 Shares issued in connection with the reinvestment of: Dividends from net investment income 2,866 48,761 0 0 Distributions from net realized gain 184,256 2,759,892 273,220 5,057,795 ----------- ----------- ----------- ----------- 9,135,718 136,525,754 6,314,289 135,468,432 Shares repurchased...................... (9,816,773) (146,515,786) (5,661,976) (120,604,737) ----------- ----------- ----------- ----------- Net increase (decrease)................. (681,055) $ (9,990,032) 652,313 $ 14,863,695 ----------- ----------- ----------- ----------- Year Ended December 31, -------------------------------------------------------- 1999 2000 -------------------------- -------------------------- Class B Shares Amount Shares Amount - ------- ----------- ----------- ----------- ----------- Shares sold.......................... 174,034 $ 2,997,379 885,381 $ 20,233,007 Shares issued in connection with the reinvestment of: Distributions from net realized gain 56,778 1,196,312 148,131 2,640,281 ----------- ----------- ----------- ----------- 230,812 4,193,691 1,033,512 22,873,288 Shares repurchased................... (471,443) (7,021,664) (394,426) (8,217,240) ----------- ----------- ----------- ----------- Net increase (decrease).............. (240,631) $ (2,827,973) 639,086 $ 14,656,048 ----------- ----------- ----------- -----------
22 NOTES TO FINANCIAL STATEMENT -- continued
Year Ended December 31, -------------------------------------------------------- 1999 2000 -------------------------- -------------------------- Class C Shares Amount Shares Amount - ------- ----------- ----------- ----------- ----------- Shares sold.......................... 69,578 $ 1,151,320 717,222 $ 13,840,232 Shares issued in connection with the reinvestment of: Distributions from net realized gain 2,643 55,847 14,535 258,483 ----------- ----------- ----------- ----------- 72,221 1,207,167 731,757 14,098,715 Shares repurchased................... (82,442) (1,285,310) (430,484) (7,767,471) ----------- ----------- ----------- ----------- Net increase (decrease).............. (10,221) $ (78,143) 301,273 $ 6,331,244 ----------- ----------- ----------- ----------- Year Ended December 31, -------------------------------------------------------- 1999 2000 -------------------------- -------------------------- Class Y Shares Amount Shares Amount - ------- ----------- ----------- ----------- ----------- Shares sold.......................... 220,939 $ 3,992,137 287,339 $ 7,194,382 Shares issued in connection with the reinvestment of: Dividends from net investment income 1,792 30,949 0 0 Distributions from net realized gain 26,052 573,138 57,967 1,096,473 ----------- ----------- ----------- ----------- 248,783 4,596,224 345,306 8,290,855 Shares repurchased................... (73,477) (1,114,555) (203,374) (4,485,078) ----------- ----------- ----------- ----------- Net increase (decrease).............. 175,306 $3,481,669 141,932 $3,805,777 ----------- ----------- ----------- ----------- Increase (decrease) derived from capital shares transactions........ (756,601) $ (9,414,479) 1,734,604 $39,656,764 =========== =========== =========== ===========
6. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 7. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund had on loan securities having a market value of $15,189,758 and collateralized by cash in the amount of $15,935,522 which was invested in a short-term investment. 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest International Equity Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest International Equity Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 24 Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 3,314,170.773 30,499.092 70,591.055 3,415,260.920 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 3,311,194.191 31,975.830 72,090.899 3,415,260.920 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 25 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 26 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 27 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Market Capitalization - The value of a company's issued and outstanding common stock, as priced by the market: Number of outstanding shares x current market price of a share = market capitalization. Price/Earnings Ratio - Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different stocks. Growth Investing - An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. Value Investing - A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks tend to have a lower price/earnings ratio than that of growth stocks. Standard & Poor's 500(R) (S&P 500) - Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. It is not possible to invest directly in an index. 28 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds - -------------------------------------------------------------------------------- For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Fund(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: Drowning in paper? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs IE56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Fund(SM) Where The Best Minds Meet(R) Nvest Growth Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional ~adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC~name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST GROWTH FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Growth Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index, and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares over 20 Years [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Growth of a $10,000 Investment in Class A Shares over 10 Years [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] These illustrations 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. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST GROWTH FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------- Class A (Inception 11/27/68) 1 Year 5 Years 10 Years 15 Years 20 Years Net Asset Value1 -4.55% 16.98% 16.43% 15.21% 16.67% With Maximum Sales Charge2 -10.03 15.61 15.74 14.75 16.32 - ----------------------------------------------------------------------------------------------------------------- Class B (Inception 2/28/97) 1 Year Since Inception Net Asset Value1 -5.23% 13.79% With CDSC3 -9.45 13.39 - ----------------------------------------------------------------------------------------------------------------- Class C (Inception 9/1/98) 1 Year Since Inception Net Asset Value1 -5.23% 12.81% With Maximum Sales Charge and CDSC3 -7.03 12.34 - ----------------------------------------------------------------------------------------------------------------- Class Y (Inception 6/30/99) 1 Year Since Inception Net Asset Value1 -4.23% 3.32% - ------------------------------------------------------------------------------------------------------------------ Since Since Since Fund's Fund's Fund's 1 5 10 15 20 Class B Class C Class Y Comparative Performance Year Years Years Years Years Inception Inception Inception S&P 5004 -9.10% 18.33% 17.46% 16.02% 15.68% 15.92% 16.20% -1.41% Morningstar Large Cap Blend Average5 5.47 13.91 14.95 13.07 -- 11.80 14.66 1.24 Lipper Large-Cap Core Average6 1.32 15.56 15.65 14.07 14.15 12.95 15.51 0.87 - ------------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those noted. Class Y shares are available to certain institutional investors only. 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains and the maximum sales charge of 5.75%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales ~charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000 are not subject to the additional sales charge. 4 S&P 500 Stock Index is an unmanaged index of U.S. common stock performance. You may not invest directly in an index. 5 Morningstar Large Cap Blend Average is an average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class C since-inception return is calculated from 8/31/98. The Morningstar Large Blend Average does not track a 20-year performance average. 6 Lipper Large-Cap Core Average is the average performance without sales charges of mutual funds with a similar current investment style or objective as calculated by Lipper Inc. Class C since-inception return is calculated from 8/31/98. 2 NVEST GROWTH FUND Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTOS] G. Kenneth Heebner Capital Growth Management Q. How did Nvest Growth Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Growth Fund Class A shares had a total return of -4.55% based on net asset value, including $1.13 in reinvested distributions. The Fund's benchmark, the Standard & Poor's 500 Index, returned - -9.10% for the same period. Q. What was the investment environment like during the year? The U.S. economy continued to grow with minimal inflation during 2000. In the latter half of 1999, the Federal Reserve Board initiated a series of interest-rate increases designed to slow the growth of the economy to avoid the possibility of increases in inflation. The Fed completed this process by mid-year 2000, and by the final quarter of the year, concern had shifted from averting future inflation to avoiding recession. In December the Fed began publicly hinting that it would shift to a more accommodative monetary policy in an effort to prevent the economy from slowing too abruptly. Q. What was your strategy with the Fund? Our strategy during 2000 was to select companies and industries that we believed would produce strong profit growth despite the tendency of the economy to slow in response to the rate increases initiated by the Fed. Early in the year, more than 40% of the portfolio was invested in telecommunications and technology -- two sectors that demonstrated a remarkable ability to grow much faster than the economy. Approximately 20% of the Fund was invested in metals companies with a global orientation, with the expectation that solid global growth would enable strong pricing in steel, nickel and aluminum, and contribute to a positive profit outlook for these companies. As the year progressed, it became apparent that excess capacity growth in telecommunications and technology was clouding the outlook for these industries, despite the strong demand growth they enjoyed. Therefore, by the end of 2000 we had eliminated our positions in these industries. In addition, the price increases in metals we had forecast failed to occur, so we also scaled back on these stocks during the year. 3 NET GROWTH FUND - -------------------------------------------------------------------------------- We maintained a significant position in food, beverage and tobacco stocks in 2000, and we initiated a modest position in real estate investment trusts (REITs) early in the year. We continued to add to this position so that, by year-end, REITs were one of the Fund's largest areas of concentration. We used proceeds from the sales of the Fund's metals, telecommunications and technology stocks (sold earlier in the year) to invest in healthcare, insurance and energy stocks, which we believe will perform well in a slower economic environment. Q. Which were the Fund's best- and worst-performing ~stocks in 2000? Investment results from Nvest Growth Fund's technology holdings were mixed. We elected to sell a number of technology stocks at a loss. We also realized losses when we eliminated the Fund's position in metals. During the year, the Fund benefited from its holdings in consumer non-durables, healthcare stocks and REITs. Top-performing individual stocks in the portfolio during 2000 included Philip Morris and United HealthCare Group. Philip Morris recovered from depressed valuations as investors became more optimistic about the company's ability to deal with a hostile litigation environment. Earnings growth in excess of 30% during the year -- as well as increased recognition of the improving profit outlook for the health maintenance industry as a whole -- helped propel United HealthCare's stock price upward in 2000. Q. What is your current outlook? The Federal Reserve's dramatic interest-rate cut, which occurred just two business days after the end of the year, surprised most observers by its size (0.5%, or 50 basis points) and timing (almost four weeks before the next scheduled meeting). Such inter-meeting announcements are rare. These facts give us reason to expect that the Fed will continue to pursue more accommodative policies in 2001. However, in general we expect a slower growth rate in the U.S. in the future than we have experienced in the past five or so years. 4 NET GROWTH FUND - -------------------------------------------------------------------------------- Top 10 Portfolio Holdings -- 12/31/00 % of Company Net Assets 1. UnitedHealth Group, Inc. 8.1 2. Hershey Foods Corp. 6.3 3. Philip Morris Companies, Inc. 6.3 4. XL Capital Ltd., Class A 6.0 5. Inco Ltd. 5.8 6. Apartment Investment & Management Co., Class A 5.5 7. CVS Corp. 5.3 8. General Dynamics Corp. 5.2 9. Schlumberger Ltd. 5.1 10. Equity Office Properties Trust 5.1 Portfolio holdings and asset allocations will vary. Outside the United States, younger, developing economies in Asia, Europe and Latin America grew steadily last year, and we anticipate continued growth in these economies in 2001. Accordingly, we structured the Fund's portfolio to emphasize companies whose earnings progress seems least likely to be negatively impacted by an economic slowdown in the U.S. In general, we believe the best opportunities will come from companies -- whether based in the U.S. or ~overseas - -- that are able to participate in growth around the world. At year-end, Nvest Growth Fund's largest sectors included REITS, health care, energy, insurance, food, beverages and tobacco. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject ~to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Growth Fund invests primarily in growth stocks, which tend to be more sensitive to market movements because their stock prices are based on future expectations. It also invests in foreign securities, which involves special risks. REITs are subject to changes in underlying real estate values, rising interest rates, limited diversification of holdings, higher costs and prepayment risk associated with related mortgages. Frequent portfolio turnover may increase your risk of greater tax liability, which can lower your return from this Fund. These risks may increase share price volatility. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 100.2% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Aerospace -- 5.2% 1,030,000 General Dynamics Corp. ............................. $ 80,340,000 ------------- Beverages & Tobacco -- 11.1% 1,650,000 Anheuser-Busch Companies, Inc....................... 75,075,000 2,190,000 Philip Morris Companies, Inc........................ 96,360,000 ------------- 171,435,000 ------------- Domestic Oil -- 1.8% 390,000 Anadarko Petroleum Corp............................. 27,721,200 ------------- Financial Services -- 9.4% 831,000 Fannie Mae ......................................... 72,089,250 1,360,000 Washington Mutual, Inc.............................. 72,165,000 ------------- 144,254,250 ------------- Food & Beverages -- 6.3% 1,515,000 Hershey Foods Corp.................................. 97,528,125 ------------- Gas & Pipeline Utilities -- 4.5% 965,000 El Paso Energy Corp................................. 69,118,125 ------------- Health Care - Drugs -- 16.3% 1,350,000 HCA-The Healthcare Co............................... 59,413,500 2,030,000 UnitedHealth Group, Inc. ........................... 124,591,250 580,000 Wellpoint Health Networks, Inc. (c) ................ 66,845,000 ------------- 250,849,750 ------------- Insurance -- 10.1% 475,000 CIGNA Corp. ........................................ 62,842,500 1,060,000 XL Capital Ltd., Class A ........................... 92,617,500 ------------- 155,460,000 ------------- Metals & Mining -- 5.8% 5,280,000 Inco Ltd. (c) ...................................... 88,492,800 ------------- Oil-Major Integrated -- 3.2% 980,000 Petroleo Brasileiro SA - Petrobras (ADR) ........... 22,785,000 185,000 Petroleo Brasileiro SA - Petrobras (ADR) (c) ....... 4,671,250 307,200 TotalFinaElf SA (sponsored ADR) .................... 22,329,600 ------------- 49,785,850 ------------- Oil Services -- 5.1% 990,000 Schlumberger Ltd. .................................. 79,138,125 ------------- Real Estate Investment Trusts -- 16.1% 1,682,500 Apartment Investment & Management Co., Class A ..... 84,019,844 1,500,000 Boston Properties, Inc. ............................ 65,250,000 2,400,000 Equity Office Properties Trust ..................... 78,300,000 360,000 Equity Residential Properties Trust ................ 19,912,500 ------------- 247,482,344 ------------- 6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Retail -- 5.3% 1,360,000 CVS Corp. ......................................... $ 81,515,000 -------------- Total Common Stock (Identified Cost $1,340,469,803) 1,543,120,569 -------------- Short Term Investment -- 0.1% Principal Amount - -------------------------------------------------------------------------------- $1,280,000 American Express Credit Corp., 6.480%, 1/02/2001 .. 1,280,000 ------------- Total Short Term Investment (Identified Cost $1,280,000) ................................ 1,280,000 ------------- Total Investments - 100.3% (Identified Cost $1,341,749,803) (b) ........................ 1,544,400,569 Other assets less liabilities ..................... (4,671,372) ------------- Total Net Assets - 100% ........................... $1,539,729,197 ------------- (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments ~based on cost of $1,341,698,073 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 ...... $ 228,619,316 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ...................................... (25,916,820) ------------- Net unrealized appreciation .......................... $ 202,702,496 ============= During the year ended December 31, 2000, the Fund distributed $95,739,167 (unaudited) from long-term capital gains. (c) Non-income producing security. ADR An American Depositary Receipt is a certificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described. The values of ADRs are significantly influenced by trading on exchanges not located in the United States. Percentage of net assets by country at December 31, 2000 (unaudited): United States 91.0% Canada 5.7% Brazil 1.8 France 1.5 See accompanying notes to financial statements. 7 STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $1,341,749,803)............ $ 1,544,400,569 Cash............................................................. 391,350 Receivable for: Fund shares sold.............................................. 1,123,153 Securities sold............................................... 76,891,039 Dividends and interest........................................ 3,527,536 Tax reclaims.................................................. 193,514 ---------------- 1,626,527,161 LIABILITIES Payable for: Securities purchased.......................................... $ 72,647,985 Fund shares redeemed.......................................... 12,581,640 Withholding taxes............................................. 57,501 Accrued expenses: Management fees............................................... 864,037 Deferred trustees' fees....................................... 215,783 Transfer agent................................................ 258,400 Accounting and administrative................................. 46,386 Other......................................................... 126,232 -------------- 86,797,964 ---------------- NET ASSETS.......................................................... $ 1,539,729,197 ================ Net Assets consist of: Paid in capital............................................... $ 1,405,713,786 Undistributed net investment income........................... 5,486,267 Accumulated net realized gains (losses)....................... (74,121,622) Unrealized appreciation (depreciation) on investments.............................................. 202,650,766 ---------------- NET ASSETS.......................................................... $ 1,539,729,197 ================ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($1,413,684,974 / 150,982,531 shares of beneficial interest)..... $ 9.36 ========= Offering price per share (100 / 94.25 of $9.36)..................... $ 9.93* ========= Net asset value and offering price of Class B shares ($107,954,428 / 11,968,579 shares of beneficial interest)........ $ 9.02** ========= Net asset value of Class C shares ($5,829,725 / 646,123 shares of beneficial interest)............. $ 9.02** ========= Offering price per share (100 / 99.00 of $9.02)..................... $ 9.11 ========= Net asset value, offering and redemption price of Class Y shares ($12,260,070 / 1,308,102 shares of beneficial interest).......... $ 9.37 =========
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 8 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends (net of foreign taxes of $530,252)................ $ 34,184,979 Interest.................................................... 536,758 ---------------- 34,721,737 Expenses Management fees.......................................... $ 11,676,626 Service fees - Class A................................... 4,014,852 Service and distribution fees - Class B................. 1,172,243 Service and distribution fees - Class C.................. 60,689 Trustees' fees and expenses.............................. 73,465 Accounting and administrative............................ 636,976 Custodian................................................ 262,723 Transfer agent - Class A, Class B, Class C............... 3,138,989 Transfer agent - Class Y................................. 13,472 Audit and tax services................................... 40,417 Legal.................................................... 25,401 Printing................................................. 182,780 Registration............................................. 113,663 Miscellaneous............................................ 22,991 -------------- Total expenses before reductions............................ 21,435,287 Less reductions............................................. (288,987) 21,146,300 -------------- ---------------- Net investment income....................................... 13,575,437 ---------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net................... 12,770,111 Unrealized appreciation (depreciation) on investments - net. (118,691,383) ---------------- Net gain (loss) on investment transactions.................. (105,921,272) ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.......... $ (92,345,835) ================
See accompanying notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, --------------------------------- 1999 2000 ------------- --------------- FROM OPERATIONS Net investment income (loss)............................... $ 3,468,742 $ 13,575,437 Net realized gain (loss) on investments.................... 394,461,456 12,770,111 Net unrealized appreciation (depreciation) on investments.. (123,562,713) (118,691,383) --------------- ---------------- Increase (decrease) in net assets from operations.......... 274,367,485 (92,345,835) --------------- ---------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A................................................. 0 (8,340,768) Class B................................................. 0 (147,789) Class C................................................. 0 (7,510) Class Y................................................. 0 (114,156) Net realized gain on investments Class A................................................. (284,686,939) (91,898,737) Class B................................................. (20,990,502) (7,089,946) Class C................................................. (1,367,985) (353,917) Class Y................................................. (2,322,809) (770,634) In excess of net realized gain on investments Class A................................................. 0 (65,697,938) Class B................................................. 0 (5,068,566) Class C................................................. 0 (253,013) Class Y................................................. 0 (550,922) --------------- ---------------- (309,368,235) (180,293,896) --------------- ---------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS.................... 163,514,961 (218,727,513) --------------- ---------------- Total increase (decrease) in net assets....................... 128,514,211 (491,367,244) NET ASSETS Beginning of the year...................................... 1,902,582,230 2,031,096,441 --------------- ---------------- End of the year............................................ $ 2,031,096,441 $ 1,539,729,197 =============== ================ UNDISTRIBUTED NET INVESTMENT INCOME End of the year............................................ $ 2,622,961 $ 5,486,267 =============== ================
10 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year............ $ 10.55 $ 11.63 $ 10.41 $ 11.36 $ 11.00 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss).................. 0.04 0.01 0.08(a) 0.02 0.09(a) Net Realized and Unrealized Gain (Loss) on Investments ................. 2.07 2.79 3.00 1.57 (0.60) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations.............. 2.11 2.80 3.08 1.59 (0.51) ---------- ---------- ---------- ---------- ---------- Less Distributions Distributions From Net Investment Income ..... (0.04) 0.00 (0.10) 0.00 (0.06) Distributions From Net Realized Gain on Investments ........................ (0.99) (4.02) (1.32) (1.95) (0.62) Distributions in Excess of Realized Gain on Investments................................. 0.00 0.00 (0.35) 0.00 (0.45) Distributions From Return of Capital.......... 0.00 0.00 (0.36) 0.00 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions........................... (1.03) (4.02) (2.13) (1.95) (1.13) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year.................. $ 11.63 $ 10.41 $ 11.36 $ 11.00 $ 9.36 ========== ========== ========== ========== ========== Total Return (%) (b).......................... 20.9 23.5 33.4 15.2 (4.6) Ratio of Operating Expenses to Average Net Assets(%) ................... 1.18 1.12 1.12 1.12 1.18 Ratio of Operating Expenses to Average Net Assets after Expense Reductions (%) 1.18 1.12 1.12 1.12 1.16(c) Ratio of Net Investment Income to Average Net Assets(%) ................... 0.33 0.08 0.74 0.23 0.83 Portfolio Turnover Rate (%)................... 199 214 202 206 266 Net Assets, End of Year (000,000)............. $ 1,297 $ 1,460 $ 1,825 $ 1,871 $ 1,414
(a) Per share net investment income (loss) has been calculated using the average shares outstanding during the year. (b) A sales charge is not reflected in total return calculations. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B -------------------------------------------------------- February 28, 1997(a) through December 31, Year Ended December 31, ------------ ----------------------------------------- 1996 1997 1998 1999 ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Period.......... $ 12.47 $ 10.32 $ 11.15 $ 10.67 ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss).................. (0.07) (0.00)(b) (0.05) 0.01(b) Net Realized and Unrealized Gain (Loss) on Investments ................. 1.94 2.95 1.52 (0.58) ----------- ----------- ----------- ----------- Total From Investment Operations.............. 1.87 2.95 1.47 (0.57) ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income ..... 0.00 (0.06) 0.00 (0.01) Distributions From Net Realized Gain on Investments ........................ (4.02) (1.32) (1.95) (0.62) Distributions in Excess of Realized Gain on Investments ........................ 0.00 (0.35) 0.00 (0.45) Distributions From Return of Capital.......... 0.00 (0.39) 0.00 0.00 ----------- ----------- ----------- ----------- Total Distributions........................... (4.02) (2.12) (1.95) (1.08) ----------- ----------- ----------- ----------- Net Asset Value, End of Period................ $ 10.32 $ 11.15 $ 10.67 $ 9.02 =========== =========== =========== =========== Total Return (%) (c).......................... 14.4 32.4 14.4 (5.2) Ratio of Operating Expenses to Average Net Assets (%) ..................... 1.87(d) 1.87 1.87 1.93 Ratio of Net Operating Expenses to Average Net Assets After Expense Reductions (%) .... 1.87(d) 1.87 1.87 1.91(e) Ratio of Net Investment Income to Average Net Assets (%) ..................... (0.67)(d) (0.01) (0.52) 0.08 Portfolio Turnover Rate (%)................... 214 202 206 266 Net Assets, End of Period (000,000)........... $ 18 $ 75 $ 136 $ 108
(a) Commencement of operations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the year. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) Computed on an annualized basis. (e) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C Class Y ----------------------------------------- -------------------------- September 1 1998(a) June 30, 1999(a) Year through Years Ended through Ended December 31, December 31, December 31, December 31, ----------- -------------------------- ----------- ----------- 1998 1999 2000 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Period $ 11.18 $ 11.15 $ 10.67 $ 11.94 $ 11.01 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss)....... (0.00)(b) (0.05) 0.01(b) 0.03 0.12(b) Net Realized and Unrealized Gain (Loss) on Investments 2.09 1.52 (0.58) 0.99 (0.60) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations... 2.09 1.47 (0.57) 1.02 (0.48) ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income (0.06) 0.00 (0.01) 0.00 (0.09) Distributions From Net Realized Gain on Investments (1.32) (1.95) (0.62) (1.95) (0.62) Distributions in Excess of Realized Gain on Investments (0.35) 0.00 (0.45) 0.00 (0.45) Distributions From Return of Capital (0.39) 0.00 0.00 0.00 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions................ (2.12) (1.95) (1.08) (1.95) (1.16) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period..... $ 11.15 $ 10.67 $ 9.02 $ 11.01 $ 9.37 =========== =========== =========== =========== =========== Total Return (%) (c)............... 22.2 14.4 (5.2) 9.7 (4.2) Ratio of Operating Expenses to Average Net Assets (%) 1.87(d) 1.87 1.93 0.87(d) 0.85 Ratio of Operating Expenses to Average Net Assets After Expense Reductions(%) 1.87(d) 1.87 1.91(e) 0.87(d) 0.83(e) Ratio of Net Investment Income to Average Net Assets (%) (0.01)(d) (0.52) 0.08 0.48(d) 1.16 Portfolio Turnover Rate (%)........ 202 206 266 206 266 Net Assets, End of Period (000,000) $ 2 $ 9 $ 6 $ 15 $ 12
(a) Commencement of operations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) A sales charge and a contingent deferred sales charge are not reflected in total return calculations of Class C shares. Periods less than one year are not annualized. (d) Computed on an annualized basis. (e) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Growth Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks long-term growth of capital through investment in equity securities of companies whose earnings are expected to grow at a faster rate than the United States economy. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00% do not convert to any class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund was liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser 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. 14 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Interest income for the Fund is increased by the accretion of discount and decreased by the amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. d. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for distributions from real estate investment trusts. Permanent book and tax basis differences will result in reclassification to the capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's adviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000 purchases and sales of securities (excluding short-term investments) were $4,601,454,605 and $4,979,148,645 respectively. 3a. Management Fees and Other Transactions with Affiliates. During the year ended December 31, 2000, the Fund incurred management fees payable to its investment adviser, Capital Growth Management, L.P. ("Capital Growth Management"). Capital Growth Management is an affiliate of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. The management agreement in effect during the year ended December 31, 2000 provided for fees as set forth below: Fees Earned Annual Percentage Rate Annual Net Asset Value Levels ----------- ---------------------- ----------------------------- $11,676,626 0.750% the first $200 million 0.700% the next $300 million 0.650% the next $1,500 million 0.600% the excess over $2 billion The effective management fee for the year ended December 31, 2000 was 0.67%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets, and 0.03% 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $636,976 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as a sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $2,162,807 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and a Service and Distribution Plan relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $4,014,852 in fees under the Class A Plan. Prior to June 1, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses as of December 31, 2000 is $2,030,882. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $293,061 and $15,172 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $879,182 and $45,517 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000, amounted to $1,707,818. 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Funds Management, L.P., Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Fund until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class A Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold.......................................... 18,434,322 $ 213,507,329 6,442,912 $ 67,793,846 Shares issued in connection with the reinvestment of: Dividends from net investment income.............. 0 0 862,365 8,037,715 Distributions from net realized gain.............. 26,795,700 275,995,710 15,943,237 152,763,355 ----------- ------------- ------------ -------------- 45,230,022 489,503,039 23,248,514 228,594,916 Shares repurchased................................... (35,860,181) (413,701,486) (42,339,597) (435,596,467) ----------- ------------- ------------ -------------- Net increase (decrease).............................. 9,369,841 $ 75,801,553 (19,091,083) $ (207,001,551) ----------- ------------- ------------ -------------- Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class B Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold.......................................... 6,618,990 $ 75,011,147 1,867,464 $ 18,801,530 Shares issued in connection with the reinvestment of: Dividends from net investment income.............. 0 0 13,645 132,353 Distributions from net realized gain.............. 1,918,125 19,181,257 1,212,653 11,187,136 ----------- ------------- ------------ -------------- 8,537,115 94,192,404 3,093,762 30,121,019 Shares repurchased................................... (2,578,844) (29,179,794) (3,849,341) (38,906,352) ----------- ------------- ------------ -------------- Net increase (decrease).............................. 5,958,271 $ 65,012,610 (755,579) $ (8,785,333) ----------- ------------- ------------ --------------
17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class C Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold.......................................... 734,168 $ 8,322,147 220,068 $ 2,116,323 Shares issued in connection with the reinvestment of: Dividends from net investment income.............. 0 0 519 5,036 Distributions from net realized gain.............. 79,732 797,323 47,518 437,813 ----------- ------------- ------------ -------------- 813,900 9,119,470 268,105 2,559,172 Shares repurchased................................... (175,788) (1,978,356) (442,204) (4,430,762) ----------- ------------- ------------ -------------- Net increase (decrease).............................. 638,112 $ 7,141,114 (174,099) $ (1,871,590) ----------- ------------- ------------ -------------- Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class Y Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold.......................................... 1,258,953 $ 14,177,783 139,551 $ 1,464,823 Shares issued in connection with the reinvestment of: Dividends from net investment income.............. 0 0 12,302 114,156 Distributions from net realized gain.............. 225,296 2,322,801 137,485 1,321,552 ----------- ------------- ------------ -------------- 1,484,249 16,500,584 289,338 2,900,531 Shares repurchased................................... (83,631) (940,900) (381,854) (3,969,570) ----------- ------------- ------------ -------------- Net increase (decrease).............................. 1,400,618 $ 15,559,684 (92,516) $ (1,069,039) ----------- ------------- ------------ -------------- Increase (decrease) derived from capital shares transactions................................ 17,366,842 $ 163,514,961 (20,113,277) $ (218,727,513) =========== ============= ============ ==============
5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings under the line of credit during the year ended December 31, 2000. 6. Expense Reductions. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $288,987 under these agreements. 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Growth Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Growth Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 19 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposal: 1. Approval of a new advisory agreement between the Fund and Capital Growth Management Limited Partnership. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 87,875,465.370 3,130,343.399 4,094,757.925 95,100,566.694 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 2. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 20 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds - -------------------------------------------------------------------------------- This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Fund(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: Drowning in paper? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs GF56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Capital Growth Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST CAPITAL GROWTH FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Capital Growth Value Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 8/3/92 10000 9425 12/31/92 11490 10830 12/31/93 12398 11685 12/31/94 12195 11494 12/31/95 15945 15028 12/31/96 18664 17590 12/31/97 21879 20621 12/31/98 28241 26617 12/31/99 32282 30426 12/31/00 28368 26737 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1
NVEST CAPITAL GROWTH FUND Average Annual Total Returns -- 12/31/00 Class A (Inception 8/3/92) 1 Year 5 Years Since Inception Net Asset Value1 -19.52% 12.20% 13.19% With Maximum Sales Charge2 -24.14 10.88 12.40 Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value1 -20.11% 11.26% 11.67% With CDSC3 -23.31 11.06 11.67 Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value1 -20.10% 11.28% 14.14% With Maximum Sales Charge and -21.52 11.06 13.95 CDSC3 Since Since Since Fund's Fund's Fund's Class A Class B Class C Comparative Performance 1 Year 5 Years Inception Inception Inception Russell 1000 Growth Index4 -22.42% 18.15% 16.31% 18.23% 21.13% Morningstar Large Growth Average5 -14.09 18.10 16.87 17.06 21.04 Lipper Multi-Cap Growth Average6 -11.10 18.98 17.08 16.79 21.16
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales _charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. 4 Russell 1000 Growth Index is an unmanaged index measuring the performance of the largest 1000 U.S. companies within the Russell 3000 selected for their growth orientation. You may not invest directly in an index. Class A since-inception return is calculated from 7/31/92. Class B since-inception return is calculated from 9/30/93. 5 Morningstar Large Growth Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class A since-inception return is calculated from 7/31/92. Class B since-inception return is calculated from 9/30/93. 2 NVEST CAPITAL GROWTH FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTO] Gerald Scriver Westpeak Investment Advisors, L.P. Q. How did Nvest Capital Growth Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Capital Growth Fund Class A shares had a total return of -19.52% based on net asset value, including $3.50 in reinvested capital gains. The Fund's benchmark, the Russell 1000 Growth Index, returned -22.42% for the same, volatile period. Technology has become a large component of the benchmark, and this sector was hard hit during the fourth quarter. The Fund held up better because we reduced the portfolio's exposure to technology. Q. What was the investment environment like during the year? The climate changed radically in March. At the beginning of 2000, the market continued the trends exhibited in 1999, led by stocks of high-growth technology companies selling at extremely high valuations. In spite of their volatility and the fact that they had little or no current earnings, these "new economy" stocks were immensely popular. Those shares with strong price momentum soared to very high price/earnings ratios. (A stock's price/earnings ratio, or P/E ratio, is a measure of a stock's price relative to its projected earnings.) In March, this speculative bubble burst. "Old economy" stocks selling at much lower P/E ratios came back into favor, as investors reverted to the time-tested approach of analyzing a company's stock valuation relative to its fundamentals. When data emerged showing a slowdown in the U.S. economy, stocks offering solid prospects for steady earnings growth took the lead in the market through the end of the year. Q. How did you position Nvest Capital Growth Fund within this backdrop? From the very beginning of the year, we believed that the market's appetite for high-growth technology stocks would wane. As a result, we shifted our search for capital growth, focusing on attractively priced stocks of companies with good earnings momentum. Although we will always have some technology exposure in the portfolio for risk/return purposes, currently the Fund has a very small position relative to its benchmark. The average stock in Nvest Capital Growth Fund's portfolio was selling at approximately 35 times last year's earnings, versus more than 65 times earnings for the stocks in the Russell 1000 Growth Index, but with a comparable projected growth rate. 3 NVEST CAPITAL GROWTH FUND Top 10 Portfolio Holdings - 12/31/00 % of Company Net Assets 1. General Electric Co. 9.9 2. Cisco Systems, Inc. 5.4 3. Pfizer, Inc. 5.4 4. Microsoft Corp. 3.2 5. Intel Corp. 3.1 6. Sun Microsystems, Inc. 2.9 7. Alberto-Culver Co. 2.5 8. Varian Medical Systems, Inc. 2.5 9. EMC Corp. 2.3 10. Oracle Corp. 2.3 In the course of the year, we trimmed the Fund's holdings in computer hardware and wireless communications, focusing on the high-quality, large-capitalization names that we felt would be less vulnerable or faster to recover when the tech bubble burst. The technology companies that remain in Nvest Capital Growth Fund's portfolio include Cisco Systems, Sun Microsystems and Microsoft. We also balanced the portfolio with attractively priced stocks of "old economy" businesses offering opportunities for steady earnings growth - companies like General Electric, PepsiCo and Alberto-Culver. Q. What were the Fund's best and worst performers this year? The Fund's healthcare stocks performed well because demand for their products and services tends to be relatively constant. Pharmaceutical companies, in particular, did well for the Fund, including Schering-Plough, Bristol-Myers Squibb and Cardinal Health. Adobe Systems, a software company that avoided the tech downdraft, was another strong performer. 4 NVEST CAPITAL GROWTH FUND On the down side, any exposure the Fund had to technology was negative to some degree. Examples include Applied Materials, a semiconductor equipment firm; Texas Instruments, a semiconductor manufacturer; and electronics provider, Vishay Intertechnology. Although these stocks tend to be volatile, we believe they have strong upside potential going forward. Q. What is your current outlook for 2001? The momentum in the market appears to have changed. Investors seem to be putting a higher priority on value rather than focusing on growth at any price, and we believe this trend will endure. We don't expect the technology sector to snap back to the same levels it reached early in the year. Having said that, once the technology sell-off ends and valuations are at levels we find attractive, we may increase Nvest Capital Growth Fund's weighting in technology, bringing it closer to that of its benchmark. We also expect interest rates to trend down, within an environment of slower economic growth. Two business days into the new year, the Federal Reserve cut interest rates, which surprised most observers by its size (0.5%, or 50 basis points) and timing (almost four weeks before the next scheduled meeting). Indications are that the Fed may ease rates further to avert a recession, but we don't expect a return to the high growth rate of the past several years. As a result, we plan to focus on sectors that we believe will benefit from these trends, including interest-rate sensitive businesses and consumer staples. Overall, however, we don't expect to make any major changes to the portfolio as we continue our focus on finding companies offering attractive growth rates selling at appealing valuations. This portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Capital Growth Fund invests primarily in growth stocks, which are generally more sensitive to market movements because their stock prices are based on future expectations. From time to time it may also invest a portion of assets in small-cap companies, which are more volatile than the overall market. These risks affect the value of your investment. See the Fund's prospectus for details. Frequent portfolio turnover may increase your risk of greater tax liability, which could lower your return from this Fund. 5 Investments as of December 31, 2000
PORTFOLIO COMPOSITION Common Stock -- 98.9% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Airlines-- 0.5% 30,600 Northwest Airlines Corp. (c).......................... $ 921,825 ---------- Banks-- 1.1% 26,000 Citigroup, Inc........................................ 1,327,625 25,400 Silicon Valley Bancshares ............................ 877,888 ---------- 2,205,513 ---------- Computer Hardware-- 11.1% 4,966 Avaya, Inc. (c)....................................... 51,212 286,500 Cisco Systems, Inc. (c) 10,958,625 70,300 EMC Corp. (c)......................................... 4,674,950 25,100 Hewlett-Packard Co.................................... 792,219 8,000 SanDisk Corp. (c)..................................... 222,000 210,200 Sun Microsystems, Inc. (c)............................ 5,859,325 ---------- 22,558,331 ---------- Computer Software-- 3.9% 48,400 International Business Machines Corp.................. 4,114,000 40,700 Jack Henry & Associates, Inc.......................... 2,528,487 32,800 Mentor Graphics Corp. (c)............................. 899,950 4,850 VERITAS Software Corp. (c)............................ 424,375 ---------- 7,966,812 ---------- Consumer Durables-- 1.1% 78,000 Herman Miller, Inc.................................... 2,242,500 ---------- Drugs-- 14.8% 36,600 Albany Molecular Research, Inc. (c)................... 2,255,475 38,200 Amgen, Inc. (c)....................................... 2,442,413 35,400 Bristol-Myers Squibb Co............................... 2,617,387 5,700 Cardinal Health, Inc.................................. 567,863 8,000 Eli Lilly and Co...................................... 744,500 15,187 King Pharmaceuticals, Inc. (c)........................ 784,978 39,900 Medicis Pharmaceutical Corp. (c)...................... 2,359,088 43,900 Merck & Co............................................ 4,110,137 238,050 Pfizer, Inc........................................... 10,950,300 54,600 Schering-Plough Corp.................................. 3,098,550 ---------- 29,930,691 ---------- Drugs & Health Care-- 4.5% 53,000 Amerisource Health Corp. (c).......................... 2,676,500 29,900 Andrx Corp. (c)....................................... 1,730,462 16,300 Barr Labs, Inc. (c)................................... 1,188,881 72,400 IVAX Corp............................................. 2,772,920 22,300 Techne Corp. (c)...................................... 804,194 ---------- 9,172,957 ---------- Electric Utilities-- 1.0% 36,400 Dynegy, Inc........................................... 2,040,675 ----------
6 See accompanying notes to financial statements PORTFOLIO COMPOSITION - continued Common Stock - continued Shares Description Value (a) - -------------------------------------------------------------------------------- Electrical Equipment-- 0.3% 12,600 Corning, Inc.......................................... $ 665,438 ---------- Electronics-- 6.3% 18,200 ADC Telecommunications, Inc. (c)...................... 329,875 34,000 Amphenol Corp. (c).................................... 1,332,375 229,600 AVX Corp.............................................. 3,759,700 104,500 KEMET Corp. (c)....................................... 1,580,563 96,800 Molex, Inc............................................ 3,436,400 19,000 Solectron Corp. (c)................................... 644,100 119,100 Vishay Intertechnology, Inc. (c)...................... 1,801,387 ---------- 12,884,400 ---------- Financial Services-- 11.3% 56,700 AmeriCredit Corp. (c)................................. 1,545,075 69,500 CompuCredit Corp. (c)(d).............................. 1,259,688 419,900 General Electric Co................................... 20,128,956 ---------- 22,933,719 ---------- Food & Beverages-- 3.0% 109,200 Pepsi Bottling Group, Inc............................. 4,361,175 36,100 PepsiCo, Inc.......................................... 1,789,206 ---------- 6,150,381 ---------- Health Care-Products-- 2.5% 75,300 Varian Medical Systems, Inc........................... 5,115,694 ---------- Hotels & Restaurants-- 1.6% 48,600 Marriott International, Inc........................... 2,053,350 43,900 MGM Grand, Inc. (d)................................... 1,237,431 ---------- 3,290,781 ---------- Household Products-- 2.9% 120,100 Alberto-Culver Co..................................... 5,141,781 12,000 Colgate-Palmolive Co.................................. 774,600 ---------- 5,916,381 ---------- Information Services-- 3.8% 32,900 Automatic Data Processing, Inc........................ 2,082,981 26,900 DST Systems, Inc. (c)................................. 1,802,300 55,000 SunGard Data Systems, Inc. (c)........................ 2,591,875 63,800 TeleTech Holdings, Inc. (c)........................... 1,172,325 ---------- 7,649,481 ---------- Internet-- 2.8% 67,200 America Online, Inc. (c).............................. 2,338,560 22,700 Commerce One, Inc. (c)................................ 574,594 43,700 InfoSpace.com, Inc. (c)............................... 386,472 9,000 Juniper Networks, Inc. (c)............................ 1,134,562 14,100 Macromedia, Inc. (c).................................. 856,575 10,400 Yahoo!, Inc. (c)...................................... 312,650 ---------- 5,603,413 ---------- See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION - continued Common Stock - continued Shares Description Value (a) - -------------------------------------------------------------------------------- Medical Products & Supplies-- 1.7% 84,700 Biomet, Inc........................................... $3,361,531 ---------- Oil & Gas-Drilling Equipment-- 0.7% 31,600 Noble Drilling (c).................................... 1,372,625 ---------- Oil & Gas-Exploration & Production-- 0.4% 12,000 Murphy Oil Corp....................................... 725,250 ---------- Property & Casualty Insurance-- 1.5% 40,300 Radian Group, Inc..................................... 3,025,019 ---------- Real Estate Investment Trusts-- 0.5% 35,800 Health Care Property Investors, Inc................... 1,069,525 ---------- Restaurants-- 0.4% 19,400 Brinker International, Inc. (c)....................... 819,650 ---------- Retail-Department Store-- 2.7% 28,400 Kohl's Corp. (c)...................................... 1,732,400 69,500 Wal-Mart Stores, Inc.................................. 3,692,187 ---------- 5,424,587 ---------- Retail-Grocery-- 0.2% 16,200 The Kroger Co. (c).................................... 438,413 ---------- Retail-Specialty-- 2.8% 56,800 Caremark Rx, Inc. (c)................................. 770,350 86,650 Home Depot, Inc....................................... 3,958,822 32,100 Tiffany & Co.......................................... 1,015,162 ---------- 5,744,334 ---------- Securities & Asset Management-- 1.2% 35,200 Lehman Brothers Holdings, Inc......................... 2,380,400 ---------- Semiconductors-- 8.0% 26,700 Analog Devices, Inc. (c).............................. 1,366,706 31,100 Applied Materials, Inc. (c)........................... 1,187,631 8,800 Applied Micro Circuits Corp. (c)...................... 660,413 5,500 Broadcom Corp. (c).................................... 462,000 104,000 Dallas Semiconductor Corp............................. 2,665,000 206,000 Intel Corp............................................ 6,192,875 17,300 Linear Technology Corp................................ 800,125 9,700 Maxim Integrated Products, Inc. (c)................... 463,781 24,810 Texas Instruments, Inc................................ 1,175,374 26,700 Xilinx, Inc. (c)...................................... 1,231,537 ---------- 16,205,442 ---------- Software-- 6.0% 18,800 Adobe Systems, Inc.................................... 1,093,925 149,900 Microsoft Corp. (c)................................... 6,501,912 160,600 Oracle Corp. (c)...................................... 4,667,438 ---------- 12,263,275 ---------- 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION - continued Common Stock - continued Shares Description Value (a) - -------------------------------------------------------------------------------- Telecommunications-- 0.3% 25,500 BroadWing, Inc. (c)................................... $ 581,719 ----------- Total Common Stock (Identified Cost $203,693,582)..... 200,660,762 ----------- Short Term Investment-- 1.4% Principal Amount - -------------------------------------------------------------------------------- $ 2,742,000 Repurchase Agreement with State Street Bank and Trust Co.dated 12/29/2000 at 5.25% to be repurchased at $2,743,600 on 1/02/2001, collateralized by $2,760,000 U.S. Treasury Bond, 6.250%, due 10/31/2001 valued at $2,801,483........... 2,742,000 ----------- Total Short Term Investment (Identified Cost $2,742,000)...................................... 2,742,000 ----------- Total Investments-- 100.3% (Identified Cost $206,435,582) (b)................................ 203,402,762 Other assets less liabilities (607,058) ----------- Total Net Assets-- 100% $202,795,704 =========== (a) See Note 1a. of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized depreciation on investments based on cost of $206,634,617 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of tax cost over value.......................................... 28,563,085 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value.......................................(31,794,940) ----------- Net unrealized depreciation $(3,231,855) =========== During the year ended December 31, 2000, the Fund distributed $25,674,156 (unaudited) from long-term capital gains. (c) Non-income producing security. (d) All or a portion of this security was on loan to brokers at December 31, 2000. See accompanying notes to financial statements. 9 STATEMENT OF ASSETS & LIABILITIES ASSETS Investments at value (Identified cost $206,435,582) 203,402,762 Cash............................................ 40,085 Investments held as collateral for loaned securities 2,583,916 Receivable for: Fund shares sold.............................. 152,583 Dividends and interest........................ 106,876 Securities lending income..................... 5,583 ------------ 206,291,805 LIABILITIES Payable for: Collateral on securities loaned, at value..... $2,583,916 Fund shares redeemed.......................... 602,092 Accrued expenses: Management fees............................... 133,612 Transfer agent 66,535 Deferred trustees' fees....................... 39,595 Accounting and administrative 6,463 Other.............................................. 63,888 ------------ 3,496,101 ------------ NET ASSETS.......................................... $202,795,704 ============ Net Assets consist of: Paid in capital................................ $208,567,322 Undistributed (overdistributed) net investment income (loss)....................... (31,167) Accumulated net realized gain (loss)........... (2,707,631) Unrealized appreciation (depreciation) on investments................................. (3,032,820) ------------ NET ASSETS.......................................... $202,795,704 ------------ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares($143,424,802 O 9,534,994 shares of beneficial interest)............................. $ 15.04 ======= Offering price per share (100 O 94.25 of $15.04).... $ 15.96* ======= Net asset value and offering price of Class B shares ($56,883,947 O 4,221,720 shares of beneficial interest)............................. $ 13.47** ======= Net asset value of Class C shares ($2,486,955 O 184,689 shares of beneficial interest)............................. $ 13.47** ======= Offering price per share (100 O 99.00 of $13.47).... $ 13.61 ======= * Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 10
STATEMENT OF ASSETS & OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends....................................... $ 1,248,741 Interest........................................ 215,920 Securities lending income....................... 33,506 ------------ 1,498,167 Expenses Management fees............................... $ 1,933,858 Service fees - Class A........................ 466,661 Service and distribution fees - Class B...... 722,386 Service and distribution fees - Class C....... 30,728 Trustees' fees and expenses................... 17,457 Accounting and administrative................. 93,578 Custodian..................................... 115,632 Transfer agent................................ 697,983 Audit and tax services........................ 31,462 Legal......................................... 5,925 Printing...................................... 54,012 Registration.................................. 44,582 Miscellaneous................................. 8,300 ------------ Total expenses before reductions................ 4,222,564 Less reductions................................. (63,280) 4,159,284 ------------ ------------ Net investment income (loss).................... (2,661,117) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net........ 36,617,435 Unrealized appreciation (depreciation) on investments - net............................. (84,752,540) ------------ Net gain (loss) on investment transactions....... (48,135,105) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (50,796,222) ===========
See accompanying notes to financial statements. 11 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, -------------------------- 1999 2000 ----------- ------------ FROM OPERATIONS Net investment income (loss)..................... $(2,012,296) $(2,661,117) Net realized gain (loss) on investments.......... 35,883,311 36,617,435 Unrealized appreciation (depreciation) on investments................................... 22,175,104 (84,752,540) ----------- ------------ Increase (decrease) in net assets from operations.................................. 56,046,119 (50,796,222) ----------- ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net realized gain on investments Class A........................................ (21,565,434) (28,038,980) Class B........................................ (8,617,664) (12,056,741) Class C........................................ (360,787) (515,976) Class Y........................................ (16,088) 0 In excess of net realized gain on investments Class A........................................ 0 (37,905) Class B........................................ 0 (16,299) Class C........................................ 0 (698) ----------- ------------ (30,559,973) (40,666,599) ----------- ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS 18,457,562 15,399,125 ----------- ------------ Total increase (decrease) in net assets............. 43,943,708 (76,063,696) NET ASSETS Beginning of the year............................ 234,915,692 278,859,400 ----------- ------------ End of the year.................................. $278,859,400 $202,795,704 =========== ============ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year.................................. $ (27,258) $ (31,167) =========== ============
See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period. Class A ----------------------------------------- Year Ended December 31, ----------------------------------------- 1996 1997 1998 1999 2000 ----- ------ ------ ------ ------ Net Asset Value, Beginning of the Year........ $18.41 $ 19.27 $ 19.95 $20.67 $22.86 ----- ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) (b).................. (0.14) (0.18) (0.13) (0.13) (0.18) Net Realized and Unrealized Gain (Loss) on Investments.. 3.22 3.43 5.18 5.05 (4.14) ----- ------ ------ ------ ------ Total From Investment Operations.................. 3.08 3.25 5.05 4.92 (4.32) ----- ------ ------ ------ ------ Less Distributions Distributions From Net Realized Capital Gains...... (2.22) (2.57) (4.33) (2.73) (3.50) Distributions In Excess of Realized Gain on Investments 0.00 0.00 0.00 0.00 0.00(d) ----- ------ ------ ------ ------ Total Distributions.......... (2.22) (2.57) (4.33) (2.73) (3.50) ----- ------ ------ ------ ------ Net Asset Value, End of the Year.............$ 19.27 $ 19.95 $ 20.67 $ 22.86 $ 15.04 ===== ====== ====== ====== ====== Total Return (%) (a)......... 17.1 17.2 29.0 24.7 (19.5) Ratio of Operating Expenses to Average Net Assets (%)............ 1.50 1.45 1.46 1.39 1.40 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)............ 1.50 1.45 1.46 1.39 1.37(c) Ratio of Net Investment Income (loss) to Average Net Assets (%). (0.71) (0.87) (0.62) (0.61) (0.80) Portfolio Turnover Rate (%).. 74 48 136 124 118 Net Assets, End of the Year (000)............ $141,326 $149,734 $175,511 $200,821 $ 143,425 The subadviser to the Fund prior to February 14, 1998 was Loomis, Sayles & Company, L.P. Effective February 14, 1998 Westpeak Investment Advisers, L.P. became subadviser to the Fund. (a) A sales charge is not reflected in total return calculations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (d) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period. Class B ----------------------------------------- Year Ended December 31, ----------------------------------------- 1996 1997 1998 1999 2000 ----- ------ ------ ------ ------ Net Asset Value, Beginning of the Year......$ 18.09 $ 18.74 $ 19.10 $19.37 $21.06 ----- ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) (b)................. (0.28) (0.32) (0.27) (0.27) (0.32) Net Realized and Unrealized Gain (Loss) on Investments............. 3.15 3.25 4.87 4.69 (3.77) ----- ------ ------ ------ ------ Total From Investment Operations................. 2.87 2.93 4.60 4.42 (4.09) ----- ------ ------ ------ ------ Less Distributions Distributions From Net Realized Capital Gains..... (2.22) (2.57) (4.33) (2.73) (3.50) Distributions In Excess of Realized Gain on Investments 0.00 0.00 0.00 0.00 0.00(d) ----- ------ ------ ------ ------ Total Distributions.......... (2.22) (2.57) (4.33) (2.73) (3.50) ----- ------ ------ ------ ------ Net Asset Value, End of the Year ...........$ 18.74 $ 19.10 $ 19.37 $ 21.06 $13.47 ===== ====== ====== ====== ====== Total Return (%) (a)......... 16.2 15.9 28.2 23.8 (20.1) Ratio of Operating Expenses to Average Net Assets (%)............ 2.25 2.20 2.21 2.14 2.15 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)..... 2.25 2.20 2.21 2.14 2.12(c) Ratio of Net Investment Income (loss) to Average Net Assets (%)................ (1.46) (1.62) (1.37) (1.36) (1.55) Portfolio Turnover Rate (%).. 74 48 136 124 118 Net Assets, End of the Year (000)............ $37,439 $45,546 $57,796 $74,774 $56,884 The subadviser to the Fund prior to February 14, 1998 was Loomis Sayles & Company, L.P. Effective February 14, 1998 Westpeak Investment Advisers, L.P. became subadviser to the Fund. (a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions_ are used to reduce operating expenses of the Fund. (d) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 14 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period. Class C ----------------------------------------- Year Ended December 31, ----------------------------------------- 1996 1997 1998 1999 2000 ----- ------ ------ ------ ------ Net Asset Value, Beginning of the Year................$ 18.08 $ 18.74 $ 19.11 $19.37 $ 21.06 ----- ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) (b)................. (0.28) (0.34) (0.27) (0.27) (0.32) Net Realized and Unrealized Gain (Loss) on Investments ............... 3.16 3.28 4.86 4.69 (3.77) ----- ------ ------ ------ ------ Total From Investment Operations................. 2.88 2.94 4.59 4.42 (4.09) ----- ------ ------ ------ ------ Less Distributions Distributions from Net Realized Capital Gains..... (2.22) (2.57) (4.33) (2.73) (3.50) Distributions In Excess of Realized Gain on Investments........ 0.00 0.00 0.00 0.00 0.00(d) ----- ------ ------ ------ ------ Total Distributions.......... (2.22) (2.57) (4.33) (2.73) (3.50) ----- ------ ------ ------ ------ Net Asset Value, End of the Year............$ 18.74 $ 19.11 $ 19.37 $21.06 $13.47 ===== ====== ====== ====== ====== Total Return (%) (a)......... 16.2 15.9 28.1 23.8 (20.1) Ratio of Operating Expenses to Average Net Assets (%)............. 2.25 2.20 2.21 2.14 2.15 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)..... 2.25 2.20 2.21 2.14 2.12(c) Ratio of Net Investment Income (Loss) to Average Net Assets(%)... (1.46) (1.62) (1.37) (1.36) (1.55) Portfolio Turnover Rate (%).. 74 48 136 124 118 Net Assets, End of the Year (000).............$ 504 $ 979 $1,609 $3,110 $2,487 The subadviser to the Fund prior to February 14, 1998 was Loomis Sayles & Company, L.P. Effective February 14, 1998 Westpeak Investment Advisers, L.P. became subadviser to the Fund. (a) A sales charge and contingent deferred sales charge are not reflected in total return calculations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated _ commissions are used to reduce operating expenses of the Fund. (d) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 15 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000. 1. Significant Accounting Policies. The Nvest Capital Growth Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks long-term growth of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series of shares is a "Fund"). The Fund offers Class A, Class B, and Class C shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related 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. 16 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. d. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to differing treatment of net operating loss and real estate investment trusts. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to the capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $301,907,793 and $330,678,633 respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.75% of the first $200 million of the Fund's average daily net assets, 0.70% of the next $300 million and 0.65% of such assets in excess of $500 million reduced by the payment to Westpeak Investment Advisers, L.P. ("Westpeak") the Fund's investment subadviser at the rate of 0.40% of the first $200 million of the Fund's average daily net assets, 0.35% of the next $300 million and 0.30% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Westpeak are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Westpeak under the management and subadvisery agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 916,955 Westpeak 1,016,903 --------- $ 1,933,858 ========= The effective management fee for the year ended December 31, 2000 was 0.74%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata 17 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $93,578 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $510,739 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $466,661 in fees under the Class A Plan. Prior to September 13, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000 is $563,284. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $180,597 and $7,682 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $541,789 and $23,046 in distribution fees under the Class B and Class C plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $370,222. 18 NOTES TO FINANCIAL STATEMENTS - continued e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. All shares of Class Y were redeemed during the period. Transactions in capital shares were as follows:
Year Ended December 31, ------------------------------------------- 1999 2000 --------------------- ------------------- Class A Shares Amount Shares Amount ------ -------- ----------- -------- --------- Shares sold..........................5,621,317 $120,686,618 2,070,086 $47,256,732 Shares issued in connection with the reinvestment of: Distributions from net realized gain...................... 976,412 20,905,335 1,719,068 27,349,712 -------- ----------- ---------- ---------- 6,597,729 141,591,953 3,789,154 74,606,444 Shares repurchased...................(6,304,823)(135,708,449)(3,040,068)(68,575,974) -------- ------------ ---=------ ---------- Net increase (decrease).............. 292,906 $5,883,504 749,086 $6,030,470 -------- ------------ ---------- ----------- Year Ended December 31, ------------------------------------------- 1999 2000 --------------------- ------------------- Class B Shares Amount Shares Amount ------ -------- ----------- -------- --------- Shares sold.......................... 727,026 $14,638,814 741,402 $15,265,298 Shares issued in connection with the reinvestment of: Distributions from net realized gain...................... 425,766 8,406,124 826,447 11,800,258 -------- ----------- -------- --------- 1,152,792 23,044,938 1,567,849 27,065,556 Shares repurchased................... (586,477) (11,878,592) (896,553)(18,087,383) -------- ----------- -------- --------- Net increase (decrease)............ 566,315 $11,166,346 671,296 $8,978,173 -------- ----------- -------- ---------
19 NOTES TO FINANCIAL STATEMENTS - continued
Year Ended December 31, ------------------------------------------- 1999 2000 --------------------- ------------------- Class C Shares Amount Shares Amount ------ -------- ----------- -------- --------- Shares sold.......................... 93,837 $1,890,390 97,875 $ 2,003,918 Shares issued in connection with the reinvestment of: Distributions from net realized gain...................... 17,947 354,357 34,957 498,562 -------- ----------- -------- --------- 111,784 2,244,747 132,832 2,502,480 Shares repurchased................... (47,180) (981,675) (95,844) (1,967,375) -------- ----------- -------- --------- Net increase (decrease).............. 64,604 $1,263,072 36,988 $ 535,105 -------- ----------- -------- --------- March 16, 1999(a) January 1, 2000 through to December 31, 1999 May 9, 2000 --------------------- --------------------- Class Y Shares Amount Shares Amount ------ -------- ----------- -------- ----------- Shares sold........................ 6,148 $ 132,698 7,479 $ 175,584 Shares issued in connection with the reinvestment of: Distributions from net realized gain...................... 751 16,089 0 0 -------- ----------- -------- --------- 6,899 148,787 7,479 175,584 Shares repurchased................. (180) (4,147) (14,198) (320,207) -------- ----------- -------- ---------- Net increase (decrease)............ 6,719 $ 144,640 (6,719) $ (144,623) -------- ----------- -------- ----------- Increase (decrease) derived from capital shares transactions... 930,544 $18,457,562 1,450,651 $15,399,125 ======== =========== ======== ==========
5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund had securities on loan with a market value of $2,450,970 collateralized by United States Treasury Bonds with a market value of $2,583,916. 7. Expense Reductions. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $63,280 under these agreements. 20 REPORT ON INDEPENDENT ACCOUNTANTS For the Year Ended December 31, 2000 In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Capital Growth Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 21 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 5,847,477.530 96,956.162 263,183.781 6,207,617.473 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Westpeak Investment Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 5,855,349.323 106,069.489 246,198.661 6,207,617.473 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for thefollowing proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total ------------- ------------ ------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 22 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. ThePower of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 23 Glossary for Mutual Fund Investors Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Market Capitalization - The value of a company's issued and outstanding common stock, as priced by the market. Number of outstanding shares X current market price of a share = market capitalization. Price/Earnings Ratio - Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different stocks. Growth Investing - An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. Value Investing - A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks tend to have a lower price/earnings ratio than that of growth stocks. Standard & Poor's 500(R) (S&P 500) - Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. It is not possible to invest directly in an index. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs LCV56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Bond Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST BOND INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Bond Income Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged, and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9550 12/31/91 11815 11283 12/31/92 12717 12145 12/31/93 14226 13586 12/31/94 13632 13019 12/31/95 16463 15722 12/31/96 17223 16448 12/31/97 19125 18265 12/31/98 20656 19726 12/31/99 20585 19659 12/31/00 22107 21112 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST BOND INCOME FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- Class A (Inception 11/7/73) 1 Year 5 Years 10 Years Net Asset Value(1) 7.39% 6.07% 8.25% With Maximum Sales Charge(2) 2.58 5.10 7.76 - -------------------------------------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1) 6.51% 5.26% 5.34% With CDSC(3) 1.51 4.96 5.34 - -------------------------------------------------------------------------------------------------------------------------- Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) 6.50% 5.28% 7.32% With Maximum Sales Charge and CDSC(3) 4.42 5.08 7.15 - -------------------------------------------------------------------------------------------------------------------------- Class Y (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) 7.60% 6.30% 8.57% - -------------------------------------------------------------------------------------------------------------------------- Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. Lehman Bros. Aggregate Bond Index(4) 11.63% 6.46% 7.96% 6.45% 8.37% 8.37% Lehman Bros. Corporate Bond Index(5) 9.08 5.74 8.41 6.23 8.33 8.33 Morningstar Int. Bond Average(6) 9.45 5.43 7.62 5.51 7.38 7.38 Lipper Int. Investment Grade Debt Avg.(7) 9.78 5.47 7.58 5.53 7.35 7.35 - --------------------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to a 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. (4) Lehman Brothers Aggregate Bond Index is an unmanaged index of nearly all debt issued by the U.S. Treasury, U.S. government agencies and U.S. corporations rated investment-grade, and U.S. agency debt backed by mortgage pools. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. (5) The Lehman Brothers Corporate Bond Index is an unmanaged index that includes all publicly issued, fixed-rate, nonconvertible, dollar-denominated, SEC-registered, investment-grade corporate debt. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. (6) Morningstar Intermediate Bond Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (7) Lipper Intermediate Investment Grade Debt Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. 2 NVEST BOND INCOME FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTO] Peter Palfrey Richard Raczkowski Back Bay Advisors, L.P. For the 12 months ended December 31, 2000, the total return on Nvest Bond Income Fund's Class A shares was 7.39% based on net asset value, including $0.80 per share in dividends reinvested during the year. For the same period, the Lehman Brothers Aggregate Bond Index had a total return of 11.63%, while the Lehman Corporate Bond Index returned 9.08%. Lehman's Aggregate Bond Index includes a relatively high concentration in U.S. government and Treasury securities, which outperformed corporate bonds during 2000. The Fund invests in a combination of quality corporate and U.S. government bonds, in search of high current income consistent with reasonable risk. Economic uncertainty and a volatile stock market triggered an overall flight to quality on the part of both bond and stock investors in 2000. The Fund's Treasuries and government agency bonds, which have the highest possible rating, provided the best performance results. Corporate bond holdings with ratings below the very top tier hurt the Fund's performance during the year, as did its Yankee securities. Holdings denominated in currencies outside the U.S. were disappointing early in the year, but they proved positive for the Fund as the year drew to a close and investors began to seek opportunities in overseas markets. Q. What factors influenced the bond market most in 2000? The Federal Reserve Board's restrictive monetary policy, designed to rein in economic growth, was one of the most significant factors. The Fed's program of raising interest rates, which began in 1999, continued throughout the first half of 2000, for a total increase of 1.75% over 18 months. As one of the longest economic expansions in U.S. history matured, the effects of higher credit costs finally became evident. According to Commerce Department figures released in December, the economy grew at just 2.2% in the third quarter of 2000 -- the slowest pace in four years and down from 5.6% in the second quarter. Liquidity in both the equity and fixed-income markets plunged, prompting the Fed to hint that it might shift from a tightening to an easing bias in order to avoid a recession. 3 NVEST BOND INCOME FUND [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Credit Quality Composition -- 12/31/00 AAA 39.0% AA 2.3% A 22.9% BBB 20.0% BB 12.8% B and Unrated 3.0% Portfolio holdings and asset allocation will vary. Another major factor last year was the Treasury's program of buying back $30 billion in long-term debt. Because the debt repurchases were concentraed in longer maturities, long-term Treasuries rose in value during the year, sending rates down. This led to an inverted yield curve at mid year, as short-term interest rates rose above long-term rates for a time, before reverting to a more normal pattern in the latter part of the year. Q. How did you adjust Nvest Bond Income Fund's portfolio in light of these events? As the year progressed, we positioned the Fund more defensively, in anticipation of ongoing tight monetary policy and slower growth in the U.S. Strategy changes included a greater emphasis on longer term Treasuries and, an increased allocation to agencies and mortgage-backed securities (pools of mortgages, issued or guaranteed by financial institutions). By year end, AAA-rated securities composed nearly 40% of the portfolio. We also shifted more assets into higher rated, less cyclical corporate and Yankee securities, bringing the average quality of the portfolio to a high A. We also trimmed our position in non-investment grade securities and Canadian-dollar denominated bonds. 4 We maintained the Fund's holdings denominated in euros and Australian dollars in anticipation of a weakening dollar. After disappointing performance earlier in the year, this position benefited the Fund in the closing quarter. Nvest Bond Income Fund's current industry emphasis is on cable and media companies, electric utilities, and select telecommunications companies. As the year ended, we were trimming the Fund's energy position because we expect demand to moderate as the global economy slows and the winter heating crunch lessens demand. With the yield curve now back to a more normal pattern and the Fed shifting to a more neutral bias, we have started to increase Nvest Bond Income Fund's holdings in longer-term corporate bonds. We've also increased the Fund's exposure to 20- and 30-year Treasuries in recent weeks, since the federal budget for 2001 includes a program to buy back another $48 billion in Treasuries. Q. What is your current outlook for the bond market? We expect quality and liquidity to remain important drivers in 2001, as they were last year. The spread (difference in yield) between Treasury and non-Treasury issues is currently at or near recession levels, leaving ample room for a rebound. Although the U.S. is now clearly in a period of slower growth, the Fed's rate cut, announced January 3, 2001, surprised observers by its size (0.5%) and timing (between scheduled meetings). The rate cut is likely to accelerate the significant rebound that we were already starting to see in bond prices. Going forward, we expect the Fed to maintain a neutral policy, possibly easing rates further, until it becomes clear that its "pre-emptive strike against recession" has succeeded. This creates a supportive backdrop for bond investors generally, and for the management style of Nvest Bond Income Fund in particular. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Bond Income Fund invests primarily in quality corporate and U.S. government bonds. Treasuries and U.S. government securities are guaranteed; mutual funds that invest in these securities are not. The Fund may invest in lower rated corporate bonds, which offer higher yields in return for more risk, and in mortgage-backed securities that are subject to prepayment risk. The Fund is also permitted to invest a portion of assets in foreign and emerging market securities, which have special risks. These risks effect the value of your investment. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 97.0% of Total Net Assets
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------- Aerospace -- 1.0% $ 1,715,000 Lockheed Martin Corp., 8.200%, 12/01/2009..................... Baa3 BBB- $ 1,888,219 1,045,000 Lockheed Martin Corp., 8.500%, 12/01/2029..................... Baa3 BBB- 1,189,328 ----------- 3,077,547 ----------- Asset Backed -- 0.8% 2,460,000 Americredit Automobile 7.150%, 8/12/2004...................... Aaa AAA 2,493,825 ----------- Auto & Related -- 1.7% 3,630,000 Ford Motor Co., 7.450%, 7/16/2031............................. A2 A 3,423,449 1,500,000 Motor Corporation Ltd, 7.500%, 11/08/2010 (e)................. A3 A 1,574,538 ----------- 4,997,987 ----------- Business Services -- 1.0% 3,500,000 Equifax, Inc., 6.900%, 7/01/2028.............................. Baa1 A- 3,130,932 ----------- Cable & Media -- 5.9% 1,990,000 British Sky Broadcasting Group, 8.200%, 7/15/2009............. Ba1 BB+ 1,885,652 3,200,000 Continental Cablevision, Inc., 9.500%, 8/01/2013.............. A2 A 3,503,910 2,000,000 CSC Holdings, Inc., 7.625%, 7/15/2018......................... Ba1 BB+ 1,827,102 3,500,000 CSC Holdings, Inc., 7.875%, 2/15/2018......................... Ba1 BB+ 3,277,862 1,050,000 Multicanal SA, 9.250%, 2/01/2002 (yankee)..................... B1 BB 910,875 1,250,000 Multicanal SA, 10.500%, 4/15/2018 (yankee).................... B1 BB 753,125 955,000 Multicanal SA, 13.125%, 4/15/2009 (yankee).................... B1 BB 756,838 3,000,000 News America Holdings, Inc., 7.750%, 2/01/2024................ Baa3 BBB- 2,780,286 2,245,000 News America Holdings, Inc., 8.250%, 8/10/2018................ Baa3 BBB- 2,205,091 ----------- 17,900,741 ----------- Consumer Goods & Services -- 1.8% 3,180,000 Owens Illinois, Inc., 7.800%, 5/15/2018....................... B1 BB 1,478,700 3,880,000 Unilever Capital Corp., 6.875%, 11/01/2005 (e)................ A1 A+ 4,008,998 ----------- 5,487,698 ----------- Electric Utilities -- 10.1% 9,905,000 Arizona Public Service Corp., 8.000%, 12/30/2015.............. Baa3 BBB 10,200,030 2,517,445 BVPS II Funding Corp., 8.890%, 6/01/2017...................... Baa2 BB- 2,778,038 2,900,000 Empresa Nacional de Electric, 8.500%, 4/01/2009............... Baa1 A- 2,925,604 1,150,000 Endesa-Chile Overseas, 7.200%, 4/01/2006...................... Baa1 A- 1,116,938 930,000 Florida Power and Light Co., 6.875%, 12/01/2005............... Aa3 AA- 953,169 3,050,000 Hydro Quebec, 8.050%, 7/07/2024............................... A2 A+ 3,473,413 500,000 Keyspan Corp., 7.625%, 11/15/2010............................. A3 A 532,194 3,604,000 New Mexico Public Service Corp., 10.250%, 10/01/2012.......... Ba1 BBB- 3,901,042 2,000,000 Ohio Edison Corp., 8.680%, 6/01/2017.......................... Baa2 BB- 2,178,592 1,300,000 Sempra Energy, 6.950%, 12/01/2005............................ A2 A 1,273,043 1,390,000 Southern California Edison Co., 7.200%, 11/03/2003............ Baa3 BBB- 1,193,079 ----------- 30,525,142 ----------- Energy -- 3.5% 1,745,000 AES Corp., 9.375%, 9/15/2010.................................. Ba1 BB 1,792,987
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------- Energy -- continued $ 2,390,000 El Paso Energy Corp., 6.950%, 12/15/2007...................... Baa2 BBB $ 2,399,125 2,500,000 Nisource Finance Corp., 7.875%, 11/15/2010.................... Baa2 BBB 2,630,835 645,000 Pioneer Natural Resources Co., 9.625%, 4/01/2010.............. Ba2 BB+ 689,639 2,990,000 Southern Energy, 8.625%, 6/30/2012............................ -- -- 2,995,442 ----------- 10,508,028 ----------- Federal Agencies -- 27.1% 6,630,000 Federal Home Loan Mortgage Corp. 5.000%, 1/15/2004............ Aaa AAA 6,509,798 11,798 Federal Home Loan Mortgage Corp. 9.000%, 5/01/2001............ Aaa AAA 11,886 6,500,000 Federal National Mortgage Association 5.250%, 1/15/2009....... Aaa AAA 6,206,460 10,512,804 Federal National Mortgage Association 6.500%, with various maturities to 2014 (d)(e)............................. Aaa AAA 10,606,310 17,947,176 Federal National Mortgage Association 7.000%, with various maturities to 2030 (d)................................ Aaa AAA 17,975,174 17,429,862 Federal National Mortgage Association 7.500%, with various maturities to 2030 (d)................................ Aaa AAA 17,725,373 2,815,000 Government National Mortgage Association 6.000%, 1/15/2029..................................................... Aaa AAA 2,731,423 6,458,171 Government National Mortgage Association 6.500%, with various maturities to 2029 (d)................................ Aaa AAA 6,385,516 6,757,005 Government National Mortgage Association 7.000%, with various maturities to 2029 (d)................................ Aaa AAA 6,789,948 1,603,192 Government National Mortgage Association 7.500%, 10/15/2025.................................................... Aaa AAA 1,633,252 3,246,666 Government National Mortgage Association 8.000%, 11/15/2029.................................................... Aaa AAA 3,331,891 1,492,892 Government National Mortgage Association 8.500%, with various maturities to 2023 (d)................................ Aaa AAA 1,552,138 104,816 Government National Mortgage Association 9.000%, with various maturities to 2016 (d)................................ Aaa AAA 110,580 151,934 Government National Mortgage Association 11.500%, with various maturities to 2018 (d)................................ Aaa AAA 170,308 ----------- 81,740,057 ----------- Finance & Banking -- 5.1% 4,075,000 American General Finance Corp., 8.450%, 10/15/2009............ A2 A+ 4,490,463 1,990,000 General Electric Capital Corp. Medium Term Note, 6.800%, 11/01/2005............................................ Aaa AAA 2,054,446 4,500,000 Merita Bank, Ltd., 144A, 7.150%, 12/29/2049 (g)............... A1 A- 4,496,733 2,200,000 State Street Institutional Capital A, 7.940%, 12/30/2026............................................ Aa3 A 2,108,636 2,100,000 UBS Preferred Funding, 8.622%, 10/29/2049..................... Aa2 AA- 2,208,396 ----------- 15,358,674 ----------- Food & Beverages -- 1.5% 4,600,000 Aramark Services, Inc., 7.000%, 7/15/2006..................... Baa3 BBB- 4,442,639 -----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------- Food-Retailers/Wholesalers -- 1.6% $ 4,205,000 Great Atlantic and Pacific Tea, Inc., 7.750%, 4/15/2007............................................. Ba3 BB $ 2,471,615 2,320,000 Kroger Co., 7.800%, 8/15/2007................................. Baa3 BBB- 2,441,004 ----------- 4,912,619 ----------- Foreign Governments and Agencies -- 4.5% 1,600,000 Panama Republic, 8.875%, 9/30/2027............................ Ba1 BB+ 1,364,000 2,970,000 Philippines Republic, 9.875%, 1/15/2019....................... Ba1 BB+ 2,390,850 5,000,000 Province of British Columbia, 7.750%, 6/16/2003 (CAD)......... Aa2 AA- 3,505,832 1,000,000 Republic of Colombia, 8.375%, 2/15/2027....................... Ba2 BB 657,500 1,900,000 Republic of Colombia, 9.750%, 4/23/2009....................... Ba2 BBB+ 1,733,750 3,000,000 United Mexican States, 8.500%, 2/01/2006...................... Baa3 BB+ 3,037,500 660,000 United Mexican States, 9.875%, 2/01/2010 (e).................. Baa3 BB+ 709,830 ----------- 13,399,262 ----------- Freight Services -- 1.3% 4,300,000 Freeport Term Malta PLC, 144A, 7.250%, 5/15/2028.............. A3 A 4,014,308 ----------- Insurance -- 0.4% 1,810,000 Conseco, Inc., 9.000%, 10/15/2006............................. B1 BB- 1,267,000 ----------- Oil-Foreign -- 3.4% 407,000 PDVSA Finance Ltd., 8.750%, 2/15/2004 (yankee)................ Baa1 -- 411,196 3,535,000 Pemex Finance, Ltd., 8.020%, 5/15/2007 (yankee)............... Baa1 BBB+ 3,611,586 3,000,000 Pemex Finance, Ltd., 9.150%, 11/15/2018 (yankee).............. Baa1 BBB+ 3,165,795 3,200,000 YPF SA, 7.750%, 8/27/2007..................................... B1 BBB- 3,098,355 ----------- 10,286,932 ----------- Paper & Forest Products -- 2.2% 5,000,000 Abitibi-Consolidated, Inc., 6.950%, 4/01/2008................. Baa3 BBB- 4,565,280 900,000 Kappa Beheer BV, 10.625%, 7/15/2009........................... B2 B 922,500 1,100,000 Kappa Beheer BV, 10.625%, 7/15/2009 (EUR)..................... B2 B 1,055,624 ----------- 6,543,404 ----------- Retail-Department Store -- 0.4% 1,785,000 Penney J C, Inc., 9.750%, 6/15/2021........................... Baa3 BBB- 1,102,089 ----------- Retail-Food & Drug -- 0.2% 1,370,000 Rite Aid Corp., 7.125%, 1/15/2007............................. Caa3 B- 380,175 750,000 Rite Aid Corp., 7.700%, 2/15/2027............................. Caa3 B- 199,687 ----------- 579,862 ----------- Supranational -- 0.9% 5,000,000 World Bank, 5.500%, 5/14/2003 (AUD) .......................... Aaa AAA 2,774,795 ----------- Telecommunications -- 15.5% 2,750,000 British Telecommunications PLC, 8.125%, 12/15/2010............ A2 A 2,791,913 1,885,000 Corning, Inc., 5.625%, 2/18/2005 (EUR)........................ A2 AAA 1,768,245 2,540,000 Global Crossings Holdings, Ltd., 9.625%, 5/15/2008 (e)........ Ba2 BB 2,400,300 1,650,000 GTE Corp., 7.900%, 2/01/2027.................................. A2 A+ 1,633,333 660,000 KPN NV, 8.000%, 10/01/2010.................................... A3 A- 618,397
8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION - continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------- Telecommunications -- continued $ 3,055,000 KPNqwest BV, 7.125%, 6/01/2009 (EUR).......................... Ba1 BB $ 2,515,801 3,175,000 KPNqwest BV, 8.125%, 6/01/2009................................ Ba1 BB 2,809,875 3,200,000 LCI International, Inc., 7.250%, 6/15/2007.................... Baa1 BBB+ 3,239,712 2,000,000 McLeodUSA, Inc., 8.375%, 3/15/2008............................ B1 B+ 1,790,000 500,000 McLeodUSA, Inc., 9.500%, 11/01/2008........................... B1 B+ 457,500 795,000 Metromedia Fiber Network, Inc., 10.000%, 12/15/2009 (e)....... B2 B+ 663,825 890,000 Motorola, Inc., 7.625%, 11/15/2010............................ A1 A+ 916,633 2,700,000 SK Telecom Company, Ltd., 7.750%, 4/29/2004................... Ba1 BBB 2,695,035 1,010,000 Sprint Capital Corp., 6.900%, 5/01/2019....................... Baa1 BBB+ 838,139 9,342,000 Tele-Communications, Inc., 9.250%, 1/15/2023.................. A3 A 9,915,262 3,110,000 Telefonica Europe BV, 7.750%, 9/15/2010....................... A2 A+ 3,153,643 2,410,000 Verizon Global Funding Corp., 7.750%, 12/01/2030.............. A1 A+ 2,459,427 6,061,000 WorldCom, Inc., 8.875%, 1/15/2006............................. A3 A- 6,179,571 ----------- 46,846,611 ----------- U.S. Government -- 7.1% 2,445,000 United States Treasury Bonds 7.625%, 2/15/2025 (e)(f)......... Aaa AAA 3,099,429 2,290,000 United States Treasury Bonds 8.125%, 8/15/2021 (e)............ Aaa AAA 2,994,541 6,340,000 United States Treasury Notes 5.750%, 8/15/2010 (e)(f)......... Aaa AAA 6,646,602 3,680,000 United States Treasury Notes 6.000%, 8/15/2009 (e)............ Aaa AAA 3,882,989 3,000,000 United States Treasury Notes 6.500%, 2/15/2010 (e)............ Aaa AAA 3,284,295 1,525,000 United States Treasury Notes 6.750%, 5/15/2005 (e)............ Aaa AAA 1,623,694 ----------- 21,531,550 ----------- Total Bonds and Notes (Identified Cost $297,947,810) 292,921,702 ----------- Short Term Investment -- 1.0% - ------------------------------------------------------------------------------------------------------------------- 2,995,000 Household Finance Corp. 6.500%, 1/02/2001..................... 2,994,459 ------------ Total Short Term Investment (Identified Cost $2,994,459)...... 2,994,459 ------------ Total Investments -- 98.0% (Identified Cost $300,942,269)(b).. 295,916,161 Other assets less liabilities................................. 5,960,681 ------------ Total Net Assets -- 100%...................................... $301,876,842 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized depreciation on investments based on cost of $300,987,341 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost............ $ 6,096,275 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value............ (11,167,455) ------------ Net unrealized depreciation................................... $ (5,071,180) ============
See accompanying notes to financial statements. 9 At December 31, 2000 the Fund had a capital loss carryover of approximately $10,681,396 of which $2,808,699 expires on December 31, 2007 and $7,872,697 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) The Fund's investments in Government National Mortgage Association and Federal National Mortgage Association securities, which have the same coupon rate, have been aggregated for the purpose of presentation in the portfolio composition. (e) All or a portion of this security was on loan to brokers at December 31, 2000. (f) A portion of these securities has been segregated as collateral for a FNMA TBA open at December 31, 2000. (g) Multi Coupon: coupon rate is as stated for an initial period and then increases to a higher coupon rate at a specified date. AUD Australian Dollars CAD Canadian Dollars. EUR Euro Currency 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2000, the value of these securities amounted to $8,511,041 or 2.8% of net assets. Portfolio Allocation by Country (unaudited) ------------------------------------------- United States 80.7% Malta 1.3% Canada 3.8 Luxembourg 0.9 Cayman Islands 2.3 South Korea 0.9 Netherlands 2.1 Philippines 0.8 Argentina 1.6 United Kingdom 0.6 Finland 1.5 Mexico 0.2 Chile 1.3 10 See accompanying notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES ASSETS Investments at value (Identified cost $300,942,269)............. $ 295,916,161 Cash............................................................ 5,585 Investments held as collateral for loaned securities............ 30,735,573 Receivable for: Fund shares sold.............................................. 1,935,233 Securities sold............................................... 3,211,406 Accrued interest.............................................. 5,775,142 ------------- 337,579,100 LIABILITIES Payable for: Collateral on securities loaned, at value..................... $ 30,735,573 Securities purchased.......................................... 2,726,510 Fund shares redeemed. ........................................ 1,733,774 Dividends declared............................................ 164,372 Accrued expenses: Transfer agent................................................ 57,537 Management fees............................................... 105,465 Deferred trustees' fees....................................... 94,753 Accounting and administrative................................. 9,143 Other......................................................... 75,131 ------------- 35,702,258 ------------- NET ASSETS......................................................... $ 301,876,842 ============= Net Assets consist of: Paid in capital............................................... $ 318,215,848 Undistributed (overdistributed) net investment income ........ (358,985) Accumulated net realized gains (losses)....................... (10,960,888) Unrealized appreciation (depreciation) on investments and foreign currency transactions, net........ (5,019,133) ------------- NET ASSETS ........................................................ $ 301,876,842 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($174,969,248 / 15,194,301 shares of beneficial interest)..... $ 11.52 ============= Offering price per share (100 / 95.50 of $11.52)................ $ 12.06* ============= Net asset value and offering price of Class B shares ($100,353,101 / 8,717,893 shares of beneficial interest)...... $ 11.51** ============= Net asset value of Class C shares ($12,541,492 / 1,088,382 shares of beneficial interest)....... $ 11.52** ============= Offering price per share (100 / 99.00 of $11.52)................ $ 11.64 ============= Net asset value, offering and redemption price of Class Y shares ($14,013,001 / 1,213,843 shares of beneficial interest) ...... $ 11.54 =============
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 11
STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Interest .................................................. $23,931,404 Securities lending income ................................. 57,839 ----------- 23,989,243 Expenses Management fees ......................................... $ 1,240,185 Service fees - Class A .................................. 453,608 Service and distribution fees - Class B ................ 916,336 Service and distribution fees - Class C ................. 135,121 Trustees' fees and expenses ............................. 19,206 Accounting and administrative ........................... 107,368 Custodian ............................................... 145,355 Transfer agent - Class A, Class B, Class C .............. 622,057 Transfer agent - Class Y ................................ 10,794 Audit and tax services .................................. 37,301 Legal ................................................... 4,077 Printing ................................................ 71,277 Registration ............................................ 65,521 Miscellaneous ........................................... 3,976 ----------- Total expenses ............................................ 3,832,182 ----------- Net investment income ..................................... 20,157,061 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments - net ....................................... (8,129,543) Foreign currency transactions - net ..................... 2,339 ------------ Total realized gain (loss) on investments and foreign currency transactions.................................. (8,127,204) ------------ Unrealized appreciation (depreciation) on: Investments - net ....................................... 8,037,101 Foreign currency transactions - net ..................... 5,600 ------------ Total unrealized appreciation (depreciation) on investments and foreign currency transactions .......... 8,042,701 ------------ Net gain (loss) on investment transactions ................ (84,503) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........ $ 20,072,558 ============
12 See accompanying notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year Ended December 31, ------------------------------ 1999 2000 -------------- -------------- FROM OPERATIONS Net investment income ................................................... $ 21,851,209 $ 20,157,061 Net realized gain (loss) on investments and foreign currency transactions (2,780,855) (8,127,204) Net unrealized appreciation (depreciation) on investments and foreign currency transactions ..................................... (20,965,075) 8,042,701 ------------- ------------- Increase (decrease) in net assets from operations ....................... (1,894,721) 20,072,558 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................................... (14,939,750) (12,765,917) Class B ............................................................... (4,785,260) (5,797,554) Class C ............................................................... (741,180) (851,085) Class Y ............................................................... (747,853) (797,445) Net realized gain on investments Class A ............................................................... (187,042) 0 Class B ............................................................... (72,950) 0 Class C ............................................................... (11,768) 0 Class Y ............................................................... (8,834) 0 In excess of net realized gain Class A ............................................................... (42,382) 0 Class B ............................................................... (16,530) 0 Class C ............................................................... (2,666) 0 Class Y ............................................................... (2,002) 0 ------------- ------------- (21,558,217) (20,212,001) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................. 47,329,080 (26,157,588) ------------- ------------- Total increase (decrease) in net assets .................................... 23,876,142 (26,297,031) NET ASSETS Beginning of the year ................................................... 304,297,731 328,173,873 ------------- ------------- End of the year ......................................................... $ 328,173,873 $ 301,876,842 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ......................................................... $ 103,946 $ (358,985) ============= =============
See accompanying notes to financial statements. 13 For a share outstanding throughout each period.
Class A ------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ...... $ 12.36 $ 12.05 $ 12.39 $ 12.3 $ 11.51 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ....................... 0.84 0.83 0.81 0.81 0.78 Net Realized and Unrealized Gain (Loss) on Investments .................... (0.31) 0.45 0.15 (0.86) 0.03 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............ 0.53 1.28 0.96 (0.05) 0.81 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........ (0.84) (0.81) (0.78) (0.79) (0.80) Distributions in Excess of Net Investment Income ........................ 0.00 (0.01) (0.03) 0.00 0.00 Distributions From Net Realized Capital Gains ............................ 0.00 (0.12) (0.17) (0.01) 0.00 Distributions in Excess of Net Realized Gains 0.00 0.00 (0.01) 0.00(b) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions ......................... (0.84) (0.94) (0.99) (0.80) (0.80) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............ $ 12.05 $ 12.39 $ 12.36 $ 11.51 $ 11.52 =========== =========== =========== =========== =========== Total Return (%) (a) ........................ 4.6 11.0 8.0 (0.3) 7.4 Ratio of Operating Expenses to Average Net Assets (%) ................... 1.05 1.05 1.01 0.97 1.04 Ratio of Net Investment Income to Average Net Assets (%) ................... 7.00 6.73 6.44 6.87 7.03 Portfolio Turnover Rate (%) ................. 104 54 65 63 83 Net Assets, End of the Year (000) ........... $ 189,685 $ 193,513 $ 221,799 $ 213,769 $ 174,969 (a) A sales charge is not reflected in total return calculations. (b) Amount is less that $0.01. 14 See accompanying notes to financial statements. For a share outstanding throughout each period. Class B -------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ....... $ 12.36 $ 12.04 $ 12.39 $ 12.36 $ 11.51 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........................ 0.75 0.74 0.71 0.72 0.70 Net Realized and Unrealized Gain (Loss) on Investments ..................... (0.32) 0.46 0.15 (0.86) 0.02 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............. 0.43 1.20 0.86 (0.14) 0.72 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ......... (0.75) (0.72) (0.69) (0.70) (0.72) Distributions in Excess of Net Investment Income ......................... 0.00 (0.01) (0.02) 0.00 0.00 Distributions From Net Realized Capital Gains 0.00 (0.12) (0.17) (0.01) 0.00 Distributions in Excess of Net Realized Gains 0.00 0.00 (0.01) 0.00(b) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions .......................... (0.75) (0.85) (0.89) (0.71) (0.72) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............. $ 12.04 $ 12.39 $ 12.36 $ 11.51 $ 11.51 =========== =========== =========== =========== =========== Total Return (%) (a) ......................... 3.7 10.3 7.2 (1.1) 6.5 Ratio of Operating Expenses to Average Net Assets (%) .................... 1.80 1.80 1.76 1.72 1.79 Ratio of Net Investment Income to Average Net Assets (%) .................... 6.25 5.98 5.69 6.12 6.28 Portfolio Turnover Rate (%) .................. 104 54 65 63 83 Net Assets, End of the Year (000) ............ $ 31,191 $ 37,559 $ 64,240 $ 89,213 $ 100,353 (a) A contingent deferred sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. See accompanying notes to financial statements. 15 For a share outstanding throughout each period. Class C ------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ......... $ 12.36 $ 12.06 $ 12.40 $ 12.37 $ 11.52 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .......................... 0.75 0.74 0.71 0.72 0.70 Net Realized and Unrealized Gain (Loss) on Investments ................................. (0.30) 0.45 0.15 (0.86) 0.02 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.45 1.19 0.86 (0.14) 0.72 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... (0.75) (0.72) (0.69) (0.70) (0.72) Distributions in Excess of Net Investment Income 0.00 (0.01) (0.02) 0.00 0.00 Distributions from Net Realized Capital Gains .. 0.00 (0.12) (0.17) (0.01) 0.00 Distributions in Excess of Net Realized Gains .. 0.00 0.00 (0.01) 0.00(b) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ............................ (0.75) (0.85) (0.89) (0.71) (0.72) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 12.06 $ 12.40 $ 12.37 $ 11.52 $ 11.52 ========== ========== ========== ========== ========== Total Return (%) (a) ........................... 3.9 10.2 7.2 (1.1) 6.5 Ratio of Operating Expenses to Average Net Assets (%) ................... 1.80 1.80 1.76 1.72 1.79 Ratio of Net Investment Income to Average Net Assets (%) ................... 6.25 5.98 5.69 6.12 6.28 Portfolio Turnover Rate (%) .................... 104 54 65 63 83 Net Assets, End of the Year (000) .............. $ 2,391 $ 5,276 $ 8,969 $ 14,872 $ 12,541 (a) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. (b) Amount is less than $0.01. 16 See accompanying notes to financial statements. For a share outstanding throughout each period. Class Y ---------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ......... $ 12.40 $ 12.06 $ 12.41 $ 12.38 $ 11.54 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .......................... 0.87 0.86 0.84 0.85 0.83 Net Realized and Unrealized Gain (Loss) on Investments ................................. (0.34) 0.46 0.15 (0.86) 0.01 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.53 1.32 0.99 (0.01) 0.84 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........... (0.87) (0.84) (0.81) (0.82) (0.84) Distributions in Excess of Net Investment Income 0.00 (0.01) (0.03) 0.00 0.00 Distributions from Net Realized Capital Gain ... 0.00 (0.12) (0.17) (0.01) 0.00 Distributions in Excess of Net Realized Gains .. 0.00 0.00 (0.01) 0.00(a) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ............................ (0.87) (0.97) (1.02) (0.83) (0.84) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............... $ 12.06 $ 12.41 $ 12.38 $ 11.54 $ 11.54 ========== ========== ========== ========== ========== Total Return (%) ............................... 4.6 11.4 8.2 (0.0)(b) 7.6 Ratio of Operating Expenses to Average Net Assets (%) ................... 0.80 0.80 0.76 0.72 0.67 Ratio of Net Investment Income to Average Net Assets (%) ................... 7.25 6.98 6.69 7.12 7.40 Portfolio Turnover Rate (%) .................... 104 54 65 63 83 Net Assets, End of the Year (000) .............. $ 1,844 $ 4,153 $ 9,289 $ 10,320 $ 14,013 (a) Amount is less than $0.01. (b) Amount is less than one tenth of one percent.
See accompanying notes to financial statements. 17 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Bond Income Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income consistent with what the Fund considers reasonable risk. The Fund invests primarily in corporate and U.S. Government bonds. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and are subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of all classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent expenses applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser under the supervision of the Fund's Trustees. 18 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 b. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. Since the values of investment securities are presented at the foreign exchange rates prevailing at the end of the period, it is not practical to isolate that portion of the results of operations arising from changes in exchange rates from fluctuations arising from changes in market prices of the investment securities. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, resulting from changes in the exchange rate. c. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income is increased by the accretion of original issue discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not effect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of the adoption of this principle will not be material to the financial statements. d. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains at least annually. Accordingly, no provision for federal income tax has been made. e. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for mortgage backed securities and foreign currency transactions for book and tax purposes. Permanent book and tax basis differences will result in reclassifications to capital accounts. 19 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 f. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ------------------------------ ------------------------------ U.S. Government Other U.S. Government Other -------------- ------------- --------------- ------------- $ 139,431,659 $ 105,006,386 $ 90,585,484 $ 184,177,537 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management L.P. ("Nvest Management") at the annual rate of 0.50% of the first $100 million of the Fund's average daily net assets and 0.375% of such assets in excess of $100 million reduced by the payment to the Fund's investment subadviser Back Bay Advisors, L.P. ("Back Bay"), at the rate of 0.25% of the first $100 million of the Fund's average daily net assets and 0.1875% of such assets in excess of $100 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 620,092 Back Bay 620,093 ----------- $ 1,240,185 =========== The effective management fee for the year ended December 31, 2000 was 0.42%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $107,368 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administration expense for the year ended December 31, 2000 was 0.035%. 20 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $457,948 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest) a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $453,608 in service fees under the Class A Plan. Prior to September 13, 1993, to the extent that Nvest Funds L.P. reimbursable expenses in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursment in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000 is $1,919,349. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $229,084 and $33,780 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $687,252 and $101,341 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $763,414. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other 21 NOTES TO FINANCIAL STATEMENTS - continued For the Year Ended December 31, 2000 Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, ---------------------------------------------------------------- 1999 2000 ------------------------------ ------------------------------ Class A Shares Amount Shares Amount - ------ ------------- ------------- ------------- ------------- Shares sold ......................................... 7,081,566 $ 84,892,202 5,539 $ 62,399,490 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 1,008,210 11,946,031 926,682 10,556,925 Distributions from net realized gain .............. 16,733 193,774 0 0 ------------- ------------- ------------- ------------- 8,106,509 97,032,007 6,466,045 72,956,415 Shares repurchased .................................. (7,480,202) (88,965,876) (9,837,004) (112,051,525) ------------- ------------- ------------- ------------- Net increase (decrease) ............................. 626,307 $ 8,066,131 (3,370,959) $ (39,095,110) ------------- ------------- ------------- ------------- Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ----------------------------- Class B Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 3,874,628 $ 46,282,836 2,643,742 $ 30,750,636 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 304,344 3,596,122 385,949 4,394,805 Distributions from net realized gain .............. 6,223 72,058 0 0 ------------ ------------ ------------ ------------ 4,185,195 49,951,016 3,029,691 35,145,441 Shares repurchased .................................. (1,631,207) (19,265,518) (2,062,798) (23,510,872) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 2,553,988 $ 30,685,498 966,893 $ 11,634,569 ------------ ------------ ------------ ------------ 22 Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ----------------------------- Class C Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 863,321 $ 10,317,158 290,185 $ 3,311,389 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 44,159 522,256 49,574 564,991 Distributions from net realized gain .............. 912 10,568 0 0 ------------ ------------ ------------ ------------ 908,392 10,849,982 339,759 3,876,380 Shares repurchased .................................. (342,543) (4,058,281) (542,083) (6,187,351) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 565,849 $ 6,791,701 (202,324) $ (2,310,971) ------------ ------------ ------------ ------------ Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ----------------------------- Class Y Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 411,333 $ 5,002,343 556,735 $ 6,338,929 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 52,565 624,421 51,551 588,651 Distributions from net realized gain .............. 882 10,266 0 0 ------------ ------------ ------------ ------------ 464,780 5,637,030 608,286 6,927,580 Shares repurchased .................................. (320,208) (3,851,280) (289,046) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 144,572 $ 1,785,750 319,240 $ 3,613,924 ------------ ------------ ------------ ------------ Increase (decrease) derived from capital shares transactions ....................... 3,890,716 $ 47,329,080 (2,287,150) $(26,157,588) ============ ============ ============ ============
5. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund had loaned securities having a market value of $30,092,502 and collateralized by cash in the amount of $30,735,573 which was invested in a short-term investment. 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Bond Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Bond Income Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 24 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 15,506,655.710 242,759.269 397,300.293 16,146,715.272 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 15,510,913.576 265,243.530 370,558.166 16,146,715.272 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 25 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 26 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 27 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Market Capitalization - The value of a company's issued and outstanding common stock, as priced by the market: Number of outstanding shares x current market price of a share = market capitalization. Price/Earnings Ratio - Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different stocks. Growth Investing - An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. Value Investing - A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks tend to have a lower price/earnings ratio than that of growth stocks. Standard & Poor's 500(R) (S&P 500) - Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. It is not possible to invest directly in an index. 28 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs B156-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Fund(SM) Where The Best Minds Meet(R) Nvest Balanced Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST BALANCED FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Balanced Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Nvest Balanced 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. Nvest Balanced Fund's benchmark is a blend consisting of 65% S&P 500 Index/35% Lehman Govt./Corp. Index. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees, and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST BALANCED FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------- Class A (Inception 11/27/68) 1 Year 5 Years 10 Years Net Asset Value(1) -6.41% 6.05% 10.73% With Maximum Sales Charge(2) -11.77 4.80 10.08 - ----------------------------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1) -7.17% 5.24% 6.79% With CDSC(3) -11.78 4.97 6.79 - ----------------------------------------------------------------------------------------------------------------- Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) -7.20% 5.22% 8.31% With Maximum Sales Charge and CDSC(3) -9.07 5.01 8.14 - ----------------------------------------------------------------------------------------------------------------- Class Y (Inception 3/8/94) 1 Year 5 Years Since Inception Net Asset Value(1) -5.97% 6.52% 8.01% - ----------------------------------------------------------------------------------------------------------------- Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. S&P 500/Lehman Bros. Gov't./Corp. Blend(4) -1.77% 14.10% 14.15% 13.85% 16.78% 15.33% Morningstar Domestic Hybrid Average(5) 2.06 10.90 11.82 10.45 12.95 11.52 Lipper Balanced Average(6) 1.51 11.39 12.21 11.22 13.80 12.39 - -----------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. (4) S&P 500/Lehman Brothers Gov't./Corp. Blend is an unmanaged index made up of 65% S&P 500 and 35% of the Lehman Brothers Government/Corporate Bond Index. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. Class Y since-inception return is calculated from 3/31/94. (5) Morningstar Domestic Hybrid Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. Class Y since-inception return is calculated from 3/31/94. (6) Lipper Balanced Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. Class Y since-inception return is calculated from 3/31/94. 2 NVEST BALANCED FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] John Hyll, Kurt Wagner, Jeff Wardlow Mark Baribeau, Pamela Czekanski, Richard Skaggs Loomis, Sayles & Company, L.P. Q. How did Nvest Balanced Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Balanced Fund's Class A shares provided a total return of -6.41% at net asset value, including $0.24 in reinvested distributions. Since the Fund invests in both stocks and bonds, we use a combination of the Standard & Poor's 500 Composite Stock Index and the Lehman Brothers Government/Corporate Bond Index as a benchmark. The combined index, composed of 65% of the stock index and 35% of the bond index, had a total return of -1.77% for the 12-month period. In March the Fund's equity portfolio, which previously focused on value stocks, was divided between large-capitalization growth and value stocks. Q. What factors influenced large-cap growth stocks during the year? After a long run of stellar performance, large-cap growth stocks slumped in the second quarter. Prices recovered in the third quarter, delivering several months of strong performance, and then declined again on heavy selling during the last quarter of 2000. Higher interest rates and fears of slowing profit growth were key factors in the sell-off. In addition, well-established technology firms that had led the market on the upside suffered when many of their dot-com customers ran out of capital. Although technology stocks as a whole were down significantly in the fourth quarter, Nvest Balanced Fund's portfolio included two strong performers for the year: Juniper Networks, which provides Internet infrastructure devices, and EMC 3 NVEST BALANCED FUND - -------------------------------------------------------------------------------- Corporation, a leader in data storage. Technology stocks in general were hard hit during the year, and we shifted assets out of this sector into such leading healthcare and consumer-staples companies as Merck, CVS and PepsiCo. We believe these sectors should hold up well in a slower economy. Q. What about the Fund's value stocks? Value stocks as a whole returned to the limelight in 2000 after years of neglect. The Fund's holdings in utilities and financial services benefited the Fund relative to its benchmark, but healthcare was under-represented, which was a negative this year. The Fund benefited from an improving regulatory climate enhanced earnings for some utilities companies. Exelon -- a company created by the merger of PECO Energy and Unicom -- has been buying nuclear generation facilities at low prices and is now profiting from rising electric rates. Another positive performer was U.S. West, which merged with Qwest, creating a new leader in broadband Internet communications. Among financial companies, life and property insurers have been in a cyclical upturn. Ace Ltd. bought CIGNA's property-casualty insurance business -- an acquisition that has benefited Ace and helped boost the price of its stock. Asset Classes -- 12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE MATERIAL] Type of Security % of Asset Common Stocks .................... 61.6% Bonds ............................ 37.2% Other ............................ 1.2% 4 Portfolio holdings and asset allocation will vary. NVEST BALANCED FUND - -------------------------------------------------------------------------------- Financial-service providers like Citigroup, another portfolio selection, stand to benefit strongly from the decline in interest rates we expect in 2001. Increased federal reimbursements and better pricing helped hospitals and HMOs improve their bottom lines. Now that CIGNA is more focused on healthcare coverage, it has gained meaningful premium increases and reduced its medical losses. Meanwhile, strong earnings and new product introductions pushed drug company stocks higher. Rising energy prices and price appreciation resulting from the merger of El Paso Energy and The Coastal Corporation benefited the Fund. Although the telecommunications sector as a whole did poorly in 2000, regional service companies like SBC, BellSouth and Verizon provided better results than long-distance providers AT&T, Sprint and WorldCom, which detracted from the Fund's results. Q. What about the fixed-income markets? As higher interest rates put the brakes on the economy, apprehensive investors moved away from corporate bonds into government obligations. This shift drove prices down and yields up in all corporate sectors, leaving spreads at levels that have not been seen since the recession of 1990-91. (Yield spreads refer to the difference between yields available from corporate versus Treasury securities.) To raise the portfolio's overall credit quality while maintaining satisfactory yields, we cut back on corporate bonds and added mortgage-backed bonds and bonds of federal agencies -- a move that benefited the Fund. Of the remaining corporate bonds, Nvest Balanced Fund's largest commitment is in telecommunications, where we believe bonds have been oversold. Our primary focus now is on bonds in the 5- to 10-year maturity range because they were hardest hit in 2000. Q. What is your current outlook? According to Commerce Department figures announced in December, the annual growth rate of the U.S. economy dropped from 5.6% in the second quarter to 2.2% in the third quarter, which is a steep slide. However, the Federal Reserve's sights now seem to be trained on averting a recession. We expect them to continue the accommodative policy that began with the rate cut of 50 basis points 5 NVEST BALANCED FUND - -------------------------------------------------------------------------------- (0.5%), announced on January 3, 2001. In time, we believe this change of policy should lead to a broad price rally for bonds. As for the equity markets, in the absence of a single theme like technology, investors will have to focus on individual stock selection in the months to come. We expect value stocks to continue to attract investors. We believe there may also be new opportunities in carefully selected technology stocks now that the sharp price declines of last year have wrung out some of the excesses in this area of the market. In general, we see attractive opportunities for all three segments of Nvest Balanced Fund's portfolio. If investor horizons widen in 2001, as we believe they will, the Fund should benefit from well-researched selections among growth and value stocks, and from fixed-income securities. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Balanced Fund generally invests approximately 65% of assets in stocks and 35% in fixed-income securities. The fund's equity securities may include both growth and value stocks. Growth stocks are generally more sensitive to market movements because their stock prices are based on future expectations. Value stocks can fall out of favor with investors and may underperform growth stocks during certain market conditions. The Fund may also invest in foreign securities, which have special risks, and in mortgage securities that are subject to prepayment risk. Fixed-income securities are subject to credit risk, interest rate risk and liquidity risk. These risks effect the value of your investment. See the Fund's prospectus for details. 6 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 61.6% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Aerospace -- 1.2% 16,000 General Dynamics Corp. ............................. $ 1,248,000 10,000 United Technologies Corp. .......................... 786,250 ------------ 2,034,250 ------------ Apparel & Textiles -- 0.3% 12,500 Liz Claiborne, Inc. ................................ 520,313 ------------ Automotive -- 0.3% 15,000 Harley-Davidson, Inc. .............................. 596,250 ------------ Banks -- 6.1% 14,000 Bank of New York Co., Inc. ......................... 772,625 36,300 Chase Manhattan Corp. .............................. 1,649,381 60,700 Citigroup, Inc. .................................... 3,099,494 29,900 Firstar Corp. ...................................... 695,175 35,500 FleetBoston Financial Corp. ........................ 1,333,469 7,300 Northern Trust Corp. ............................... 595,406 18,000 PNC Bancorp, Inc. .................................. 1,315,125 17,400 Wells Fargo & Co. .................................. 968,962 ------------ 10,429,637 ------------ Banks & Thrifts -- 0.3% 10,200 Washington Mutual, Inc. ............................ 541,238 ------------ Beverages -- 1.3% 16,300 Anheuser-Busch Co., Inc. ........................... 741,650 28,500 PepsiCo, Inc. ...................................... 1,412,531 ------------ 2,154,181 ------------ Business Services -- 1.6% 32,800 Concord EFS, Inc. (c) .............................. 1,441,150 24,000 First Data Corp. ................................... 1,264,500 ------------ 2,705,650 ------------ Chemicals -- Major -- 1.1% 24,800 Dow Chemical Co. ................................... 908,300 20,700 Praxair, Inc. ...................................... 918,562 ------------ 1,826,862 ------------ Communication Equipment -- 1.0% 15,200 ADC Telecommunications, Inc. (c) ................... 275,500 15,900 JDS Uniphase Corp. (c) ............................. 662,831 35,500 Motorola, Inc. ..................................... 718,875 ------------ 1,657,206 ------------ Computer Equipment -- 0.3% 3,900 Juniper Networks, Inc. (c) ......................... 491,644 ------------ Computer Hardware -- 2.6% 27,200 Apple Computer, Inc. (c) ........................... 404,600 30,100 Cisco Systems, Inc. (c) ............................ 1,151,325 25,500 Compaq Computer Corp. .............................. 383,775 See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Computer Hardware -- continued 22,600 EMC Corp. (c) ...................................... $ 1,502,900 12,200 Hewlett-Packard Co. ................................ 385,062 8,200 International Business Machines Corp. .............. 697,000 ------------ 4,524,662 ------------ Computer Software & Services -- 1.5% 37,600 Oracle Corp. (c) ................................... 1,092,750 16,500 Siebel Systems, Inc. (c) ........................... 1,115,812 4,300 VERITAS Software Corp. (c) ......................... 376,250 ------------ 2,584,812 ------------ Computers & Business Equipment -- 0.9% 13,500 CIENA Corp. (c) .................................... 1,096,875 4,500 Qualcomm, Inc. (c) ................................. 369,844 ------------ 1,466,719 ------------ Electric Companies -- 0.5% 19,800 Constellation Energy Group ......................... 892,238 ------------ Electric Utilities -- 1.5% 23,625 Exelon Corp. ....................................... 1,658,711 12,100 FPL Group, Inc. .................................... 868,175 ------------ 2,526,886 ------------ Electrical Equipment -- 0.7% 12,000 Emerson Electric Co. ............................... 945,750 7,600 Solectron Corp. (c) ................................ 257,640 ------------ 1,203,390 ------------ Electronics -- 0.8% 6,300 Applied Micro Circuits Corp. (c) ................... 472,795 25,220 Koninklijke (Royal) Philips Electronics NV (ADR) ... 914,225 ------------ 1,387,020 ------------ Energy -- 0.7% 14,900 Enron Corp. ........................................ 1,238,562 ------------ Entertainment -- 1.3% 36,500 The Walt Disney Co. ................................ 1,056,219 24,004 Viacom, Inc. (c) ................................... 1,122,187 ------------ 2,178,406 ------------ Financial -- Consumer/Diversified -- 2.4% 9,500 American General Corp. ............................. 774,250 11,200 Capital One Financial Corp. ........................ 737,100 19,600 Fannie Mae ......................................... 1,700,300 17,000 Household International, Inc. ...................... 935,000 ------------ 4,146,650 ------------ Hardware -- 0.4% 16,700 Black & Decker Corp. ............................... 655,475 ------------ 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION-- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) Health Care-Drugs -- 5.1% 16,700 Bristol-Myers Squibb Co. ........................... $ 1,234,756 17,000 Genetech, Inc. ..................................... 1,385,500 28,700 Merck & Co. ........................................ 2,687,038 27,600 Pfizer, Inc. ....................................... 1,269,600 27,400 Pharmacia Corp. .................................... 1,671,400 8,000 UnitedHealth Group, Inc. ........................... 491,000 ------------ 8,739,294 ------------ Health Care-Products -- 0.9% 9,500 Baxter International, Inc. ......................... 838,969 10,400 Medtronic, Inc. .................................... 627,900 ------------ 1,466,869 ------------ Health Care-Services -- 1.6% 10,400 CIGNA Corp. ........................................ 1,375,920 30,200 Tenet Healthcare Corp. (c) ......................... 1,342,012 ------------ 2,717,932 ------------ Household Products -- 1.0% 14,000 Kimberly-Clark Corp. ............................... 989,660 32,800 Newell Rubbermaid, Inc. ............................ 746,200 ------------ 1,735,860 ------------ Insurance -- 4.2% 29,000 ACE, Ltd. .......................................... 1,230,687 10,200 AFLAC, Inc. ........................................ 736,313 22,300 American International Group, Inc. ................. 2,197,944 9,500 Hartford Financial Services Group, Inc. ............ 670,938 26,000 John Hancock Financial Services, Inc. .............. 978,250 6,000 Marsh & McLennan Co., Inc. ......................... 702,000 8,700 XL Capital Ltd. .................................... 760,162 ------------ 7,276,294 ------------ Investment Banking/Broker/Management -- 3.0% 18,400 Charles Schwab Corp. ............................... 522,100 31,900 Merrill Lynch & Co., Inc. .......................... 2,175,181 13,900 Morgan Stanley Dean Witter & Co. ................... 1,101,575 10,200 Stilwell Financial, Inc. ........................... 402,263 9,500 The Goldman Sachs Group, Inc. ...................... 1,015,906 ------------ 5,217,025 ------------ Leisure -- 0.4% 25,000 Harrahs Entertainment, Inc. (c) .................... 659,375 ------------ Manufacturing -- Diversified -- 1.8% 29,700 General Electric Co. ............................... 1,423,744 13,200 Minnesota Mining & Manufacturing Co. ............... 1,590,600 ------------ 3,014,344 ------------ See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION-- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) Natural Gas -- 0.6% 12,000 Coastal Corp. ...................................... $ 1,059,750 ------------ Oil & Gas-Major Integrated -- 3.0% 23,700 BP Amoco PLC (sponsored ADR) ....................... 1,134,638 29,000 Exxon Mobil Corp. .................................. 2,521,187 19,300 Santa Fe International Corp. ....................... 618,806 15,000 Texaco, Inc. ....................................... 931,875 ------------ 5,206,506 ------------ Paper & Forest Products -- 0.6% 25,500 International Paper Co. ............................ 1,040,719 ------------ Publishing -- 1.1% 13,300 Gannett Co. ........................................ 838,731 17,900 McGraw-Hill Co., Inc. .............................. 1,049,388 ------------ 1,888,119 ------------ Restaurants -- 0.4% 18,500 McDonald's Corp. ................................... 629,000 ------------ Retail -- 2.1% 12,700 CVS Corp. .......................................... 761,206 37,400 Federated Department Stores, Inc. (c) .............. 1,309,000 7,000 Kohl's Corp. (c) ................................... 427,000 20,300 May Department Stores Co. .......................... 664,825 9,500 Walgreen Co. ....................................... 397,219 ------------ 3,559,250 ------------ Retail-General Merchandise -- 1.4% 58,300 Target Corp. ....................................... 1,880,175 10,800 Wal-Mart Stores, Inc. .............................. 573,750 ------------ 2,453,925 ------------ Retail-Grocery -- 1.2% 41,000 Kroger Co. ......................................... 1,109,562 29,600 Sysco Corp. ........................................ 888,000 ------------ 1,997,562 ------------ Retail-Specialty -- 0.2% 9,000 Home Depot, Inc. ................................... 411,188 ------------ Services-Commercial & Consumer -- 0.4% 9,300 Omnicom Group, Inc. ................................ 770,738 ------------ Software -- 0.8% 15,000 BEA Systems, Inc. (c) .............................. 1,009,688 3,300 Check Point Software Technolgies, Ltd. (c) ......... 440,756 ------------ 1,450,444 ------------ Telephone -- 2.4% 27,000 BellSouth Corp. .................................... 1,105,312 ------------ 10 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Telephone -- continued 41,700 CenturyTel, Inc. ................................... $ 1,490,775 30,000 SBC Communications, Inc. ........................... 1,432,500 ------------ 4,028,587 ------------ Telecommunications -- 0.4% 17,121 Qwest Communications International, Inc. (c) ....... 701,961 ------------ Telecommunications-Long Distance -- 0.7% 39,100 Sprint Corp. ....................................... 794,219 25,000 WorldCom, Inc. (c) ................................. 350,000 ------------ 1,144,219 ------------ Tobacco -- 0.7% 27,800 Philip Morris Companies, Inc. ...................... 1,223,200 ------------ Waste Management -- 0.8% 48,000 Waste Management, Inc. ............................. 1,332,000 ------------ Total Common Stock (Identified Cost $98,844,402) ... 105,486,212 ------------ Bonds and Notes -- 37.2% Ratings (d) (unaudited) ----------------------- Principal Standard Amount Moody's & Poor's - -------------------------------------------------------------------------------- Aerospace/Defense -- 1.0% $1,780,000 Raytheon Co., 6.300%, 3/15/2005 .... Baa2 BBB- 1,758,676 ------------ Automotive -- 0.9% 1,700,000 Ford Motor Co., 7.450%, 7/16/2031 .. A2 A 1,573,435 ------------ Cable & Media -- 0.5% 800,000 Tele Communications, Inc., 7.250%, 8/01/2005 ................ A2 A 806,160 ------------ Consumer -- 4.0% 2,505,000 AMERCO, 7.850%, 5/15/2003 .......... Ba1 BBB 2,364,595 4,790,000 Coca Cola Enterprises, Inc., 6.750%, 1/15/2038 ................ A2 A 4,442,198 ------------ 6,806,793 ------------ Electric Utilities -- 2.4% 1,000,000 Calpine Corp., 7.625%, 4/15/2006 ... Ba1 BB+ 955,280 1,425,000 Consolidated Edison Co. New York, Inc., 7.500%, 9/01/2010 .......... A1 A+ 1,480,547 1,575,000 Consolidated Edison Co. New York, Inc., 8.125%, 5/01/2010 .......... A1 A+ 1,703,992 ------------ 4,139,819 ------------ Electronics -- 1.0% 1,790,000 Philips Electronics NV, 7.250%, 8/15/2013 ................ A3 A- 1,737,839 ------------ Equipment Trust -- 2.0% 600,000 Delta Air Lines, Inc., 9.200%, 9/23/2014 ................ Baa3 BBB 617,538 2,795,664 Federal Express Equipment Trust, 7.020%, 1/15/2016 ................ Baa1 BBB+ 2,722,753 ------------ 3,340,291 ------------ See accompanying notes to financial statements. 11 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- 37.2% Ratings (d) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - -------------------------------------------------------------------------------- Finance -- 0.9% $1,775,000 National Health Investors, Inc., 7.300%, 7/16/2007 ................ B2 B+ $ 1,600,464 ------------ Gas Utilities -- 0.7% 1,200,000 Williams Holdings Co., 6.250%, 2/01/2006 ................ Baa2 BBB- 1,179,276 ------------ Government -- 5.5% 7,500,000 United States Treasury Bond, Zero Coupon, 11/15/2009 .......... -- AAA 4,661,775 800,000 United States Treasury Bonds, 6.125%, 11/15/2027 ............... Aaa AAA 860,128 1,000,000 United States Treasury Bonds, 5.500%, 8/15/2028 ................ Aaa AAA 991,560 2,850,000 United States Treasury Notes, 5.625%, 5/15/2008 ................ Aaa AAA 2,924,812 ------------ 9,438,275 ------------ Mortgage -- 8.2% 3,049,415 Federal National Mortgage Association, 7.000%, 2/01/2030 ... Aaa AAA 3,054,172 2,983,203 Federal National Mortgage Association, 7.000%, 8/01/2030 ... Aaa AAA 2,987,856 1,745,805 Federal National Mortgage Association, 7.500%, 3/01/2030 ... Aaa AAA 1,771,434 6,057,906 Federal Home Loan Mortgage Corp., 7.500%, 5/01/2030 ................ Aaa AAA 6,150,652 ------------ 13,964,114 ------------ Oil & Gas-Exploration & Production -- 2.4% 4,190,000 Kerr-Mcgee Corp., 6.625%, 10/15/2007 ............... Baa1 BBB 4,129,622 ------------ Services -- 1.3% 3,000,000 La Quinta Inns, Inc., 7.400%, 9/15/2005 ................ B1 BB- 2,295,000 ------------ Telecommunications -- 3.6% 1,750,000 Sprint Capital Corp., 6.125%, 11/15/2008 ............... Baa1 BBB+ 1,573,985 1,600,000 Sprint Spectrum, LP, 0/12.500%, 8/15/2006 (e) ......... Baa2 BBB+ 1,620,976 1,500,000 Williams Communications Group, Inc., 10.875%, 10/01/2009 .............. B2 B+ 1,117,500 1,750,000 WorldCom, Inc., 8.000%, 5/15/2006 .. A3 A- 1,792,945 ------------ 6,105,406 ------------ Telecommunications-Cellular -- 0.8% 1,300,000 Motorola, Inc., 7.625%, 11/15/2010 . A1 A+ 1,338,903 ------------ Telecommunications-Long Distance -- 0.3% 625,000 AT&T Corp., 5.625%, 3/15/2004 ...... A2 A 595,788 ------------ Transportation -- 1.7% 3,000,000 Northwest Airlines Corp., 8.375%, 3/15/2004 ................ Ba2 BB 2,944,350 ------------ Total Bonds and Notes (Identified Cost $64,556,538) 63,754,211 ------------ 12 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Short Term Investment -- 1.4% Principal Amount Description Value (a) - ------------------------------------------------------------------------------- $2,381,461 Associates Corp. of North America, 6.500%, 1/02/2001 ............................... $ 2,381,461 ------------ Total Short Term Investment (Identified Cost $2,381,461) .................... 2,381,461 ------------ Total Investments -- 100.2% (Identified Cost $165,782,401) (b) .............. 171,621,884 Other assets less liabilities ..................... (318,828) ------------ Total Net Assets -- 100% .......................... $171,303,056 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized appreciation on investments based on cost of $166,413,792 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. ..................................... $ 14,052,893 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ......................................... (8,844,801) ------------ Net unrealized appreciation. ......................... $ 5,208,092 ============ At December 31, 2000, the Fund had a capital loss carryover of approximately $15,926,671 which expires on December 31, 2008. During the year ended December 31, 2000, the Fund distributed $25,649 (unaudited) from long-term capital gains. (c) Non-income producing security. (d) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (e) Step Bond: Coupon rate is zero or below market for an initial period and then increases to a higher coupon rate at a specified date. ADR An American Depositary Receipt (ADR) is a certificate issued by a custodian bank representing the right to receive securities of the foreign issuer described. The values of ADRs are significantly influenced by trading on exchanges not located in the United States. See accompanying notes to financial statements. 13 STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $165,782,401) ............ $ 171,621,884 Cash ........................................................... 3,318 Receivable for: Fund shares sold ............................................. 129,584 Dividends and interest ....................................... 1,142,916 ------------- 172,897,702 LIABILITIES Payable for: Securities purchased ......................................... $ 899,643 Fund shares redeemed ......................................... 389,368 Accrued expenses: Management fees .............................................. 108,838 Deferred trustees' fees ...................................... 77,055 Accounting and administrative ................................ 5,243 Transfer agent ............................................... 58,670 Other ........................................................ 55,829 ------------ 1,594,646 ------------- NET ASSETS ....................................................... $ 171,303,056 ============= Net Assets consist of: Paid in capital .............................................. $ 185,511,695 Undistributed net investment income .......................... 7,469 Accumulated net realized gain (loss) ......................... (20,055,591) Unrealized appreciation (depreciation) on investments - net .. 5,839,483 ------------- NET ASSETS ....................................................... $ 171,303,056 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($100,993,171 / 9,442,334 shares of beneficial interest) ..... $ 10.70 ============= Offering price per share (100 / 94.25 of $10.70) ............... $ 11.35* ============= Net asset value and offering price of Class B shares ($39,548,074 / 3,702,392 shares of beneficial interest) ...... $ 10.68** ============= Net asset value of Class C shares ($2,021,846 / 190,168 shares of beneficial interest) ......... $ 10.63** ============= Offering price per share (100 / 99.00 of $10.63) ............... $ 10.74 ============= Net asset value, offering and redemption price of Class Y shares ($28,739,965 / 2,706,312 shares of beneficial interest) ...... $ 10.62 =============
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 14 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends (net of foreign taxes of $3,608) ................ $ 1,604,884 Interest .................................................. 5,968,907 ------------ 7,573,791 Expenses Management fees ......................................... $ 1,569,212 Service fees - Class A .................................. 310,459 Service and distribution fees - Class B ................ 477,052 Service and distribution fees - Class C ................. 26,362 Trustees' fees and expenses ............................. 11,092 Accounting and administrative ........................... 72,761 Custodian ............................................... 111,423 Transfer agent - Class A, Class B, Class C .............. 690,946 Transfer agent - Class Y ................................ 35,362 Audit and tax services .................................. 37,105 Legal ................................................... 3,838 Printing ................................................ 66,905 Registration ............................................ 49,050 Miscellaneous ........................................... 7,947 ------------ Total expenses before reductions .......................... 3,469,514 Less reductions ........................................... (95,854) 3,373,660 ------------ ------------ Net investment income ..................................... 4,200,131 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net ................. (20,039,633) Unrealized appreciation (depreciation) on investments - net (1,389,661) ------------ Net gain (loss) on investment transactions ................ (21,429,294) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ....... $(17,229,163) ============
See accompanying notes to financial statements. 15 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ................................... $ 7,553,382 $ 4,200,131 Net realized gain (loss) on investments ................. 21,528,018 (20,039,633) Net unrealized appreciation (depreciation) on investments (41,558,788) (1,389,661) Increase (decrease) in net assets from operations ....... (12,477,388) (17,229,163) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................... (4,639,384) (2,671,815) Class B ............................................... (1,264,308) (324,462) Class C ............................................... (85,562) (18,562) Class Y ............................................... (1,639,492) (1,218,118) Net realized gain on investments Class A ............................................... (13,844,100) (15,553) Class B ............................................... (5,598,800) (6,046) Class C ............................................... (372,784) (308) Class Y ............................................... (3,811,458) (4,792) ------------- ------------- (31,255,888) (4,259,656) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................. (56,609,069) (92,677,754) ------------- ------------- Total increase (decrease) in net assets .................... (100,342,345) (114,166,573) NET ASSETS Beginning of the year ................................... 385,811,974 285,469,629 ------------- ------------- End of the year ......................................... $ 285,469,629 $ 171,303,056 ============= ============= UNDISTRIBUTED NET INVESTMENT INCOME End of the year ......................................... $ 31,634 $ 7,469 ============= =============
16 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ...... $ 13.14 $ 13.94 $ 14.25 $ 13.52 $ 11.69 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ....................... 0.38 0.33 0.33 0.32 0.23 Net Realized and Unrealized Gain (Loss) on Investments ............................ 1.76 2.05 0.74 (0.82) (0.98) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............ 2.14 2.38 1.07 (0.50) (0.75) ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........ (0.39) (0.33) (0.32) (0.32) (0.24) Distributions From Net Realized Capital Gains (0.95) (1.74) (1.48) (1.01) 0.00(c) ----------- ----------- ----------- ----------- ----------- Total Distributions ......................... (1.34) (2.07) (1.80) (1.33) (0.24) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............ $ 13.94 $ 14.25 $ 13.52 $ 11.69 $ 10.70 =========== =========== =========== =========== =========== Total Return (%) (a) ........................ 17.1 17.5 8.2 (3.8) (6.4) Ratio of Operating Expenses to Average Net Assets (%) ............................ 1.33 1.29 1.30 1.33 1.56 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ... 1.33 1.29 1.30 1.33 1.52(b) Ratio of Net Investment Income to Average Net Assets (%) .................... 2.79 2.25 2.25 2.30 2.08 Portfolio Turnover Rate (%) ................. 70 69 81 61 133 Net Assets, End of the Year (000) ........... $ 219,626 $ 233,421 $ 222,866 $ 167,943 $ 100,993
(a) A sales charge is not reflected in total return calculations. (b) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (c) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 17 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ...... $ 13.08 $ 13.86 $ 14.15 $ 13.40 $ 11.58 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ....................... 0.29 0.23 0.21 0.21 0.16 Net Realized and Unrealized Gain (Loss) on Investments ............................... 1.74 2.03 0.74 (0.80) (0.99) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............ 2.03 2.26 0.95 (0.59) (0.83) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........ (0.30) (0.23) (0.22) (0.22) (0.07) Distributions From Net Realized Capital Gains (0.95) (1.74) (1.48) (1.01) 0.00(c) ---------- ---------- ---------- ---------- ---------- Total Distributions ......................... (1.25) (1.97) (1.70) (1.23) (0.07) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year $13.86 ..... $ 14.15 $ 13.40 $ 11.58 $_10.68 ========== ========== ========== ========== ========== Total Return (%) (a) ........................ 16.3 16.7 7.3 (4.4) (7.2) Ratio of Operating Expenses to Average Net Assets (%) ............................... 2.08 2.04 2.05 2.08 2.31 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ...... 2.08 2.04 2.05 2.08 2.27(b) Ratio of Net Investment Income to Average Net Assets (%) ........................... 2.04 1.50 1.50 1.55 1.33 Portfolio Turnover Rate (%) ................. 70 69 81 61 133 Net Assets, End of the Year (000) ........... $ 58,367 $ 76,558 $ 84,255 $ 65,492 $ 39,548
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (c) Amount rounds to less than $0.01 per share. 18 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C ------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Year ...... $ 13.05 $ 13.82 $ 14.10 $ 13.35 $ 11.53 --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ....................... 0.29 0.23 0.21 0.21 0.16 Net Realized and Unrealized Gain (Loss) on Investments ............... 1.73 2.02 0.74 (0.80) (0.99) --------- --------- --------- --------- --------- Total From Investment Operations ............ 2.02 2.25 0.95 (0.59) (0.83) --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income ........ (0.30) (0.23) (0.22) (0.22) (0.07) Distributions From Net Realized Capital Gains (0.95) (1.74) (1.48) (1.01) 0.00(c) --------- --------- --------- --------- --------- Total Distributions ......................... (1.25) (1.97) (1.70) (1.23) (0.07) --------- --------- --------- --------- --------- Net Asset Value, End of the Year ............ $ 13.82 $ 14.10 $ 13.35 $ 11.53 $ 10.63 ========= ========= ========= ========= ========= Total Return (%) (a) ........................ 16.2 16.6 7.3 (4.5) (7.2) Ratio of Operating Expenses to Average Net Assets (%) ................... 2.08 2.04 2.05 2.08 2.31 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) .. 2.08 2.04 2.05 2.08 2.27(b) Ratio of Net Investment Income to Average Net Assets (%) ............... 2.04 1.50 1.50 1.55 1.33 Portfolio Turnover Rate (%) ................. 70 69 81 61 133 Net Assets, End of the Year (000) ........... $ 2,538 $ 4,596 $ 5,480 $ 4,454 $ 2,022
(a) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. (b) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (c) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 19 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class Y ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ........... $ 13.15 $ 13.95 $ 14.27 $ 13.54 $ 11.71 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ............................ 0.44 0.40 0.39 0.36 0.28 Net Realized and Unrealized Gain (Loss) on Investments ................................... 1.76 2.06 0.74 (0.81) (0.98) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ................. 2.20 2.46 1.13 (0.45) (0.70) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ............. (0.45) (0.40) (0.38) (0.37) (0.39) Distributions From Net Realized Capital Gains .... (0.95) (1.74) (1.48) (1.01) 0.00(b) ---------- ---------- ---------- ---------- ---------- Total Distributions .............................. (1.40) (2.14) (1.86) (1.38) (0.39) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ................. $ 13.95 $ 14.27 $ 13.54 $ 11.71 $ 10.62 ========== ========== ========== ========== ========== Total Return (%) ................................. 17.6 18.1 8.6 (3.3) (6.0) Ratio of Operating Expenses to Average Net Assets (%) ........................ 0.88 0.88 0.90 0.93 1.02 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) 0.88 0.88 0.90 0.93 0.97(a) Ratio of Net Investment Income to Average Net Assets (%) ........................... 3.24 2.66 2.65 2.68 2.63 Portfolio Turnover Rate (%) ...................... 70 69 81 61 133 Net Assets, End of the Year (000) ................ $ 77,665 $ 85,620 $ 73,212 $ 47,130 $ 28,740
(a) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (b) Amount rounds to less than $0.01 per share. 20 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Balanced Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a reasonable long-term investment return from a combination of long-term capital appreciation and moderate current income. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). On February 25, 2000, the Board of Trustees approved changes to the investment strategies of the Fund to add a growth-style component to the equity portfolio of the Fund. The Fund liquidated a portion of its existing value-based equity portfolio in order to purchase securities that are considered by the Fund's subadviser to have growth characteristics. The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased prior to May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent expenses applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service as 21 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date and interest income is recorded on an accrual basis. Interest income for the Fund is increased by the accretion of discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premiums and discounts on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not effect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact, if any, resulting from the adoption of this principle will not be material to the financial statements. c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. d. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for mortgage backed securities. Permanent book and tax differences relating to shareholder distributions will result in reclassifications to capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 22 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales -------------------------------- ------------------------------- U.S. Government Other U.S. Government Other --------------- ------------ --------------- ------------ $35,203,659 $242,825,796 $38,925,099 $332,963,133 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P., ("Nvest Management") at the annual rate of 0.750% of the first $200 million of the Fund's average daily net assets, 0.700% of the next $300 million and 0.650% of such assets in excess of $500 million reduced by the payment to the Fund's investment subadviser, Loomis Sayles & Company, L.P. ("Loomis Sayles") at the rate of 0.535% of the first $200 million of the Fund's average daily net assets, 0.350% of the next $300 million and 0.300% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Loomis Sayles under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 474,070 Loomis Sayles 1,095,142 ---------- $1,569,212 ========== The effective management fee for the year ended December 31, 2000 was 0.75%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $72,761 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $556,340 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. 23 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A Shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $310,459 in service fees under the Class A Plan. Prior to September 13, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000, is $2,041,399. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $119,263 and $6,591 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $357,789 and $19,771 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000, amounted to $271,309. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 24 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class A Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 1,265,090 $ 16,907,083 506,126 $ 5,568,331 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 341,407 4,400,684 229,172 2,510,444 Distributions from net realized gain .............. 1,139,027 13,348,732 1,303 14,819 ------------ ------------ ------------ ------------ 2,745,524 34,656,499 736,601 8,093,594 Shares repurchased .................................. (4,870,716) (63,915,765) (5,656,229) (62,263,739) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. (2,125,192) $(29,259,266) (4,919,628) $(54,170,145) ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class B Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 860,330 $ 11,357,242 342,695 $ 3,724,246 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 94,655 1,206,918 28,811 313,046 Distributions from net realized gain .............. 467,733 5,429,353 518 5,835 ------------ ------------ ------------ ------------ 1,422,718 17,993,513 372,024 4,043,127 Shares repurchased................................... (2,015,881) (26,014,153) (2,362,349) (25,785,001) ------------ ------------ ------------ ------------ Net increase (decrease)........................ (593,163) $ (8,020,640) (1,990,325) $(21,741,874) ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class C Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 89,239 $ 1,163,532 24,535 $ 268,681 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 6,531 83,083 1,600 17,303 Distributions from net realized gain .............. 31,247 361,197 26 288 ------------ ------------ ------------ ------------ 127,017 1,607,812 26,161 286,272 Shares repurchased .................................. (151,265) (1,959,487) (222,250) (2,417,313) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. (24,248) $ (351,675) (196,089) $ (2,131,041) ------------ ------------ ------------ ------------
25 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class Y Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 405,924 $ 5,372,675 196,077 $ 2,129,973 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 126,531 1,639,492 111,724 1,218,118 Distributions from net realized gain .............. 324,920 3,811,458 421 4,792 ------------ ------------ ------------ ------------ 857,375 10,823,625 308,222 3,352,883 Shares repurchased .................................. (2,239,982) (29,801,113) (1,627,899) (17,987,577) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. (1,382,607) $(18,977,488) (1,319,677) $(14,634,694) ------------ ------------ ------------ ------------ Increase (decrease) derived from capital shares transactions ....................... (4,125,210) $(56,609,069) (8,425,719) $(92,677,754) ============ ============ ============ ============
5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Expense Reductions. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $95,854 under these agreements. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Balanced Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Balanced Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 27 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- -------------- 9,487,852.876 207,279.751 426,645.570 10,121,778.197 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ------------- --------------- -------------- 9,495,740.700 218,002.541 408,034.956 10,121,778.197 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 28 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust -- Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds - -------------------------------------------------------------------------------- For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Fund(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID BROCKTON, MA - --------------------- PERMIT NO. 770 P.O. Box 8551 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: Drowning in paper? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs BL56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Strategic Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST STRATEGIC INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Strategic Income Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. Two bond indices measure the performance of theoretical portfolios. Unlike a fund, the indices are unmanaged and do not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 5/1/95 10000 9550 12/31/95 11038 10542 12/31/96 12639 12070 12/31/97 13819 13197 12/31/98 13580 12969 12/31/99 15226 14541 12/31/00 15327 14637 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST STRATEGIC INCOME FUND Average Annual Total Returns -- 12/31/00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 5/1/95) 1 Year 5 Years(8) Since Inception(8) Net Asset Value(1) 0.68% 6.79% 7.83% With Maximum Sales Charge(2) -3.86 5.82 6.96 - -------------------------------------------------------------------------------- Class B (Inception 5/1/95) 1 Year 5 Years(8) Since Inception(8) Net Asset Value(1) -0.15% 5.98% 6.99% With CDSC(3) -4.79 5.72 6.88 - -------------------------------------------------------------------------------- Class C (Inception 5/1/95) 1 Year 5 Years(8) Since Inception(8) Net Asset Value(1) -0.15% 5.97% 6.95% With Maximum Sales Charge and CDSC(3) -2.09 5.76 6.75 - -------------------------------------------------------------------------------- Class Y (Inception 12/1/99) 1 Year Since Inception Net Asset Value(1) 1.04% 3.44% - --------------------------------------------------------------------------------
Since Fund's Since Fund's Class A,B, C Class Y Comparative Performance 1 Year 5 Years Inception Inception Lehman Brothers Aggregate Bond Index(4) 11.63% 6.46% 7.68% 11.09% Lehman Brothers Universal Index(5) 10.82 6.43 7.69 9.75 Morningstar Multi-Sector Bond Average(6) 1.27 4.91 6.41 2.17 Lipper Multi-Sector Income Average(7) 0.01 4.84 6.01 1.14 - -----------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. (4) Lehman Brothers Aggregate Bond Index is an unmanaged index of domestic debt issued by the U.S. government and its agencies. Since-inception returns for Class A, B and C shares are calculated from 4/30/95. Since-inception return for Class Y shares is calculated from 11/30/99. You may not invest directly in an index. (5) Lehman Brothers Universal Bond Index is an unmanaged index representing a blend of the Lehman Aggregate, High Yield and Emerging Market indices. Since-inception returns for Class A, B and C shares are calculated from 4/30/95. Since-inception return for Class Y shares is calculated from 11/30/99. You may not invest directly in an index. (6) Morningstar Multi-Sector Bond Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Since-inception returns for Class A, B and C shares are calculated from 4/30/95. Since-inception return for Class Y shares is calculated from 11/30/99. (7) Lipper Multi-Sector Income Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Since-inception returns for Class A, B and C shares are calculated from 4/30/95. Since-inception return for Class Y shares is calculated from 12/1/99. (8) Fund performance may have been increased by voluntary expense waivers, without which performance would have been lower. 2 NVEST STRATEGIC INCOME FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Dan Fuss, Kathleen Gaffney Loomis, Sayles & Company, L.P. Q. How did Nvest Strategic Income Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Strategic Income Fund's Class A shares had a total return of 0.68% at net asset value, including $0.93 in reinvested dividends. The Fund's primary benchmark, the Lehman Brothers Aggregate Bond Index, returned 11.63% for the same period. The Lehman Aggregate Bond Index is an unmanaged list of domestic debt issued by the U.S. government and its agencies. This Fund, by contrast, takes a total-return approach to fixed-income investing, using a broad set of parameters and balancing income and price appreciation opportunities. Nvest Strategic Income Fund may invest in international fixed-income securities, bonds selling at a discount and convertible bonds that give bondholders the right to convert the bonds to common stock - none of which are in the benchmark. In part because of these differences, the Fund did not do as well as the Lehman Brothers Aggregate in 2000, although its results are comparable to similarly structured funds tracked by Lipper and Morningstar. (Please see the table on the facing page.) Q. What was the investment environment like? The stock market and the Federal Reserve Board set the tone for fixed-income investments in 2000. Investor preoccupation with growth and worries over the impact of high short-term interest rates left the fixed-income market neglected, pushing yields up and prices down for most corporate bonds. Corporate bonds of all kinds, especially higher yielding issues, fell in price. And spreads - additional yield available from high-yield bonds compared to U.S. Treasury securities - widened to levels normally seen only during recessions. 3 NVEST STRATEGIC INCOME FUND - -------------------------------------------------------------------------------- An increase in the number of high-yield issues slipping into default also weighed on the market. Most bonds that have defaulted recently were first offered three to five years ago. At that time, capital was abundant and investors were less discriminating, making it possible for many underfinanced companies to issue high-yield bonds. Q. Given that environment, what strategies did you pursue? Our research-intensive approach to security selection focuses on seasoned bonds that can be bought at discount levels. Our strategy has been to seek bonds selling at discounts to par value, emphasizing bonds rated BBB - the low end of the investment-grade category. Bonds that qualify as investment grade generally offer less risk than speculative issues with lower ratings, and investors have a stronger likelihood of receiving interest and principal on a timely basis. At today's depressed valuations, some of these BBB-rated issues carry yields more usually associated with lower-rated bonds. Thus, we can target very high yields without compromising portfolio quality. As of December 31, 2000, investment-grade securities accounted for over one third of Nvest Strategic Income Fund's net assets, with about two thirds in high-yielding, lower rated domestic securities (rated below BBB). Foreign bonds accounted for more than half of the Fund's net assets. Q. What factors have affected performance the most, positively or negatively? High-yield bonds emerged as the worst performing fixed-income sector in 2000, accounting in large part for the Fund's underperformance versus its benchmark. Investor indifference was the primary factor. In an effort to minimize the impact on the portfolio, we shifted some assets from the U.S. to dollar-denominated bonds in emerging markets, including Argentina. This move helped performance, as the global high-yield sector outperformed its U.S. counterpart. We also made substantial commitments in high-quality (AAA- and AA-rated) bonds issued by the Canadian government and its provinces, and backed by budget surpluses. 4 NVEST STRATEGIC INCOME FUND - -------------------------------------------------------------------------------- Portfolio Composition -- 12/31/00 % of Net Assets ---------------------------------------------------- Non-Convertible Bonds 74.9 ---------------------------------------------------- Convertible Bonds 13.6 ---------------------------------------------------- Common Stock 4.4 ---------------------------------------------------- Short-Term Investments 3.9 ---------------------------------------------------- Preferred Stocks & Other 3.2 Average Portfolio Maturity - 16.8 years Portfolio holdings and asset allocations will vary. Holdings in such emerging markets as Brazil, Argentina and Mexico were a positive factor early in the year but pulled back sharply at the end of the year. As a result of these price declines, by year end we were once again actively seeking attractively valued bonds in these countries for Nvest Strategic Income Fund. In telecommunications, we concentrated on mature companies with positive cash flows and no near-term need for capital. Although we reduced the Fund's technology holdings as prices rose in the spring, we were not able to entirely avoid the tech sell-off in the fourth quarter of 2000. The Fund's real estate investment trusts (REITs) performed well, and we believe market conditions remain favorable for well-funded REITs. Supply and demand are in balance, the securities provide good cash flows, vacancy rates are low, and rents are rising. In the retail sector, we found value in J.C. Penney, whose profitable online sales division aided company results. Lennar Corporation should gain market share as the fragmented homebuilding industry continues to consolidate. Better federal reimbursement levels and more rational pricing are benefiting healthcare companies. 5 NVEST STRATEGIC INCOME FUND - -------------------------------------------------------------------------------- Energy companies boosted performance. The high-yield bonds of contract oil driller R&B Falcon moved up when the company agreed to be acquired by TransOcean, whose bonds are investment grade. Natural gas producer Chesapeake Energy rode the strength of rising gas prices and Diamond Offshore's convertible bonds rose along with the company's common stock. Q. What is your current outlook? In our view, the weakness in the high-yield market during 2000 stemmed more from investor disinterest than from widespread credit concerns. For a recovery in the corporate market to begin, interest rates will have to come down, easing concerns about earnings and perhaps encouraging investors to take a second look at the values present in the high-yield marketplace. As early as December of 2000, the Federal Reserve Board began to hint that it would shift to a more accommodative monetary policy. The Fed's announcement of a 0.5% cut in interest rates early in January 2001 surprised many observers by its size and timing (between Board meetings). If the Fed is successful in engineering a "soft landing" for the U.S. economy - allowing it to slow gradually and avoid a recession - the domestic markets will not be the only beneficiaries. For many economies around the world, the United States is a key customer. Many overseas central banks are also lowering interest rates, and debt reduction is accelerating. Those trends imply less worldwide competition for capital, reducing pressures on the capital markets. This scenario should favor Nvest Strategic Income Fund's non-U.S. holdings, while domestic issuers may benefit from the Fed's more accommodative policies. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Strategic Income Fund may invest in foreign and emerging market securities, which have special risks. It may also invest in lower-rated bonds, which offer higher yields in return for more risk, and in mortgage securities that are subject to prepayment risk. These risks affect the value of your investment. See the Fund's prospectus for details. 6 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 88.5% of Total Net Assets
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- Convertible Bonds -- 13.6% Canada -- 0.1% $ 500,000 Rogers Communications, Inc. (yankee) 2.000%, 11/26/2005 (h) ................................... Ba2 BB- $ 372,500 ------------ Hong Kong -- 0.7% 4,075,000 Bangkok Bank PLC, 4.589%, 3/03/2004 ...................... Ba3 -- 1,864,312 ------------ Mauritius -- 0.3% 1,350,000 App Finance VII Mauritius Ltd., 144A, 3.500%, 4/30/2003 (h) .................................... B3 CCC+ 364,500 1,600,000 App Finance VII Mauritius Ltd., 3.500%, 4/30/2003 ........ B3 CCC+ 432,000 ------------ 796,500 ------------ Mexico -- 0.7% 3,325,000 Empresas ICA Sociedad (yankee), 5.000%, 3/15/2004 ........ B3 CCC+ 1,862,000 ------------ Netherlands -- 0.6% 1,000,000 Burns Philp Treasury Co., Ltd., 144A, 5.500%, 4/30/2004 .. -- B- 600,000 500,000 KPNqwest BV, 7.125%, 6/01/2009 ........................... Ba1 BBB+ 411,119 950,000 Versatel Telecom BV, 4.000%, 12/17/2004 .................. B3 B- 524,292 ------------ 1,535,411 ------------ South Korea -- 0.4% 250,000 Samsung SDI Co., Ltd., 0.250%, 3/12/2006 ................. -- -- 303,750 1,000,000 Ssangyong Oil Refining Corp., Ltd., 3.000%, 12/31/2004 ... -- -- 733,750 ------------ 1,037,500 ------------ Thailand -- 0.5% 2,250,000 Loxley PLC, 2.500%, 4/04/2001 ............................ -- -- 787,500 1,130,000 Siam Commercial Bank Co., 3.250%, 1/24/2004 .............. Ba3 B- 520,535 ------------ 1,308,035 ------------ United Kingdom -- 1.2% 2,500,000 Colt Telecom Group PLC, 2.000%, 12/16/2006 ............... B1 B+ 1,820,670 1,075,000 Jazztel PLC, 13.250%, 12/15/2009 ......................... Caa1 CCC+ 666,717 1,500,000 Jazztel PLC, 14.000%, 7/15/2010 .......................... -- -- 958,494 ------------ 3,445,881 ------------ United States -- 9.1% 500,000 Baker Hughes, Inc., Zero Coupon, 5/05/2008 ............... A2 A 438,900 3,910,000 Broadband Technologies, Inc., 5.000%, 5/15/2001 .......... -- -- 723,350 1,000,000 Builders Transport, Inc., 8.000%, 8/15/2005, (e)(g) ...... -- -- 1,250 200,000 Builders Transport, Inc., 6.500%, 5/01/2011, (e)(g) ...... -- -- 250 1,000,000 Cablevision SA, (yankee), 13.750%, 4/30/2007 ............. B1 BB 745,000 275,000 CML Group, Inc., 5.500%, 1/15/2003, (e)(g) ............... -- -- 173 500,000 Columbia/HCA Healthcare Corp., Medium Term Note, 7.580%, 9/15/2025 ........................................ Ba2 BB+ 426,250 827,000 Cray Research, Inc., 6.125%, 2/01/2011 ................... Caa2 CCC- 297,720 1,825,000 Delta Air Lines, Inc., 8.300%, 12/15/2029 ................ Baa3 BBB- 1,584,850 1,000,000 Dillards, Inc., 6.430%, 8/01/2004 ........................ Baa3 BBB- 779,500 269,000 Dixie Group, Inc., 7.000%, 5/15/2012 ..................... B3 B+ 87,425 1,050,000 Edo Corp., 7.000%, 12/15/2011 ............................ -- -- 811,125 500,000 Efficient Networks, Inc., 5.000%, 3/15/2005 .............. -- CCC+ 251,875
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- United States -- continued $ 1,000,000 Einstein/Noah Bagel Corp., 7.250%, 6/01/2004 (e)(g)(h) ... -- -- $ 450,000 1,400,000 Exide Corp., 144A, 2.900%, 12/15/2005 .................... B3 B- 602,000 250,000 Federal Realty Investment Trust, 5.250%, 10/28/2003, (REIT) ............................... Baa3 BBB- 208,125 575,000 Glycomed, Inc., 7.500%, 1/01/2003 ........................ -- -- 460,000 2,500,000 Intermedia Communications, Inc., Series B, 8.600%, 6/01/2008 ........................................ B2 B 1,750,000 525,000 Intevac, Inc., 6.500%, 3/01/2004 ......................... -- -- 228,375 1,375,000 Kent Electronics Corp., 4.500%, 9/01/2004 ................ -- B 1,152,415 1,000,000 Lennar Corp., Zero Coupon, 7/29/2018 ..................... Ba1 BB+ 555,000 775,000 Level 3 Communications, Inc., 6.000%, 3/15/2010 .......... Caa1 CCC+ 399,125 550,000 Level 3 Communications, Inc., 0/12.875%, 3/15/2010 (d) ................................. B3 B 255,750 4,250,000 Loews Corp., 3.125%, 9/15/2007 ........................... A2 A+ 3,749,053 250,000 LSI Logic Corp., 4.000%, 2/15/2005 ....................... B1 B 179,700 250,000 MascoTech, Inc., 4.500%, 12/15/2003 ...................... B2 B 157,500 1,464,000 Maxtor Corp., 5.750%, 3/01/2012 .......................... B3 -- 1,024,800 1,098,000 Nabi, Inc., 6.500%, 2/01/2003 ............................ Caa2 CCC- 760,365 125,000 NorAm Energy Corp., 6.000%, 3/15/2012 .................... Baa2 BBB- 112,500 2,250,000 NTL Communications Corp., Series B, 0/9.750%, 4/15/2009 (d) .................................. B2 BBB+ 1,461,763 750,000 Park Electrochemical Corp., 5.500%, 3/01/2006 ............ B2 B- 855,000 500,000 Preston Corp., 7.000%, 5/01/2011 ......................... B2 -- 380,000 355,000 Richardson Electronics Ltd., 7.250%, 12/15/2006 .......... B3 -- 294,650 450,000 S3, Inc., 5.750%, 10/01/2003 ............................. -- -- 312,188 500,000 Schuler Homes, Inc., 6.500%, 1/15/2003 ................... B2 B- 440,000 500,000 Sizeler Property Investments, Inc., 8.000%, 7/15/2003, (REIT) ................................ -- -- 446,250 600,000 Telxon Corp., 5.750%, 1/01/2003 .......................... -- CCC+ 564,000 150,000 Thermedics Corp., Zero Coupon, 6/01/2003 ................. Baa3 BBB+ 116,625 350,000 Thermo Electron Corp., 144A, 4.250%, 1/01/2003 ........... Baa3 BBB 349,125 3,000,000 Western Digital Corp., 144A, Zero Coupon, 2/18/2018 ...... Caa1 B- 645,000 381,000 Worldway Corp., 6.250%, 4/15/2011 ........................ Ba1 BB+ 285,750 250,000 Xerox Capital Europe PLC, 5.875%, 5/15/2004 (j) .......... Ba1 BBB- 141,250 2,750,000 Xerox Corp., 0.570%, 4/21/2018 ........................... Ba3 BB+ 550,000 ------------ 25,033,977 ------------ Total Convertible Bonds (Identified Cost $51,830,037) .... 37,256,116 ------------ Non-Convertible Bonds -- 74.9% Argentina -- 2.4% 1,800,000 Argentina Republic, Medium Term Note, 11.750%, 2/12/2007, (ARS) ................................ B1 BBB+ 1,541,466 3,500,000 Argentina Republic (yankee), 8.875%, 3/01/2029, (ARS) .... B1 BB 2,287,600 2,600,000 Buenos Aires City, Argentina, 144A, 10.500%, 5/28/2004, (ARS) ................................ Ba3 -- 2,132,000 1,000,000 Compania de Alimentos Fargo SA, (yankee), 13.250%, 8/01/2008, (ARS) ................................ Caa2 B+ 650,000 ------------ 6,611,066 ------------
8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- Brazil -- 6.0% $ 6,588,040 Federal Republic of Brazil, 8.000%, 4/15/2014, (f)(j) .... B1 BB- $ 5,089,261 14,008,000 Federal Republic of Brazil, 10.125%, 5/15/2027 (j) ....... B1 BB- 11,241,420 ------------ 16,330,681 ------------ Canada -- 21.8% 2,679,000 Alberta Province, 5.930%, 9/16/2016, (CAD) ............... Aa1 AA+ 1,825,103 18,505,000 British Columbia Province, Zero Coupon, 9/05/2020, (CAD) . Aa2 AA- 3,516,314 17,900,000 British Columbia Province, Zero Coupon, 6/09/2022, (CAD) . Aa2 AA- 3,072,220 9,775,000 British Columbia Province, Zero Coupon, 8/19/2022, (CAD) . Aa2 AA- 1,660,372 35,000,000 British Columbia Province, Zero Coupon, 8/23/2024, (CAD) . Aa2 AA- 5,296,610 11,250,000 British Columbia Province, Zero Coupon, 11/19/2027, (CAD) Aa2 AA- 1,449,723 84,475,000 Canada Government, Zero Coupon, 6/01/2025, (CAD) ......... Aa1 AAA 14,355,597 2,260,000 Clearnet Communications, Inc., 0/11.750%, 8/13/2007, (CAD) (d) .......................... Ba1 BBB+ 1,348,512 3,399,000 Manitoba Province, 7.750%, 12/22/2025, (CAD) ............. Aa3 AA- 2,700,981 17,135,000 Manitoba Province, Zero Coupon, 3/05/2031, (CAD) ......... Aa3 AA- 1,868,234 7,950,000 Manitoba Province, Medium Term Note, 6.500%, 9/22/2017, (CAD) ................................. Aa3 AA- 5,533,702 2,345,000 Microcell Telecommunications, 0/11.125%, 10/15/2007, (CAD) (d) ......................... B3 B- 1,102,187 500,000 New Brunswick FM Project, Inc., 0/6.470%, 11/30/2027, (CAD) (d) .......................... -- A 282,256 29,550,000 Ontario Hydro Bank, Zero Coupon, 10/15/2021, (CAD) ....... Aa3 AA- 5,288,444 750,000 Ontario Province, Zero Coupon, 7/13/2022, (CAD) .......... Aa3 AA- 130,734 12,600,000 Ontario Province, Zero Coupon, 6/02/2027, (CAD) .......... Aa3 AA- 1,714,161 8,800,000 Ontario Province, Zero Coupon, 3/08/2029, (CAD) .......... Aa3 AA- 1,085,487 8,500,000 Saskatchewan Province, Zero Coupon, 4/10/2014, (CAD) ..... A1 A+ 2,480,553 8,250,000 Saskatchewan Province, Zero Coupon, 2/04/2022, (CAD) ..... A1 A+ 1,448,033 9,605,000 Saskatchewan Province, Zero Coupon, 5/30/2025, (CAD) ..... A1 A+ 1,397,894 3,750,000 Saskatchewan Province, 5.750%, 3/05/2029, (CAD) .......... A1 A+ 2,355,379 ------------ 59,912,496 ------------ Cayman Islands -- 0.4% 1,365,000 Enersis SA (yankee), 7.400%, 12/01/2016 .................. Baa1 A- 1,217,685 ------------ Colombia -- 0.3% 966,735 Transgas de Occidente SA, 9.790%, 11/01/2010 ............. Ba2 BBB+ 725,051 ------------ Ecuador -- 0.3% 631,000 Republic of Ecuador, 12.000%, 11/15/2012 ................. Caa2 B- 397,530 713,000 Republic of Ecuador, 0/4.000%, 8/15/2030 (d) ............. Caa2 B- 278,070 ------------ 675,600 ------------ Hong Kong -- 2.3% 8,475,000 Bangkok Bank PLC, 9.025%, 3/15/2029 ...................... Ba3 B+ 6,398,625 ------------ India -- 1.4% 585,000 Reliance Industries Ltd., 144A, 10.375%, 6/24/2016 ....... Ba2 BB 558,347 4,000,000 Tata Electric Cos., 144A, 8.500%, 8/19/2017 .............. Ba2 BB 3,375,480 ------------ 3,933,827 ------------
See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- Israel -- 0.6% $ 3,000,000 Barak I T C International, Series B (yankee), 0/12.500%, 11/15/2007, (d) ............................... B3 CCC+ $ 1,560,000 ------------ Ivory Coast -- 0.1% 1,021,250 Ivory Coast PDI, 2.000%, 3/31/2018 ....................... -- -- 127,656 ------------ Malaysia -- 1.9% 1,750,000 Telekom Malaysia Berhad, 144A, 7.875%, 8/01/2025 ......... Baa2 BBB 1,566,250 4,300,000 Tenaga Nasional Berhad, 144A, 7.500%, 11/01/2025 ......... Baa3 BBB 3,622,488 ------------ 5,188,738 ------------ Mauritius -- 2.4% 500,000 Indah Kiat Finance Mauritius Ltd., 10.000%, 7/01/2007 ....................................... B3 CCC+ 187,500 2,700,000 Pindo Deli Finance Mauritius Ltd., (yankee), 10.750%, 10/01/2007 ...................................... B3 CCC+ 945,000 2,650,000 Pindo Deli Finance Mauritius Ltd., (yankee), 11.750%, 10/01/2017 ...................................... -- CCC+ 901,000 5,000,000 Pindo Deli Finance Mauritius Ltd., (yankee), 10.875%, 10/01/2027 ...................................... -- CCC+ 1,650,000 6,625,000 Tjiwi Kimia Mauritius Ltd., (yankee), 10.000%, 8/01/2004 ....................................... B3 CCC+ 2,981,250 ------------ 6,664,750 ------------ Mexico -- 6.4% 1,000,000 Alestra SA de RL de CV, (yankee), 12.125%, 5/15/2006 ....................................... B2 BB- 800,000 2,500,000 Espirito Santo Escelsa, 10.000%, 7/15/2007 ............... B1 BB- 2,000,000 1,585,000 Perez Companc SA, 144A, 8.125%, 7/15/2007 ................ B1 BBB- 1,299,700 3,000,000 Petroleos Mexicanos, 144A (yankee), 8.625%, 12/01/2023 ....................................... Baa3 BB+ 2,700,000 1,000,000 Petroleos Mexicanos, (yankee), 9.250%, 3/30/2018 ......... Baa3 BB+ 980,000 4,350,000 Petroleos Mexicanos, (yankee), 9.500%, 9/15/2027 ......... Baa3 BB+ 4,306,500 6,960,000 TFM SA de CV, (yankee), 0/11.750%, 6/15/2009, (d) ........ B1 BB- 5,150,400 500,000 Transportacion Maritima Mexica, SA de CV (yankee), 10.000%, 11/15/2006 ...................................... Ba3 B+ 392,500 ------------ 17,629,100 ------------ Peru -- 0.2% 750,000 Republic of Peru, 3.750%, 3/07/2017 (i) .................. Ba3 BB- 438,750 ------------ Philippines -- 2.3% 5,150,000 Bangko Sentral Ng Philipinas (yankee), 8.600%, 6/15/2027 . Ba1 BB+ 3,399,000 1,750,000 Philippine Long Distance Telephone Co., 8.350%, 3/06/2017 Ba2 BB+ 1,102,322 2,750,000 Quezon Power Philippines Ltd. (yankee), 8.860%, 6/15/2017 Ba1 BB+ 1,925,000 ------------ 6,426,322 ------------ South Africa -- 2.8% 23,100,000 Republic of South Africa, 12.500%, 12/21/2006, (ZAR) ..... -- A- 3,062,327 17,650,000 Republic of South Africa, 13.000%, 8/31/2010, (ZAR) ...... -- -- 2,363,682 17,000,000 Republic of South Africa, 13.500%, 9/15/2015, (ZAR) ...... Baa1 A- 2,365,783 ------------ 7,791,792 ------------
10 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- South Korea -- 1.9% $ 3,439,684 Korea Electric Power Corp. (yankee), 7.400%, 4/01/2016 ... Baa3 BBB $ 3,303,747 2,500,000 Samsung Electronics Ltd., 144A, 7.700%, 10/01/2027 ....... Baa3 BBB- 1,931,250 ------------ 5,234,997 ------------ Thailand -- 2.9% 2,850,000 Siam Commercial Bank PLC, 144A, 7.500%, 3/15/2006 ........ Ba3 B- 2,394,000 2,175,000 Thai Farmers Bank PLC, 144A, 8.250%, 8/21/2016 ........... Ba3 B+ 1,587,750 4,525,000 Total Access Communications PLC, 144A, 8.375%, 11/04/2006 ....................................... B2 BBB+ 3,914,125 ------------ 7,895,875 ------------ United Kingdom -- 0.1% 2,875,000 Dolphin Telecom PLC, 0/11.500%, 6/01/2008, (EUR) (d) ..................................... Caa2 -- 378,229 ------------ United States -- 16.1% 350,000 Affymetrix, Inc., 4.750%, 2/15/2007 ...................... -- CCC+ 258,563 500,000 At Home Corp., 4.750%, 12/15/2006 ........................ B3 B- 252,500 500,000 Bausch & Lomb, Inc., 7.125%, 8/01/2028 ................... Baa3 BBB- 280,710 2,000,000 Borden, Inc., 7.875%, 2/15/2023 .......................... Ba1 BB+ 1,362,760 142,000 Boston Celtics LP, 6.000%, 6/30/2038 (j) ................. -- -- 73,485 250,000 CBS, Inc., 7.125%, 11/01/2023 ............................ A3 BBB+ 242,330 1,000,000 Century Communications Corp., 8.375%, 11/15/2017 ......... B2 B+ 730,000 2,175,000 Chesapeake Energy Corp., Series B, 7.875%, 3/15/2004 ..... B2 B 2,109,750 500,000 Columbia/HCA Healthcare Corp., 7.500%, 12/15/2023 ........ Ba2 BB+ 423,750 820,000 Columbia/HCA Healthcare Corp., 7.050%, 12/01/2027 ........ Ba2 BB+ 658,050 500,000 Conseco Inc., 8.500%, 10/15/2002 ......................... B1 BB- 432,500 250,000 Covad Communications Group, Inc., Series B 0/13.500%, 3/15/2008 (d) ................................. Caa1 B- 45,000 908,392 Dillon Read Structured Finance Corp., 6.660%, 8/15/2010 .. -- BB+ 701,733 250,000 Dillion Read Structured Finance Corp., 8.550%, 8/15/2019 . -- BB+ 168,875 34,000,000 Fannie Mae, Zero Coupon, 10/29/2007, (NZD) ............... Aaa -- 9,549,257 1,000,000 Finova Capital Corp., 7.250%, 11/08/2004 (j) ............. Caa1 B 600,530 1,000,000 First Industrial LP, 7.600%, 7/15/2028 ................... Baa2 BBB 857,110 22,300,000 International Bank of Reconstruction & Development, Zero Coupon, 8/20/2007, (NZD) ............... Aaa AAA 6,396,343 4,050,000 Kmart Corp., 7.950%, 2/01/2023 ........................... Baa3 BB+ 2,727,634 250,000 Kmart Corp., 9.440%, 7/01/2018 ........................... Baa3 BB+ 187,500 66,000 Missouri Pacific Railroad Co., 4.250%, 1/01/2005 ......... Baa1 BBB+ 60,665 5,375,000 Nextel Communications, Inc., 0/9.750, 10/31/2007, (d)(h) .............................. B1 B 3,923,750 1,000,000 Nextel International, Inc., 0/12.125%, 4/15/2008 (d) ..... Caa1 B- 590,000 500,000 Nextlink Communications, Inc., 0/12.125%, 12/01/2009 (d) ................................ B2 B 222,500 1,405,000 PDVSA Finance Ltd., (yankee), 7.400%, 8/15/2016 .......... Baa1 -- 1,118,699 275,000 Penney JC Company, Inc., 7.125%, 11/15/2023 .............. Baa3 BBB- 132,014 250,000 Phillips Van Heusen Corp., 7.750%, 11/15/2023 ............ Ba2 BB 181,250 775,000 Pioneer Standard Electronics, Inc., 8.500%, 8/01/2006 .... Baa3 BB 750,780 2,500,000 RCN Corp., 0/11.125%, 10/15/2007, (d) .................... B3 B- 900,000 3,500,000 RCN Corp., 0/9.800%, 2/15/2008, (d) ...................... B3 B- 1,120,000
See accompanying notes to financial statements. 11 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- United States -- continued $ 1,000,000 Security Capital Industrial Trust, 7.625%, 7/01/2017, (REIT) Baa1 BBB+ $ 917,830 3,500,000 Teligent, Inc., Series B, 0/11.500%, 3/01/2008 (d) ....... Caa1 CCC 280,000 1,000,000 TRW, Inc., 7.750%, 6/01/2029 ............................. Baa1 BBB 819,591 2,250,000 Westinghouse Electric Corp., 7.875%, 9/01/2023 ........... A3 BBB+ 2,276,550 750,000 Williams Communications Group, Inc., 10.700%, 10/01/2007 . B2 B+ 577,500 1,000,000 Woolworth Corp., 8.500%, 1/15/2022 ....................... B1 BB 720,000 1,000,000 Woolworth Corp., Medium Term Note, 7.000%, 10/15/2002 B1 . BB 931,992 500,000 Xerox Corp., 5.500%, 11/15/2003 .......................... Ba1 BBB- 280,000 750,000 XO Communications, Inc., 0/12.250%, 6/01/2009 (d) ........ B2 B 367,500 699,000 Zenith Corp., 8.190%, 11/01/2009 ......................... -- -- 104,850 ------------ 44,333,851 ------------ Venezuela -- 2.3% 500,000 Cerro Negro Finance Ltd., 144A, 7.900%, 12/01/2020 ....... Baa2 BBB+ 425,570 9,000,000 Republic of Venezuela, 9.250%, 9/15/2027 ................. B2 B 5,805,000 ------------ 6,230,570 ------------ Total Non-Convertible Bonds (Identified Cost $229,952,109) 205,705,661 ------------ Common Stock -- 4.4% Shares - --------------------------------------------------------------------------------------------------------------- British Virgin Islands -- 1.5% 589,300 Sappi Ltd., (sponsored ADR) (j) .......................... 4,198,762 ------------ Indonesia -- 0.2% 6,786,500 PT Indah Kiat Pulp & Paper Corp. (IDR) ................... 578,694 ------------ Thailand -- 0.3% 122,000 Siam Commercial Bank PLC, 144A, (THB) (e) ................ 60,438 122,000 Siam Commercial Bank PLC, Warrants (THB) (e) ............. 7,590 260,000 Total Access Communications PLC (THB) .................... 699,400 ------------ 767,428 ------------ United States -- 2.4% 162,900 Associated Estates Realty Corp. (REIT) ................... 1,313,381 177,100 Developers Diversified Realty Corp., (REIT) .............. 2,357,644 26,133 Hvide Marine, Inc. (e) ................................... 238,464 111,700 Simon Property Group, Inc. (REIT) ........................ 2,680,800 ------------ 6,590,289 ------------ United Kingdom -- 0.0% 1,500 Jazztel PLC, Warrants (e) ................................ 42,286 ------------ Total Common Stock (Identified Cost $13,830,877) ......... 12,177,459 ------------ Preferred Stock -- 1.9% - --------------------------------------------------------------------------------------------------------------- Philippines -- 0.5% 42,800 Philippine Long Distance Telephone Co., Series III, $3.500, 12/31/2049 (GDR) ..................... 1,508,700 ------------
12 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Preferred Stock -- continued
Shares Description Value (a) - --------------------------------------------------------------------------------------------------------------- United States -- 1.4% 2,720 Adelphia Business Solutions, Inc., 12.875%, 10/15/2007(f) ................................... $ 680,000 3,600 Archstone Communities Trust, Series B, 9.000% (REIT) ..... 89,100 33,500 Arkansas Best Corp., Series A, $2.875, 12/31/2049 ........ 1,666,625 35,000 Bethlehem Steel Corp., $3.500, 12/31/2049 ................ 280,000 6,500 Camden Property Trust, Series A, $2.250, 12/31/2049 (REIT) 169,000 22,500 Owens Corning Capital LLC, $6.500, 5/10/2025 (e)(g) ...... 11,250 12,500 Pacific Gas & Electric Co., 6.570%, 7/31/2007 ............ 200,000 37,500 Rhythms Netconnections, Inc., Series F, $6.750, 3/03/2012 110,625 12,500 Western Gas Resources, Inc., $2.625, 12/31/2049 .......... 567,187 ------------ 3,773,787 ------------ Total Preferred Stock (Identified Cost $9,278,166) ....... 5,282,487 ------------ Short Term Investment -- 3.9% Principal Amount - --------------------------------------------------------------------------------------------------------------- $ 10,633,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.250% to be repurchased at $10,639,203 on 1/02/2001, collateralized by $10,690,000 U.S. Treasury Note at 6.250% due 10/31/2001 with a value of $10,850,671 ................... 10,633,000 ------------ Total Short Term Investment (Identified Cost $10,633,000) 10,633,000 ------------ Total Investments -- 98.7% (Identified Cost $315,524,189)(b) 271,054,723 Other assets less liabilities ............................ 3,674,462 ------------ Total Net Assets -- 100% ................................. $274,729,185 ============ (a) See Note 1a of Notes to the Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized depreciation on investments based on cost for federal income tax purposes of $314,758,841 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost ................................. $ 14,449,426 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .............................. (58,153,544) ------------ Net unrealized depreciation .............................................. $(43,704,118) ============ At December 31, 2000 the Fund had a capital loss carryover of approximately $19,857,873 of which $13,337,197 expires on December 31, 2007 and $6,520,676 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations.
See accompanying notes to financial statements. 13 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 - -------------------------------------------------------------------------------- (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Step Bond: Coupon rate is zero or below market for an initial period and then increases to a higher coupon rate at a specified date. (e) Non-income producing security. (f) Pay in kind securities. (g) Issuer filed petition under Chapter 11 of the Federal Bankruptcy Code. (h) Security valued at fair value as determined in good faith by or under the direction of the Board of Trustees. (i) Variable rate demand note or floating rate security. The rate disclosed as of December 31, 2000. (j) All or a portion of this security was on loan to brokers at December 31, 2000. ADR/GDR An American Depositary Receipt (ADR) or Global Depository Receipt (GDR) is a certificate issued by a Custodian Bank representing the right to receive securities of the foreign issuer described. The values of ADRs and GDRs are significantly influenced by trading on exchanges not located in the United States. REIT Real Estate Investment Trust 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these amounted to $28,128,023 or 10.2% of net assets. Principal amount is stated in United States Dollars, unless otherwise noted as the currency below: ARS Argentine Peso CAD Canadian Dollars EUR Euro Currency IDR Indonesian Rupiah NZD New Zealand Dollars THB Thai Baht ZAR South African Rand Industry Concentrations of Investments at December 31, 2000 (unaudited) Government 37.9% Telecommunications-Cellular 3.3% Finance & Banking 8.6% Real Estate Investment Trusts 3.0% Industrials 6.2% Oil & Gas-Exploration & Production 2.9% Electric 5.7% Supranational 2.3% Telecommunication-Services 4.3% Telecommunications 2.1% 14 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $315,524,189) ........................ $ 271,054,723 Cash ....................................................................... 808 Investments held as collateral for loaned securities ....................... 9,166,625 Receivable for: Fund shares sold ......................................................... 564,026 Dividends and interest ................................................... 4,836,145 ------------- 285,622,327 LIABILITIES Payable for: Collateral on securities loaned, at value ................................ $ 9,166,625 Securities purchased ..................................................... 383,833 Fund shares redeemed ..................................................... 827,542 Withholding taxes ........................................................ 6,609 Dividends declared ....................................................... 204,027 Accrued expenses: Transfer agent ........................................................... 40,380 Management fees .......................................................... 146,883 Deferred trustees' fees .................................................. 31,617 Accounting and administrative ............................................ 8,336 Other .................................................................... 77,290 ------------- 10,893,142 ------------- NET ASSETS .................................................................... $ 274,729,185 ============= Net Assets consist of: Paid in capital .......................................................... $ 336,290,723 Undistributed (overdistributed) net investment income .................... 2,653,453 Accumulated net realized gain (loss) ..................................... (19,752,624) Unrealized appreciation (depreciation) on investments and foreign currency (44,462,367) ------------- NET ASSETS .................................................................... $ 274,729,185 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($116,986,467 / 10,835,817 shares of beneficial interest) ................ $ 10.80 ========== Offering price per share (100 / 95.5 of $10.80) ............................ $ 11.31* ========== Net asset value and offering price of Class B shares ($120,199,658 / 11,134,981 shares of beneficial interest) ................ $ 10.79** ========== Net asset value of Class C shares ($37,208,428 / 3,450,401 shares of beneficial interest) .................. $ 10.78** ---------- Offering price per share (100 / 99.00 of $10.78) ..................... $ 10.89 ========== Net asset value, offering and redemption price of Class Y shares ($334,632 / 30,968 shares of beneficial interest) ........................ $ 10.81 ==========
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 15 STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends (net of foreign taxes of $22,189) ............................. $ 1,582,330 Interest ................................................................ 26,978,119 Securities lending income ............................................... 37,318 ------------ 28,597,767 Expenses Management fees ......................................................... $ 1,821,471 Service fees - Class A .................................................. 307,109 Service and distribution fees - Class B ................................ 1,246,660 Service and distribution fees - Class C ................................. 392,600 Trustees' fees and expenses ............................................. 16,362 Accounting and administrative ........................................... 104,135 Custodian ............................................................... 167,395 Transfer agent - Class A, Class B, Class C .............................. 538,494 Transfer agent - Class Y ................................................ 142 Audit and tax services .................................................. 47,466 Legal ................................................................... 4,925 Printing ................................................................ 75,083 Registration ............................................................ 46,705 Amortization of organization expense .................................... 4,503 Miscellaneous ........................................................... 10,884 ------------ Total expenses .......................................................... 4,783,934 ------------ Net investment income ................................................... 23,813,833 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments - net ....................................................... (5,526,377) Foreign currency transactions - net ..................................... (16,049) ------------ Net realized gain (loss) on investments and foreign currency transactions (5,542,426) ------------ Unrealized appreciation (depreciation) on: Investments - net ....................................................... (17,600,976) Foreign currency transactions - net ..................................... 4,807 ------------ Net unrealized appreciation (depreciation) on investments and foreign currency transactions ..................................... (17,596,169) ------------ Net gain (loss) on investment transactions ................................ (23,138,595) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........................ $ 675,238 ============
16 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ................................................... $ 26,084,279 $ 23,813,833 Net realized gain (loss) on investments and foreign currency transactions (12,179,304) (5,542,426) Net unrealized appreciation (depreciation) on investments and foreign currency transactions ......................................... 19,325,785 (17,596,169) ------------- ------------- Increase (decrease) in net assets from operations ....................... 33,230,760 675,238 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................................... (11,121,336) (10,114,949) Class B ............................................................... (10,486,796) (9,337,429) Class C ............................................................... (3,403,086) (2,943,092) Class Y ............................................................... (2) (12,570) Net realized gain on investments Class A ............................................................... (389,803) 0 Class B ............................................................... (401,214) 0 Class C ............................................................... (129,518) 0 In excess of net realized gain on investments Class A ............................................................... (23,287) 0 Class B ............................................................... (23,969) 0 Class C ............................................................... (7,737) 0 ------------- ------------- (25,986,748) (22,408,040) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS .......................................... (21,198,379) 3,604,585 ------------- ------------- Total increase (decrease) in net assets .................................... (13,954,367) (18,128,217) ------------- ------------- NET ASSETS Beginning of the year ................................................... 306,811,769 292,857,402 ------------- ------------- End of the year ......................................................... $ 292,857,402 $ 274,729,185 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ......................................................... $ (221,256) $ 2,653,453 ============= =============
See accompanying notes to financial statements. 17 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ---------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ...... $ 12.99 $ 13.36 $ 13.42 $ 11.37 $ 11.65 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ....................... 1.05 1.01 1.05 1.03 0.99(d) Net Realized and Unrealized Gain (Loss) on Investments ............................ 0.73 0.21 (1.30) 0.31 (0.91) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............ 1.78 1.22 (0.25) 1.34 0.08 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........ (1.05) (1.01) (1.05) (1.02) (0.93) Distributions in Excess of Net Investment Income ......................... 0.00 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains (0.36) (0.15) (0.70) (0.04) 0.00 Distributions in Excess of Net Realized Capital Gains ............................. 0.00 0.00 (0.05) 0.00(b) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions ......................... (1.41) (1.16) (1.80) (1.06) (0.93) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............ $ 13.36 $ 13.42 $ 11.37 $ 11.65 $ 10.80 =========== =========== =========== =========== =========== Total Return (%)(a) ......................... 14.5 9.3 (1.7) 12.2 0.7 Ratio of Operating Expenses to Average Net Assets (%) ............................ 0.96(c) 1.18 1.19 1.21 1.24 Ratio of Net Investment Income to Average Net Assets (%) ............................ 8.23 7.36 8.33 9.09 8.73 Portfolio Turnover Rate (%) ................. 52 37 33 19 13 Net Assets, End of the Year (000) ........... $ 90,729 $ 144,706 $ 127,306 $ 124,869 $ 116,986
(a) A sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, the expense ratio would have been higher. (d) Per share net investment income has been calculated using the average shares outstanding during the year. 18 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ---------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year ....... $ 12.99 $ 13.36 $ 13.42 $ 11.37 $ 11.65 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........................ 0.95 0.91 0.95 0.94 0.90(d) Net Realized and Unrealized Gain (Loss) on Investments ............................. 0.73 0.21 (1.30) 0.31 (0.91) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............. 1.68 1.12 (0.35) 1.25 (0.01) ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ......... (0.95) (0.91) (0.95) (0.93) (0.85) Distributions in Excess of Net Investment Income .......................... 0.00 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains (0.36) (0.15) (0.70) (0.04) 0.00 Distributions in Excess of Net Realized Capital Gains .............................. 0.00 0.00 (0.05) 0.00(a) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions .......................... (1.31) (1.06) (1.70) (0.97) (0.85) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............. $ 13.36 $ 13.42 $ 11.37 $ 11.65 $ 10.79 =========== =========== =========== =========== =========== Total Return (%)(b) .......................... 13.7 8.5 (2.5) 11.3 (0.2) Ratio of Operating Expenses to Average Net Assets (%) ............................. 1.71(c) 1.93 1.94 1.96 1.99 Ratio of Net Investment Income to Average Net Assets (%) ............................. 7.48 6.61 7.58 8.34 7.98 Portfolio Turnover Rate (%) .................. 52 37 33 19 13 Net Assets, End of the Year (000) ............ $ 93,408 $ 146,083 $ 134,049 $ 127,723 $ 120,200
(a) Amount is less than $0.01 (b) A contingent deferred sales charge is not reflected in total return calculations. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, the expense ratio would have been higher. (d) Per share net investment income has been calculated using the average shares outstanding during the year. See accompanying notes to financial statements. 19 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C ----------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ...... $ 12.99 $ 13.35 $ 13.41 $ 11.36 $ 11.64 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ....................... 0.95 0.91 0.95 0.94 0.90(d) Net Realized and Unrealized Gain (Loss) on Investments ............................ 0.72 0.21 (1.30) 0.31 (0.91) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............ 1.67 1.12 (0.35) 1.25 (0.01) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........ (0.95) (0.91) (0.95) (0.93) (0.85) Distributions in Excess of Net Investment Income ......................... 0.00 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains (0.36) (0.15) (0.70) (0.04) 0.00 Distributions in Excess of Net Realized Capital Gains ............................. 0.00 0.00 (0.05) 0.00(a) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ......................... (1.31) (1.06) (1.70) (0.97) (0.85) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ............ $ 13.35 $ 13.41 $ 11.36 $ 11.64 $ 10.78 ========== ========== ========== ========== ========== Total Return (%)(b) ......................... 13.6 8.5 (2.5) 11.3 (0.2) Ratio of Operating Expenses to Average Net Assets (%) ............................ 1.71(c) 1.93 1.94 1.96 1.99 Ratio of Net Investment Income to Average Net Assets (%) ............................ 7.48 6.61 7.58 8.34 7.98 Portfolio Turnover Rate (%) ................. 52 37 33 19 13 Net Assets, End of the Year (000) ........... $ 31,746 $ 56,515 $ 45,457 $ 40,265 $ 37,208
(a) Amount is less than $0.01. (b) A sales charge and contingent deferred sales charge are not reflected in total return calculations. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, the expense ratio would have been higher. (d) Per share net investment income has been calculated using the average shares outstanding during the year. 20 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period. Class Y ---------------------------- December 1(a) through Year Ended December 31, December 31, 1999 2000 ------------- ------------ Net Asset Value, Beginning of the Period ......... $ 11.45 $ 11.65 -------- -------- Income From Investment Operations Net Investment Income ............................ 0.86 0.96(d) Net Realized and Unrealized Gain (Loss) on Investments ................................. (0.56) (0.84) -------- -------- Total From Investment Operations ................. 0.30 0.12 -------- -------- Less Distributions Dividends From Net Investment Income ............. (0.10) (0.96) Distributions in Excess of Net Investment Income .............................. 0.00 0.00 Distributions From Net Realized Capital Gains ..................... 0.00 0.00 Distributions in Excess of Net Realized Capital Gains .................................. 0.00(b) 0.00 -------- -------- Total Distributions .............................. (0.10) (0.96) -------- -------- Net Asset Value, End of the Period ............... $ 11.65 $ 10.81 ======== ======== Total Return (%) ................................. 2.7 1.0 Ratio of Operating Expenses to Average Net Assets (%) ................................. 0.96(c) 0.90 Ratio of Net Investment Income to Average Net Assets (%) ......................... 9.34(c) 9.07 Portfolio Turnover Rate (%) ...................... 19 13 Net Assets, End of the Period (000) .............. $ 0.2 $ 335 (a) Commencement of operations. (b) Amount is less than $0.01. (c) Computed on an annualized basis. (d) Per share net investment income has been calculated using the average shares outstanding during the year. See accompanying notes to financial statements. 21 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Strategic Income Fund (the "Fund") is a series of Nvest Funds Trust I, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks high current income with a secondary objective of capital growth. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased prior to May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end load, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of all classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. 22 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 b. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. Since the values of investment securities are presented at the foreign exchange rates prevailing at the end of the period, it is not practical to isolate that portion of the results of operations arising from changes in exchange rates from fluctuations arising from changes in market prices of the investment securities. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities resulting from changes in the exchange rates. c. 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 original issue discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The accumulative effect of adopting this accounting principle will not have an impact on total net assets but will result in a reclassification between cost of securities held and net unrealized appreciation/depreciation. d. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains at least annually. Accordingly, no provision for federal income tax has been made. e. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for mortgage backed securities, real estate investment trust adjustments, organizational costs, foreign currency gains and losses and differences in income accrual for certain holdings for book and tax purposes. Permanent book and tax basis differences will result in reclassifications to capital accounts. 23 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 f. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. g. Organization Expense. Costs incurred in 1995 in connection with the Fund's organization and initial registration amounting to $67,920 were paid by the Fund and were fully amortized over 60 months beginning May 1, 1995. 2. Purchases and Sales of Securities. For the year ended December 31, 2000 purchases and sales of securities (excluding short-term investments) were $22,993,816 and $46,362,203 respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.65% of the first $200 million of the Fund's average daily net assets and 0.60% of such assets in excess of $200 million reduced by the payment to the Fund's investment subadviser, Loomis Sayles & Company, L.P. ("Loomis Sayles") at the rate of 0.35% of the first $200 million of the Fund's average daily net assets and 0.30% of such assets in excess of $200 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Loomis Sayles under the management and subadvisery agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 860,735 Loomis Sayles 960,736 ---------- $1,821,471 ========== The effective management fee for the year ended December 31, 2000 was 0.63 %. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $104,135 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the fund for out of pocket expenses. Class Y 24 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $395,755 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $307,109 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $311,665 and $98,150 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B shares and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $934,995 and $294,450 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors of shares of the Fund during the year ended December 31, 2000 amounted to $659,041. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 25 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 4. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class A Shares Amount Shares Amount - -------- ------------ ------------ ------------ ------------ Shares sold ....................................... 1,785,154 $ 20,839,875 2,213,180 $ 25,281,376 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 736,089 8,549,347 701,656 7,899,022 Distributions from net realized gain ............ 31,800 362,837 0 0 ------------ ------------ ------------ ------------ 2,553,043 29,752,059 2,914,836 33,180,398 Shares repurchased ................................ (3,031,274) (35,226,587) (2,796,975) (31,690,868) ------------ ------------ ------------ ------------ Net increase (decrease) ........................... (478,231) $ (5,474,528) 117,861 $ 1,489,530 ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class B Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ....................................... 1,466,960 $ 17,085,174 2,029,777 $ 23,008,589 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 587,333 6,820,440 550,085 6,189,182 Distributions from net realized gain ............ 28,144 321,125 0 0 ------------ ------------ ------------ ------------ 2,082,437 24,226,739 2,579,862 29,197,771 Shares repurchased ................................ (2,909,430) (33,741,391) (2,408,804) (27,321,187) ------------ ------------ ------------ ------------ Net increase (decrease) ........................... (826,993) $ (9,514,652) 171,058 $ 1,876,584 ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1999 2000 ---------------------------- ---------------------------- Class C Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ....................................... 505,563 $ 5,852,124 602,299 $ 6,832,461 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 220,279 2,555,812 200,658 2,257,365 Distributions from net realized gain ............ 9,937 113,282 0 0 ------------ ------------ ------------ ------------ 735,779 8,521,218 802,957 9,089,826 Shares repurchased ................................ (1,278,107) (14,730,584) (812,058) (9,201,152) ------------ ------------ ------------ ------------ Net increase (decrease) ........................... (542,328) $ (6,209,366) (9,101) $ (111,326) ------------ ------------ ------------ ------------
26 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
December 1, 1999 (a) to Year Ended December 31, 1999 December 31, 2000 ---------------------------- ---------------------------- Class Y Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ....................................... 15 $ 167 33,074 $ 374,798 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 0 0 1,129 12,412 ------------ ------------ ------------ ------------ 15 167 34,203 387,210 Shares repurchased ................................ 0 0 (3,250) (37,413) ------------ ------------ ------------ ------------ Net increase (decrease) ........................... 15 $ 167 30,953 $ 349,797 ------------ ------------ ------------ ------------ Increase (decrease) derived from capital shares transactions ............................. (1,847,537) $(21,198,379) 310,771 $ 3,604,585 ============ ============ ============ ============
(a) Commencement of operations. 5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected by the lender from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund loaned securities having a market value of $8,264,831 and collateralized by cash in the amount of $9,166,625 which was invested in a short-term investment. 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Strategic Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Strategic Income Fund (the "Fund"), a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 28 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 15,718,368.983 139,318.194 355,876.671 16,213,563.848 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes -------------- ------------- --------------- -------------- 15,762,204.445 122,383.515 328,975.888 16,213,563.848 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total --------------- ------------- --------------- Graham T. Allison, Jr. 231,271,092.896 7,321,155.651 238,592,248.547 Daniel M. Cain 231,282,396.662 7,309,851.885 238,592,248.547 Kenneth J. Cowan 231,302,361.351 7,289,887.196 238,592,248.547 Richard Darman 231,295,499.277 7,296,749.270 238,592,248.547 Sandra O. Moose 231,298,397.966 7,293,850.581 238,592,248.547 John A. Shane 231,356,664.464 7,235,584.083 238,592,248.547 Peter S. Voss 231,288,476.713 7,303,771.834 238,592,248.547 Pendleton P. White 231,230,527.401 7,361,721.146 238,592,248.547 John T. Hailer 231,453,185.052 7,139,063.495 238,592,248.547 29 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 30 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 31 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Yield - The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission. Maturity - Refers to the period of time before principal repayment on a bond is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. Duration - A measure, stated in years, of a bond's sensitivity to interest rates. Duration allows you to compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a bond is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a bond with a duration of 4 years should rise in value 4%. Conversely, the bond should decline 4% in value if interest rates rise 1%. Treasuries - Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). Municipal Bond - A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and, in most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. A small portion of income may be subject to federal and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. 32 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. ---------------- PRESORT Nvest Funds(SM) STANDARD Where The Best Minds Meet(R) U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 ---------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvest.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs ST56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Star Value Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST STAR VALUE FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Star Value Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. The Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged, and has no expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9425 12/31/91 12711 11980 12/31/92 14825 13972 12/31/93 17343 16346 12/31/94 17101 16118 12/31/95 22628 21327 12/31/96 28581 26937 12/31/97 34567 32580 12/31/98 37011 34883 12/31/99 34450 32469 12/31/00 35147 33126 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or a loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. *Restructured as an Nvest Star fund in February 2000. 1 NVEST STAR VALUE FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------ Class A (Inception 11/28/95) 1 Year 5 Years 10 Years Net Asset Value1 2.03% 9.21% 13.39% With Maximum Sales Charge(2) -3.79 7.91 12.73 - ------------------------------------------------------------------------------------------------------ Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1) 1.28% 8.39% 10.31% With CDSC(3) -3.73 8.15 10.31 - ------------------------------------------------------------------------------------------------------ Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) 1.13% 8.38% 11.90% With Maximum Sales Charge and CDSC(3) -0.84 8.16 11.72 - ------------------------------------------------------------------------------------------------------ Class Y (Inception 3/31/94) 1 Year 5 Years Since Inception Net Asset Value(1) 2.57% 9.53% 11.94% - ------------------------------------------------------------------------------------------------------
Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. Russell 1000 Value Index(4) 7.01% 16.91% 17.37% 16.11% 20.24% 18.07% Morningstar Large Cap Value Average(5) 5.47 13.91 14.95 14.08 17.05 15.43 Lipper Multi-Cap Value Average(6) 8.86 13.71 15.14 13.92 16.53 15.01 - -------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Loomis Sayles, the Fund's manager since July 1, 1996, was joined by Harris Associates; Vaughan, Nelson and Westpeak upon the restructuring of the Fund to a multi-manager Nvest Star fund in February 2000. Results for earlier periods reflect performance under previous subadvisers. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. Class C shares for accounts established on or after December 1, 2000 are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000 are not subject to the 1.00% sales charge. (4) Russell 1000 Value Index is an unmanaged index of the largest 1000 U.S. companies within the Russell 3000, selected for their value orientation. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. (5) Morningstar Large Cap Value Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (6) Lipper Multi-Cap Value Average is the average performance without sales charges at net asset value of mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class B since-inception return is calculated from 9/30/93. 2 NVEST STAR VALUE FUND Performance Overview - -------------------------------------------------------------------------------- For the 12 months ended December 31, 2000, Nvest Star Value Fund's Class A shares had a total return of 2.03% based on net asset value. The Fund's benchmark, the Russell 1000 Value Index, returned 7.01% for the same period. The Star concept is designed to broaden diversification Nvest Star Value Fund was restructured as an Nvest Star fund in February 2000, when it took its present name. The Fund is now composed of four portfolio segments, each managed by a different investment management team. The extra diversification of employing four Best Minds that don't always think alike is designed to balance out market swings over time. Each shareholder's assets are exposed to different investment styles and strategies, as well as spread among a broad array of individual securities. After a long absence, value is back in the spotlight The year began with a pattern carried over from 1999, as high-growth technology stocks reached all-time highs. However, the mood of the market shifted as the year progressed. Stocks with high valuations -- most of them leaders in new technologies -- led the decline as the economy slowed. Value stocks -- usually companies in more traditional market sectors -- became more attractive to investors. (Value stocks are defined as shares selling at prices that analysts believe do not reflect the full value of a company's assets or growth potential.) The downturn in growth stocks eventually spread to the broader market, and value stocks were volatile during the third quarter. However, for the year 2000 as a whole, value stocks generated positive returns, while many other areas of the market declined. The economy is slower In the course of last year, the Federal Reserve Board continued the program it began in 1999, raising interest rates in an effort to slow the pace of economic growth and reduce inflationary pressures. After boosting rates three times in the first half of 2000, the Fed took no action for the rest of the year. By the fourth quarter, it became clear that the growth rate was slowing. According to figures announced in December, the annual growth rate of the U.S. economy dropped from 5.6% in the second quarter to 2.2% in the third quarter. Concerns about inflation began to be replaced by the threat of a possible recession, and the Fed began to hint that it would reverse its policies and ease credit in 2001. 3 NVEST STAR VALUE FUND - -------------------------------------------------------------------------------- The Fund's investment managers use different strategies Each of Nvest Star Value Fund's portfolio segments is diversified by sector and by industry, and companies of virtually every size are represented, but a search for value is the common denominator. Harris/Oakmark concentrates on mid- and large-sized companies priced at a deep discount. Vaughan, Nelson, Scarborough and McCullough (VNSM) looks for stocks selling at low prices relative to their dividend yield. Westpeak relies on research and discipline to select stocks based on value and growth potential, while Loomis Sayles focuses on large-cap stocks with low valuations and strong earnings prospects. Harris/Oakmark's deep discount approach was a positive this year. Technology and consumer discretionary companies (radio, telephone, advertising and restaurants) accounted for a large portion of this segment's assets. In the VNSM segment, carefully selected stocks in healthcare, financial services and oil conglomerates were positives this year. However, the utility and consumer discretionary areas proved disappointing. The largest sectors in the Westpeak segment were technology and healthcare stocks, with relatively little emphasis in the consumer discretionary, financial services and utility sectors. The financial services area of this portfolio segment was one of the biggest contributors to performance, even though it was a relatively small position. However, overall results for this segment were negative this year. The best results in the Loomis Sayles segment in 2000 came from its investments in healthcare, financial services and consumer staples. Its holdings in technology and consumer discretionary stocks did not perform as well, but the segment as a whole provided positive results. The outlook for value stocks continues to be positive Going forward, slowing corporate profits are likely to keep the market volatile, at least in the short term. In this kind of environment, more defensive businesses -- including food, some retailers and utility companies -- may perform better than some of the higher risk/return areas of the market. Typically, during times of uncertainty, investors tend to seek safe havens and place greater emphasis on quality and value. 4 NVEST STAR VALUE FUND - -------------------------------------------------------------------------------- It is also important to bear in mind that slower growth is not the same as a recession. What's more, the Federal Reserve seems to have shifted to a more accommodative policy, beginning with the rate cut of 50 basis points (0.5%), announced on January 3, 2001. In the coming year, if the economy grows at a slow, non-inflationary rate, we believe value stocks will continue to be popular with investors, which should benefit shareholders of Nvest Star Value Fund. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Star Value Fund may invest in foreign securities, which have special risks. Value stocks can fall out of favor with investors and may underperform growth stocks during certain market conditions. These risks affect your investment's value. Share price and return will vary, and you may have a gain or loss when you sell your shares. Top 10 Portfolio Sectors -- 12/31/00 % of Sector Net Assets 1. Banks 10.2 2. Financial Services 6.1 3. Insurance 5.9 4. Telecommunications 5.9 5. Computer Software & Services 4.7 6. Drugs & Healthcare 4.2 7. Domestic Oil 4.0 8. Consumer Goods & Services 3.2 9. Investment Banking/Broker/Management 2.7 10. Computer Hardware 2.6 Portfolio holdings and asset allocations will vary. Top 10 Portfolio Holdings -- 12/31/00 % of Company Net Assets 1. Exxon Mobil Corp. 3.6 2. Citigroup, Inc. 3.2 3. Electronic Data Systems Corp. 2.1 4. Toys R Us, inc. 2.1 5. Wells Fargo & Co. 1.8 6. ACE, Ltd. 1.7 7. Washington Mutual, Inc. 1.7 8. Merck & Co. 1.7 9. American International Group, Inc. 1.7 10. Mattel, Inc. 1.6 Portfolio holdings and asset allocations will vary. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Common Stock -- 98.8% of Total Net Assets Shares Description Value (a) - -------------------------------------------------------------------------------- Aerospace -- 0.9% 9,300 Boeing Co. ........................................ $ 613,800 10,000 Honeywell International, Inc. ..................... 473,125 9,800 United Technologies Corp. ......................... 770,525 ----------- 1,857,450 ----------- Aerospace/Defense -- 0.7% 12,000 General Dynamics Corp. ............................ 936,000 7,000 Northrop Grumman Corp. ............................ 581,000 ----------- 1,517,000 ----------- Airlines -- 0.3% 3,500 AMR Corp. (c) ..................................... 137,156 11,900 Delta Air Lines, Inc. ............................. 597,232 ----------- 734,388 ----------- Automotive -- 1.0% 90,667 Ford Motor Co. .................................... 2,125,008 ----------- Auto & Related -- 0.4% 17,200 General Motors Corp. .............................. 876,125 ----------- Banks -- 10.2% 10,300 BancWest Corp. .................................... 269,088 43,750 Bank of New York Co., Inc. ........................ 2,414,453 76,050 Chase Manhattan Corp. ............................. 3,455,522 131,599 Citigroup, Inc. ................................... 6,719,774 13,755 Commerce Bancshares, Inc. ......................... 584,587 61,000 FleetBoston Financial Corp. ....................... 2,291,312 24,200 Golden State Bancorp, Inc. ........................ 760,787 3,400 Northern Trust Corp. .............................. 277,313 14,000 PNC Bancorp, Inc. ................................. 1,022,875 3,100 UnionBanCal Corp. ................................. 74,594 67,500 Wells Fargo & Co. ................................. 3,758,906 ----------- 21,629,211 ----------- Banks & Thrifts -- 0.3% 20,000 Bank One Corp. .................................... 732,500 ----------- Beverages-Alcoholic -- 0.9% 1,100 Adolph Coors Co., Class B ......................... 88,344 35,700 Anheuser-Busch Co., Inc. .......................... 1,624,350 1,900 Brown-Forman Corp., Class B ....................... 126,350 ----------- 1,839,044 ----------- Broadcasting -- 0.3% 45,000 AT&T Corp., Liberty Media Group, Class A (c) ........................................ 610,313 ----------- Building & Related -- 2.2% 15,900 Lennar Corp. ....................................... 576,375 50,000 Martin Marietta Materials, Inc. .................... 2,115,000 85,000 USG Corp. .......................................... 1,912,500 ----------- 4,603,875 ----------- Chemicals-Major -- 0.4% 21,100 Dow Chemical Co. ................................... 772,788 ----------- Chemicals-Specialty -- 0.6% 5,500 Ashland, Inc. ...................................... 197,395 4,100 FMC Corp. .......................................... 293,919 17,000 Praxair, Inc. ...................................... 754,375 ----------- 1,245,689 ----------- Communication Services -- 0.6% 59,500 Motorola, Inc. ..................................... 1,204,875 ----------- Computer Hardware -- 2.6% 23,700 Apple Computer, Inc. ............................... 352,537 38,200 Cisco Systems, Inc. (c) ............................ 1,461,150 22,050 Compaq Computer Corp. .............................. 331,853 36,700 Dell Computer Corp. (c) ............................ 639,956 4,400 EMC Corp. (c) ...................................... 292,600 43,200 Hewlett-Packard Co. ................................ 1,363,500 7,100 International Business Machines Corp................ 603,500 12,800 Sun Microsystems, Inc. (c) ......................... 356,800 ----------- 5,401,896 ----------- Computer Software & Services -- 4.8% 78,000 Electronic Data Systems Corp. ..................... 4,504,500 3,500 Jack Henry & Associates, Inc. ..................... 217,437 41,800 Microsoft Corp. (c) ............................... 1,813,075 160,000 NOVA Corp. (c) .................................... 3,190,000 8,300 Sybase, Inc. (c) .................................. 164,444 3,100 VERITAS Software Corp. ............................ 271,250 ----------- 10,160,706 ----------- Consumer Durables -- 1.1% 70,000 Maytag Corp. ...................................... 2,261,875 10,400 Steelcase, Inc. ................................... 144,300 ----------- 2,406,175 ----------- Consumer Goods & Services -- 3.2% 14,600 Black & Decker Corp. .............................. 573,050 18,500 Colgate-Palmolive Co. ............................. 1,194,175 11,000 Kimberly-Clark Corp. .............................. 777,590 240,000 Mattel, Inc. ...................................... 3,465,600 28,400 Newell Rubbermaid, Inc. ........................... 646,100 ----------- 6,656,515 ----------- 6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Diversified Conglomerates -- 0.4% 108,300 U.S. Industries, Inc. ............................. $ 866,400 ----------- Domestic Oil -- 4.0% 5,250 Chevron Corp. ..................................... 443,297 87,600 Exxon Mobil Corp. ................................. 7,615,725 7,500 Texaco, Inc. ...................................... 465,937 ----------- 8,524,959 ----------- Drugs & Healthcare -- 4.2% 31,600 Bristol-Myers Squibb Co. .......................... 2,336,425 38,100 Merck & Co. ....................................... 3,567,112 39,400 Pfizer, Inc. ...................................... 1,812,400 14,280 Pharmacia & Upjohn, Inc. .......................... 871,080 6,300 Schering-Plough Corp. ............................. 357,525 ----------- 8,944,542 ----------- Electric Utilities -- 1.7% 18,000 Constellation Energy Group ........................ 811,125 10,000 Duke Power Co. .................................... 852,500 10,500 FPL Group, Inc. ................................... 753,375 5,800 PPL Corp. ......................................... 262,088 21,700 Reliant Energy, Inc. .............................. 939,881 ----------- 3,618,969 ----------- Electrical Equipment -- 0.0% 6,700 KEMET Corp. (c) .................................. 101,338 ----------- Electronics -- 2.4% 16,900 AVX Corp. ........................................ 276,737 3,200 Corning, Inc. .................................... 169,000 12,500 Emerson Electric Co. ............................. 985,156 14,000 Koninklijke (Royal) Philips Electronics NV (ADR) ............................. 507,500 17,300 Molex, Inc. ...................................... 614,150 10,700 Nortel Networks Corp. ............................ 343,069 14,900 STMicroelectronics NV ............................ 637,906 35,000 Teradyne, Inc. (c) ............................... 1,303,750 10,900 Vishay Intertechnology, Inc. ..................... 164,863 ----------- 5,002,131 ----------- Electronics-Equipment -- 0.1% 4,500 Deere & Co. ...................................... 206,156 ----------- Energy -- 0.6% 19,000 Exelon Corp. ..................................... 1,333,990 ----------- Energy Reserves -- 0.1% 7,500 Occidental Petroleum Corp. ....................... 181,875 ----------- Financial Services -- 6.1% 120,000 Equifax, Inc. .................................... 3,442,500 6,300 Erie Indemnity Co. ............................... 187,819 37,600 Fannie Mae ....................................... 3,261,800 26,000 Firstar Corp. .................................... 604,500 7,500 Hartford Financial Services Group, Inc ....................................... 529,687 13,000 Household International, Inc. .................... 715,000 3,200 J.P. Morgan & Co., Inc. .......................... 529,600 68,800 Washington Mutual, Inc. .......................... 3,650,700 ----------- 12,921,606 ----------- Food & Beverages -- 1.7% 15,300 Pepsi Bottling Group, Inc. ....................... 611,044 40,200 PepsiCo, Inc. .................................... 1,992,412 5,000 Sysco Corp. ...................................... 150,000 34,000 The Kroger Co. ................................... 920,125 ----------- 3,673,581 ----------- Foods -- 0.8% 16,100 Archer-Daniels-Midland Co. ....................... 241,500 15,000 Quaker Oats Co. .................................. 1,460,625 ----------- 1,702,125 ----------- Healthcare-Managed Care -- 0.2% 6,800 UnitedHealth Group, Inc. ......................... 417,350 ----------- Health Care-Products -- 0.8% 12,200 DENTSPLY International, Inc. ......................... 477,325 11,300 Johnson & Johnson, Inc. .............................. 1,187,206 ----------- 1,664,531 ----------- Health Care-Services -- 2.1% 60,800 HCA-The Healthcare Co. ............................... 2,675,808 36,600 Tenet Healthcare Corp. (c) ........................... 1,626,412 1,200 Wellpoint Health Networks, Inc. (c) .................. 138,300 ----------- 4,440,520 ----------- Home Builders -- 0.1% 5,900 Centex Corp. ......................................... 221,619 ----------- Industrial Parts -- 0.1% 3,200 ITT Industries, Inc. ................................. 124,000 ----------- Information Services -- 1.5% 3,800 Automatic Data Processing, Inc. ...................... 240,587 110,000 Ceridian Corp. ....................................... 2,193,125 2,300 Convergys Corp. (c) .................................. 104,219 1,600 Omnicom Group, Inc. .................................. 132,600 6,500 SunGard Data Systems, Inc. (c) ....................... 306,312 2,500 TMP Worldwide, Inc. .................................. 137,500 5,500 West Teleservices Corp. .............................. 154,688 ----------- 3,269,031 ----------- See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Insurance -- 5.9% 86,500 ACE, Ltd. ............................................ $ 3,670,844 28,000 American General Corp. ............................... 2,282,000 36,000 American International Group, Inc. ................... 3,548,250 60,000 Conseco, Inc. ........................................ 791,250 22,800 John Hancock Financial Services, Inc. ................ 857,850 4,900 Marsh & McLennan Co., Inc. ........................... 573,300 7,500 XL Capital Ltd. ...................................... 655,312 ----------- 12,378,806 ----------- Internet -- 0.1% 6,100 CNET Networks, Inc. (c) .............................. 97,505 4,800 Inktomi Corp. (c) .................................... 85,800 7,700 Vitria Technology, Inc. .............................. 59,675 ----------- 242,980 ----------- Investment Banking/Broker/Management -- 2.7% 3,900 A.G. Edwards, Inc. ................................... 185,006 16,000 Lehman Brothers Holdings, Inc. ....................... 1,082,000 33,800 Merrill Lynch & Co., Inc. ............................ 2,304,738 15,800 Morgan Stanley Dean Witter & Co. ..................... 1,252,150 7,500 The Goldman Sachs Group, Inc. ........................ 802,031 --------- 5,625,925 --------- Leisure -- 0.9% 69,050 The Walt Disney Co. .................................. 1,998,134 --------- Life Insurance -- 1.1% 14,400 CIGNA Corp. .......................................... 1,905,120 7,400 The MONY Group, Inc. ................................. 365,837 --------- 2,270,957 --------- Machinery -- 0.4% 13,500 Applied Materials, Inc. .............................. 515,532 10,100 Dover Corp. .......................................... 409,681 --------- 925,213 --------- Manufacturing -- 0.4% 6,200 Minnesota Mining & Manufacturing Co. ............... 747,100 ---------- Manufacturing-Diversified -- 2.3% 60,000 Cooper Industries, Inc. ............................ 2,756,250 44,400 General Electric Co. ............................... 2,128,425 ---------- 4,884,675 ---------- Medical Products & Supplies -- 1.9% 39,050 Baxter International, Inc. ......................... 3,448,603 4,700 Cardinal Health, Inc. .............................. 468,238 ---------- 3,916,841 ---------- Office Furnishings & Supplies -- 0.3% 10,000 Avery Dennison Corp. ............................... $ 548,750 ---------- Oil & Gas-Drilling Equipment -- 0.6% 17,000 Baker Hughes, Inc. ................................. 706,563 3,200 ENSCO International, Inc. .......................... 109,000 10,000 Transocean Sedco Forex, Inc. ....................... 460,000 ---------- 1,275,563 ---------- Oil & Gas-Major Integrated -- 2.1% 20,300 BP Amoco PLC (ADR) ................................. 971,863 22,800 Coastal Corp. ...................................... 2,013,525 33,000 Conoco, Inc., Class A .............................. 944,625 16,500 Santa Fe International Corp. ....................... 529,031 ---------- 4,459,044 ---------- Oil & Gas-Refining/Marketing -- 0.4% 26,400 Ultramar Diamond Shamrock .......................... 815,100 ---------- Paper & Forest Products -- 0.7% 21,500 International Paper Co. ............................ 877,469 10,000 Weyerhaeuser Co. ................................... 507,500 ---------- 1,384,969 ---------- Pollution Control -- 1.1% 86,200 Waste Management, Inc. ............................. 2,392,050 ---------- Property & Casualty Insurance -- 0.8% 10,600 Loews Corp. ........................................ 1,097,762 4,100 MGIC Investment Corp. .............................. 276,494 1,300 PMI Group, Inc. .................................... 87,994 2,500 Radian Group, Inc. ................................. 187,656 ---------- 1,649,906 ---------- Publishing -- 1.0% 20,000 Gannett Co. ........................................ 1,261,250 15,500 McGraw-Hill Co., Inc. .............................. 908,687 ---------- 2,169,937 ---------- Restaurants -- 2.1% 20,000 Harrahs Entertainment, Inc. (c) .................... 527,500 15,000 McDonald's Corp. ................................... 510,000 100,000 Tricon Global Restaurants, Inc. (c) ................ 3,300,000 ---------- 4,337,500 ---------- Retail -- 0.4% 34,900 Family Dollar Stores, Inc. ......................... 748,169 ---------- Retail-Apparel -- 1.7% 90,000 Jones Apparel Group, Inc. (c) ...................... 2,896,875 10,800 Liz Claiborne, Inc. ................................ 449,550 10,600 The Limited, Inc. .................................. 180,862 ---------- 3,527,287 ---------- 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Common Stock -- continued Shares Description Value (a) - -------------------------------------------------------------------------------- Retail-Department Store -- 0.8% 34,000 Federated Department Stores, Inc. (c) .............. $1,190,000 17,700 May Department Stores Co. .......................... 579,675 ---------- 1,769,675 ---------- Retail-General Merchandise -- 1.1% 29,300 Sears, Roebuck & Co. ............................... 1,018,175 32,000 Target Corp. ....................................... 1,032,000 6,300 Wal-Mart Stores, Inc. .............................. 334,687 ---------- 2,384,862 ---------- Retail-Specialty -- 3.3% 10,700 Caremark Rx, Inc. (c) .............................. 145,119 290,000 Office Depot, Inc. (c) ............................. 2,066,250 8,200 Tiffany & Co. ...................................... 259,325 268,900 Toys R Us, Inc. (c) ................................ 4,487,268 ---------- 6,957,962 ---------- Savings & Loan -- 0.4% 11,700 Golden West Financial Corp. ........................ 789,750 ---------- Semiconductors -- 0.5% 2,800 Analog Devices ..................................... 143,325 31,000 Arrow Electronics, Inc. (c) ........................ 887,375 4,400 Dallas Semiconductor Corp. ......................... 112,750 ---------- 1,143,450 ---------- Services-Commercial & Consumer -- 1.2% 260,000 Cendant Corp. (c) .................................. 2,502,500 ---------- Services-Data Processing -- 0.5% 19,000 First Data Corp. ................................... 1,001,063 ---------- Telecommunications -- 5.9% 108,000 AT&T Corp. ........................................... 1,869,750 77,300 BellSouth Corp. ...................................... 3,164,469 34,000 CenturyTel, Inc. ..................................... 1,215,500 175,000 Citizens Communications Co. .......................... 2,296,875 6,600 Qwest Communications International, Inc. (c) ......... 270,600 31,900 SBC Communications, Inc. ............................. 1,523,225 30,400 Verizon Communications, Inc. ......................... 1,523,800 44,000 WorldCom, Inc. ....................................... 618,750 ---------- 12,482,969 ---------- Telecommunications-Long Distance -- 0.3% 33,800 Sprint Corp. ........................................... 686,563 ------------ Tobacco -- 0.5% 24,000 Philip Morris Companies, Inc. .......................... 1,056,000 ------------ Total Common Stock (Identified Cost $178,902,469) ...... 208,661,981 ---------- 464,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $464,271 on 1/02/2001, collateralized by $460,000 U.S. Treasury Note 6.500% due 2/28/2002 valued at $475,087 .......................... $ 464,000 ---------- 647,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $647,377 on 1/02/2001, collateralized by $505,000 U.S. Treasury Bond 7.875% due 2/15/2021 valued at $660,466 .......................... 647,000 ---------- 3,219,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.85% to be repurchased at $3,221,092 on 1/02/2001, collateralized by $3,145,000 U.S. Treasury Note 6.375% due 6/30/2002 valued at $3,287,604 ........................ 3,219,000 ---------- 910,465 Associates Corp. of North America, 6.500%, 1/02/2001 ..................................... 910,465 ---------- Total Short Term Investments (Identified Cost $5,240,465) .......................... 5,240,465 ---------- Total Investments -- 101.3% (Identified Cost $184,142,934) (b) .................... 213,902,446 Other assets less liabilities ......................... (2,731,729) ----------- Total Net Assets -- 100% .............................. $211,170,717 =========== (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost of $185,529,817 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 ................... $43,643,099 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ................... (15,270,470) ----------- Net unrealized appreciation ......................... $ 28,372,629 ============ (c) Non-income producing security. See accompanying notes to financial statements. 9 STATEMENT OF ASSETS & LIABILITIES December 31, 2000
ASSETS Investments at value (Identified cost $184,142,934)................. $ 213,902,446 Cash................................................................ 7,887 Receivable for: Fund shares sold................................................. 198,210 Securities sold.................................................. 2,519,922 Dividends and interest........................................... 219,720 ------------- 216,848,185 LIABILITIES Payable for: Securities purchased............................................. $ 3,064,231 Fund shares redeemed............................................. 2,239,819 Accrued expenses: Management fees.................................................. 132,081 Transfer agent................................................... 75,750 Deferred trustees' fees.......................................... 89,547 Accounting and administrative.................................... 6,382 Other............................................................ 69,658 ------------- 5,677,468 ------------- NET ASSETS............................................................. $ 211,170,717 ============= Net Assets consist of: Paid in capital..................................................... $ 195,244,494 Undistributed (overdistributed) net investment (loss)............... (50,396) Accumulated net realized gains (losses)............................. (13,782,893) Unrealized appreciation (depreciation) on investments - net......... 29,759,512 ------------- NET ASSETS............................................................. $ 211,170,717 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($154,178,892 / 20,295,263 shares of beneficial interest).......... $ 7.60 ============= Offering price per share (100 / 94.25 of $7.60)........................ $ 8.06 * ============= Net asset value and offering price of Class B shares ($45,364,372 / 6,286,699 shares of beneficial interest)............. $ 7.22** ============= Net asset value of Class C shares ($2,495,546 / 345,874 shares of beneficial interest)................ $ 7.22** ============= Offering price per share (100 / 99.00 of $7.22)........................ $ 7.29 ============= Net asset value, offering and redemption price of Class Y shares ($9,131,907 / 1,200,080 shares of beneficial interest).............. $ 7.61 =============
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 10 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000
INVESTMENT INCOME Dividends (net of foreign taxes of $1,488).......................... $ 3,430,209 Interest............................................................ 412,911 ------------- 3,843,120 Expenses Management fees.................................................. $ 1,692,812 Service fees - Class A........................................... 425,327 Service and distribution fees - Class B......................... 459,664 Service and distribution fees - Class C.......................... 26,749 Trustees' fees and expenses...................................... 15,763 Accounting and administrative.................................... 78,585 Custodian........................................................ 191,673 Transfer agent - Class A, Class B, Class C....................... 820,769 Transfer agent - Class Y......................................... 8,773 Audit and tax services........................................... 37,738 Legal............................................................ 14,275 Printing......................................................... 162,806 Registration..................................................... 48,743 Miscellaneous.................................................... 5,472 ------------- Total expenses before reductions.................................... 3,989,149 Less reductions..................................................... (60,629) 3,928,520 ------------- ------------- Net investment income (loss)........................................ (85,400) ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net........................... (8,446,134) Unrealized appreciation (depreciation) on investments - net......... 8,942,292 ------------- Net gain (loss) on investment transactions.......................... 496,158 ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................. $ 410,758 =============
See accompanying notes to financial statements. 11 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ----------------------------------- 1999 2000 --------------- ---------------- FROM OPERATIONS Net investment income (loss)........................................ $ 605,873 $ (85,400) Net realized gain (loss) on investments............................. 40,961,789 (8,446,134) Net unrealized appreciation (depreciation) on investments........... (67,081,156) 8,942,292 ---------------- ---------------- Increase (decrease) in net assets from operations................... (25,513,494) 410,758 ---------------- ---------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A.......................................................... (604,075) (19,976) Class B.......................................................... 0 (5,633) Class C.......................................................... 0 (317) Class Y.......................................................... (53,329) (1,092) Net realized gain on investments Class A.......................................................... (35,285,726) 0 Class B.......................................................... (10,111,504) 0 Class C.......................................................... (584,148) 0 Class Y.......................................................... (1,629,464) 0 In excess of net realized gain Class A.......................................................... (3,757,859) 0 Class B.......................................................... (1,076,855) 0 Class C.......................................................... (62,211) 0 Class Y.......................................................... (173,535) 0 ---------------- ---------------- (53,338,706) (27,018) ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS............................. (59,686,617) (79,053,138) ---------------- ---------------- Total increase (decrease) in net assets................................ (138,538,817) (78,669,398) NET ASSETS Beginning of the year............................................... 428,378,932 289,840,115 ---------------- ---------------- End of the year..................................................... $ 289,840,115 $ 211,170,717 ================ ================ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year..................................................... $ (16,077) $ (50,396) ================ ================
12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class A ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ............... $ 8.78 $ 9.60 $ 10.14 $ 9.68 $ 7.45 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) ......................... 0.06 0.03(b) 0.03(b) 0.03 0.01 Net Realized and Unrealized Gain (Loss) on Investments .............................. 2.12 1.96 0.59 (0.71) 0.14 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ..................... 2.18 1.99 0.62 (0.68) 0.15 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ................. (0.06) (0.02) (0.02) (0.02) 0.00(e) Distributions From Net Realized Capital Gains ........ (1.30) (1.43) (1.06) (1.38) 0.00 Distributions In Excess of Net Realized Gains ........ 0.00 0.00 0.00 (0.15) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions .................................. (1.36) (1.45) (1.08) (1.55) 0.00 ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ..................... $ 9.60 $ 10.14 $ 9.68 $ 7.45 $ 7.60 ========== ========== ========== ========== ========== Total Return (%) (a) (c) ............................. 26.3 21.0 7.1 (6.9) 2.0 Ratio of Operating Expenses to Average Net Assets (%) ............................ 1.31 1.25 1.26 1.33 1.62 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) .................................... 1.31 1.25 1.26 1.33 1.59(d) Ratio of Net Investment Income to Average Net Assets (%) ............................ 0.78 0.28 0.29 0.32 0.10 Portfolio Turnover Rate (%) .......................... 64 55 75 70 129 Net Assets, End of the Year (000) .................... $ 297,581 $ 348,988 $ 317,902 $ 216,740 $ 154,179
(a) A sales charge is not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the year. (c) Effective February 28, 2000, the Fund's investment adviser entered into subadvisory agreements with four subadvisers to restructure the Fund as a Star multi-manager fund. Prior to this date the Fund's investment adviser employed a single subadviser, Loomis, Sayles & Company L.P. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (e) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class B ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year .............. $ 8.70 $ 9.47 $ 9.91 $ 9.38 $ 7.13 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) ........................ 0.01 (0.05)(b) (0.05)(b) (0.04) (0.04) Net Realized and Unrealized Gain (Loss) on Investments .................................... 2.07 1.92 0.58 (0.68) 0.13 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations .................... 2.08 1.87 0.53 (0.72) 0.09 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ................ (0.01) 0.00 0.00 0.00 0.00(e) Distributions From Net Realized Capital Gains ....... (1.30) (1.43) (1.06) (1.38) 0.00 Distributions In Excess of Net Realized Gains ....... 0.00 0.00 0.00 (0.15) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ................................. (1.31) (1.43) (1.06) (1.53) 0.00 ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year .................... $ 9.47 $ 9.91 $ 9.38 $ 7.13 $ 7.22 ========== ========== ========== ========== ========== Total Return (%) (a) (c) ............................ 25.4 20.0 6.3 (7.6) 1.3 Ratio of Operating Expenses to Average Net Assets (%) ................................... 2.06 2.00 2.01 2.08 2.37 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) .......... 2.06 2.00 2.01 2.08 2.34(d) Ratio of Net Investment Income to Average Net Assets (%) ................................... 0.03 (0.47) (0.46) (0.43) (0.65) Portfolio Turnover Rate (%) ......................... 64 55 75 70 129 Net Assets, End of the Year (000) ................... $ 48,210 $ 80,008 $ 86,243 $ 59,497 $ 45,364
(a) A contingengent deferred sales charge is not reflected in total return calculations. (b) Per share net investment loss has been calculated using the average shares outstanding during the year. (c) Effective February 28, 2000, the Fund's investment adviser entered into subadvisory agreements with four subadvisers to restructure the Fund as a Star multi-manager fund. Prior to this date the Fund's investment adviser employed a single subadviser, Loomis, Sayles & Company L.P (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (e) Amount rounds to less than $0.01 per share. 14 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class C ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year .............. $ 8.70 $ 9.46 $ 9.92 $ 9.39 $ 7.14 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) ........................ 0.01 (0.05)(b) (0.05)(b) (0.04) (0.05) Net Realized and Unrealized Gain (loss) on Investments ..................................... 2.06 1.94 0.58 (0.68) 0.13 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations .................... 2.07 1.89 0.53 (0.72) 0.08 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ................ (0.01) 0.00 0.00 0.00 0.00(e) Distributions From Net Realized Capital Gains ....... (1.30) (1.43) (1.06) (1.38) 0.00 Distributions In Excess of Net Realized Gains ....... 0.00 0.00 0.00 (0.15) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ................................. (1.31) (1.43) (1.06) (1.53) 0.00 ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year .................... $ 9.46 $ 9.92 $ 9.39 $ 7.14 $ 7.22 ========== ========== ========== ========== ========== Total Return (%) (a)(c) ............................. 25.2 20.2 6.3 (7.6) 1.1 Ratio of Operating Expenses to Average Net Assets (%) ........................... 2.06 2.00 2.01 2.08 2.40 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) .......... 2.06 2.00 2.01 2.08 2.37(d) Ratio of Net Investment Income to Average Net Assets (%) ........................... 0.03 (0.47) (0.46) (0.43) (0.68) Portfolio Turnover Rate (%) ......................... 64 55 75 70 129 Net Assets, End of the Year (000) ................... $ 3,735 $ 6,527 $ 6,445 $ 3,398 $ 2,496
(a) A sales charge and contingent deferred sales charge are not reflected in total return calculations. (b) Per share net investment loss has been calculated using the average shares outstanding during the year. (c) Effective February 28, 2000, the Fund's investment adviser entered into subadvisory agreements with four subadvisers to restructure the Fund as a Star multi-manager fund. Prior to this date the Fund's investment adviser employed a single subadviser, Loomis, Sayles & Company L.P. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (e) Amount rounds to less than $0.01 per share. See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class Y ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Year ................ $ 8.75 $ 9.55 $ 10.10 $ 9.65 $ 7.42 --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................. 0.08 0.06(a) 0.06(a) 0.06 0.05 Net Realized and Unrealized Gain (loss) on Investments ...................................... 2.10 1.95 0.59 (0.71) 0.14 --------- --------- --------- --------- --------- Total From Investment Operations ...................... 2.18 2.01 0.65 (0.65) 0.19 --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income .................. (0.08) (0.03) (0.04) (0.05) 0.00(d) Distributions From Net Realized Capital Gains ......... (1.30) (1.43) (1.06) (1.38) 0.00 Distributions In Excess of Net Realized Gains ......... 0.00 0.00 0.00 (0.15) 0.00 --------- --------- --------- --------- --------- Total Distributions ................................... (1.38) (1.46) (1.10) (1.58) 0.00 --------- --------- --------- --------- --------- Net Asset Value, End of the Year ...................... $ 9.55 $ 10.10 $ 9.65 $ 7.42 $ 7.61 ========= ========= ========= ========= ========= Total Return (%) (b) .................................. 26.4 21.3 7.4 (6.7) 2.6 Ratio of Operating Expenses to Average Net Assets (%) ............................. 1.06 1.00 1.01 1.08 1.09 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ............ 1.06 1.00 1.01 1.08 1.06(c) Ratio of Net Investment Income to Average Net Assets (%) ..................................... 1.03 0.53 0.54 0.57 0.63 Portfolio Turnover Rate (%) ........................... 64 55 75 70 129 Net Assets, End of the Year ........................... $ 12,716 $ 24,164 $ 17,789 $ 10,205 $ 9,132
(a) Per share net investment income has been calculated using the average shares outstanding during the year. (b) Effective February 28, 2000, the Fund's investment adviser entered into subadvisory agreements with four subadvisers to restructure the Fund as a Star multi-manager fund. Prior to this date the Fund's investment adviser employed a single subadviser, Loomis, Sayles & Company L.P. (c) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (d) Amount rounds to less than $0.01 per share. 16 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Star Value Fund ("the Fund"), formerly the Nvest Value Fund, is a series of Nvest Funds Trust I, a Massachusetts business trust ("the Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a reasonable long-term investment return from a combination of market appreciation and dividend income from equity securities. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares, for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadvisers, under the supervision of the Fund's Trustees. 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 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 for the Fund is increased by the accretion of discount and decreased by the amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. d. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. Permanent book and tax basis differences may result in reclassification to the capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. Each subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $283,203,796 and $361,881,875 respectively. 3a. Management Fees and Other Transactions with Affiliates. Effective February 28, 2000, the Fund's investment adviser entered into subadvisory agreements with four subadvisers to restructure the Fund as a Star multi-manager fund. Prior to this date the Fund's investment adviser had entered into a subadvisory agreement with a single subadviser, Loomis, Sayles & Company L.P. who was paid in accordance with the fee schedule set forth below. The Fund pays gross management fees to its adviser, Nvest Funds Management, L.P. ("Nvest Management"), at the annual rate of 0.75% of the first $200 million of the Fund's average daily net assets, 0.70% of the next $300 million of the Fund's average daily net assets, and 0.65% of such assets in excess of $500 million reduced by amount of any subadvisers fees paid by the Fund to its subadvisers as follows: Loomis, Sayles & Company, L.P. at the annual rate of 0.535% of the first $200 million of its segment's average daily net assets, 0.35% of the next $300 million of such assets and 0.30% of such assets in excess of $500 million; Vaughan, Nelson Scarborough & McCullough, L.P. at the annual rate of 0.50% of the first $25 million of its segments average daily net assets, 0.40% of the next $175 million of such assets and 0.325% of the next $300 million of such assets, and 0.275% of such assets in excess of $500 million; Harris Associates, L.P. at the annual rate of 0.50% of the first $100 million of its segment's average daily net assets, and 0.45% of such assets in excess of $100 million; Westpeak Investment Advisors, L.P. at the annual rate of 0.50% of the first $25 million of its segment's average daily net assets, 0.40% of the next $75 million of such assets, and 0.35% of the next $100 million of such assets, and 0.30% of such assets in excess of $200 million. Certain 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 officers and directors of the Adviser are also officers or Trustees of the Fund. Nvest Management, Loomis, Sayles & Company, L.P., Harris Associates, L.P., Vaughan Nelson Scarborough & McCullough L.P., and Westpeak Investment Advisors, L.P. are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees retained by Nvest Management and paid to each Subadviser under the management agreement and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 591,154 Loomis Sayles 469,365 Harris Associates 226,954 Vaughan Nelson 204,686 Westpeak 200,653 ---------- $1,692,812 ========== The effective management fee for the year ended December 31, 2000 was 0.74%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $78,585 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for our-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $627,437 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended 19 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 December 31, 2000, the Fund paid Nvest Funds L.P. $425,327 in fees under the Class A Plan. Prior to September 13, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward at December 31, 2000 is $1,651,994. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000 the Fund paid Nvest Funds L.P. $114,916 and $6,687 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000 the Fund paid Nvest Funds L.P. $344,748 and $20,062 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $271,316. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At December 31, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows: 20 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ---------------------------------------------------------------- 1999 2000 ------------------------------ ------------------------------ Class A Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ......................................... 2,346,397 $ 22,300,459 2,153,423 $ 15,491,891 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 75,122 577,581 2,603 19,471 Distributions from net realized gain ............. 5,074,919 38,315,721 0 0 ------------- ------------- ------------- ------------- 7,496,438 61,193,761 2,156,026 15,511,362 Shares repurchased .................................. (11,234,478) (104,215,629) (10,954,362) (78,414,524) ------------- ------------- ------------- ------------- Net increase (decrease) ............................. (3,738,040) $ (43,021,868) (8,798,336) $ (62,903,162) ------------- ------------- ------------- ------------- Year Ended December 31, ---------------------------------------------------------------- 1999 2000 ------------------------------ ------------------------------ Class B Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ......................................... 1,053,267 $ 9,458,092 1,069,518 $ 7,409,239 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 0 0 754 5,367 Distributions from net realized gain ............. 1,475,509 10,666,215 0 0 ------------- ------------- ------------- ------------- 2,528,776 20,124,307 1,070,272 7,414,606 Shares repurchased .................................. (3,374,257) (29,996,708) (3,129,145) (21,369,738) ------------- ------------- ------------- ------------- Net increase (decrease) ............................. (845,481) $ (9,872,401) (2,058,873) $ (13,955,132) ------------- ------------- ------------- ------------- Year Ended December 31, ---------------------------------------------------------------- 1999 2000 ------------------------------ ------------------------------ Class C Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ......................................... 100,723 $ 920,756 77,518 $ 536,780 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 0 0 42 302 Distributions from net realized gain ............. 85,269 618,538 0 0 ------------- ------------- ------------- ------------- 185,992 1,539,294 77,560 537,082 Shares repurchased .................................. (395,961) (3,583,052) (207,759) (1,430,702) ------------- ------------- ------------- ------------- Net increase (decrease) ............................. (209,969) $ (2,043,758) (130,199) $ (893,620) ------------- ------------- ------------- ------------- Year Ended December 31, ---------------------------------------------------------------- 1999 2000 ------------------------------ ------------------------------ Class Y Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ...................................... 365,082 $ 3,446,134 237,628 $ 1,673,635 Shares issued in connection with the reinvestment of: Dividends from net investment income .......... 6,962 53,329 146 1,092 Distributions from net realized gain .......... 239,879 1,802,999 0 0 ------------- ------------- ------------- ------------- 611,923 5,302,462 237,774 1,674,727 Shares repurchased ............................... (1,079,849) (10,051,052) (413,049) (2,975,951) ------------- ------------- ------------- ------------- Net increase (decrease) .......................... (467,926) $ (4,748,590) (175,275) $ (1,301,224) ------------- ------------- ------------- ------------- Increase (decrease) derived from capital shares transactions ................................ (5,261,416) $ (59,686,617) (11,162,683) $ (79,053,138) ============= ============= ============= =============
21 NOTES TO FINANCIAL STATEMENTS -- continued 5. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected from time to time by the lender. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the year ended December 31, 2000. 6. Expense Reductions. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $60,629 under these agreements. Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 22 REPORT OF INDEPENDENT ACCOUNTS To the Trustees of Nvest Funds Trust I and the Shareholders of the Nvest Star Value Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Star Value Fund (the "Fund"), formerly the Nvest Value Fund, a series of Nvest Funds Trust I, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 23
1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------------ ------------------- ---------------------- ------------------- 15,506,828.555 594,067.097 760,877.452 16,861,773.104 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and: Harris Associates L.P. Voted For Voted Against Abstained Votes Total Votes ------------------ ------------------- ---------------------- ------------------- 15,469,588.414 665,874.016 726,310.674 16,861,773.104 Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes ------------------ ------------------- ---------------------- ------------------- 15,484,900.065 629,390.606 747,482.433 16,861,773.104 Vaughan, Nelson, Scarborough & McCullough, L.P. Voted For Voted Against Abstained Votes Total Votes ------------------ ------------------- ---------------------- ------------------- 15,467,164.215 665,901.120 738,707.769 16,861,773.104 Westpeak Investment Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------------ ------------------- ---------------------- ------------------- 15,493,167.182 631,479.212 737,126.710 16,861,773.104
Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------ --------------- Graham T. Allison, Jr. 231,271,092.89 7,321,155.65 238,592,248.547 Daniel M. Cain 231,282,396.66 7,309,851.88 238,592,248.547 Kenneth J. Cowan 231,302,361.35 7,289,887.19 238,592,248.547 Richard Darman 231,295,499.27 7,296,749.27 238,592,248.547 Sandra O. Moose 231,298,397.96 7,293,850.58 238,592,248.547 John A. Shane 231,356,664.46 7,235,584.08 238,592,248.547 Peter S. Voss 231,288,476.71 7,303,771.83 238,592,248.547 Pendleton P. White 231,230,527.40 7,361,721.14 238,592,248.547 John T. Hailer 231,453,185.05 7,139,063.49 238,592,248.547 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds (SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs SVL56-1200 [RECYCLING LOGO] Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----