SEMIANNUAL REPORT
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[LOGO] NvestFunds(SM)
Where The Best Minds Meet(R)
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Nvest High Income Fund
Where
The Best
Minds Meet(R)
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June 30, 2000
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<PAGE>
PRESIDENT'S MESSAGE
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August 2000
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[PHOTO]
John T. Hailer
President and Chief
Executive Officer
Nvest Funds
"No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes."
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months -- three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
Your choice of investment tools
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Nvest Star fund is composed of four separate segments
run by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions.
No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes.
Nvest is poised for global growth
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
/s/ John T. Hailer
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
NVEST HIGH INCOME FUND
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Investment Results Through June 30, 2000
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Putting Performance in Perspective
The charts comparing Nvest High Income Fund's performance to a benchmark index
provide you with a general sense of how your Fund performed. To put this
information in context, it may be helpful to understand the special differences
between the two. Your 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 GRAPH IN THE PRINTED MATERIAL.]
June 1990 through June 2000
NAV MSC High Yield
-----------------------------------------------------
6/00 21,891 20,898 26,678
6/99 22,716 21,694 27,043
6/98 22,944 21,911 27,054
6/97 20,607 19,679 24,294
6/96 17,679 16,884 21,331
6/95 16,200 15,471 19,448
6/94 15,370 14,678 17,084
6/93 14,752 14,088 16,499
6/92 12,728 12,155 14,229
6/91 10,176 9,718 11,432
6/90 10,000 9,550 10,000
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
<PAGE>
NVEST HIGH INCOME FUND
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Average Annual Total Returns -- 6/30/00
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Class A (Inception 2/22/84) 6 Months 1 Year 5 Years (4) 10 Years (4)
Net Asset Value(1) -3.57% -3.47% 6.24% 8.15%
With Maximum Sales Charge(2) -7.90 -7.78 5.27 7.65
-------------------------------------------------------------------------------------------------
Class B (Inception 9/20/93) 6 Months 1 Year 5 Years (4) Since Inception (4)
Net Asset Value(1) -3.79% -4.08% 5.53% 5.20%
With CDSC(3) -8.36 -8.40 5.26 5.20
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Class C (Inception 3/2/98) 6 Months 1 Year Since Inception
Net Asset Value(1) -3.79% -4.07% -1.96%
With CDSC(3) -4.71 -4.94 -1.96
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Since Since
Fund's Fund's
Class B Class C
Comparative Performance 6 Months 1 Year 5 Years 10 Years Inception Inception
<S> <C> <C> <C> <C> <C> <C>
Lehman High Yield Composite Index(5) -1.21% -1.03% 6.52% 10.31% 7.05% -0.31%
Morningstar High Yield Bond Average(6) -1.74 -0.86 6.35 9.68 6.72 -0.32
Lipper High Current Yield Average(7) -1.66 -0.77 6.42 9.72 6.40 -2.41
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</TABLE>
These returns represent past performance and do not guarantee future results.
Share price and returns will vary and you may have a gain or loss when you sell
your shares. Recent returns may be higher or lower than those shown. The Fund's
current subadviser began managing the Fund on July 1, 1996. Results for earlier
periods reflect performance under previous subadvisers.
(1) These results include reinvestment of any dividends and capital gains, but
do not include a sales charge.
(2) These results include reinvestment of any dividends and capital gains, and
the maximum sales charge of 4.50%.
(3) These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares. Class C share performance
assumes a 1.00% CDSC when you sell shares within one year of purchase.
(4) This fund waived certain fees and expenses during the period indicated and
the Fund's average annual total return would have been lower had these fees
not been waived.
(5) Lehman High Yield Composite Index is an unmanaged index of fixed rate,
coupon bearing, non-investment grade bonds. You may not invest directly in
an index. Class B since inception return is calculated from 9/30/93. Class
C since inception return is calculated from 2/28/98.
(6) Morningstar High Yield Bond Average is the average performance without
sales charges of all mutual funds with a similar investment objectives as
calculated by Morningstar, Inc.. Class B since inception return is
calculated from 9/30/93. Class C since inception return is calculated from
2/28/98.
(7) Lipper High Current Yield Average is the average performance without sales
charges of all 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. Class C since inception return is calculated from
2/28/98.
2
<PAGE>
NVEST HIGH INCOME FUND
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Interview with Your Portfolio Manager
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On May 22, 2000, Michael Millhouse and Curt Mitchell of Loomis, Sayles & Company
became co-managers of Nvest High Income Fund. Mr. Millhouse is Executive Vice
President and Chief Investment Officer and Director, and Mr. Mitchell is a Vice
President, Portfolio Manager and Manager of Fixed Income Trading at Loomis
Sayles. Both worked alongside former manager Gary Goodenough and will continue
to manage the Fund with the same investment strategy.
Q. How did the Fund perform during the first half of 2000?
For the six months ended June 30, 2000, Nvest High Income Fund's Class A shares
at net asset value had a total return of -3.57%. This return includes reinvested
distributions of $0.45 per share. The Fund underperformed the -1.21% return of
its benchmark, Lehman Brothers High Yield Composite Index, primarily as a result
of disappointing results from the Fund's telecommunications holdings.
Q. What was the investment environment like, especially as it related to the
Fund?
The markets for most corporate bonds were relatively illiquid throughout the
period; it was difficult either to buy or sell securities and prices fell as a
result. In particular, high-yield bonds reflected the volatility of the equity
markets, as investors in both areas expressed indecision by retreating to the
sidelines.
Higher short-term interest rates also played an important role in Nvest High
Income Fund's performance. Investors were concerned that if the Federal Reserve
Board succeeds in slowing the economy through repeated rate increases, companies
that issue high-yield bonds might suffer more than better-financed enterprises.
This concern over credit quality was heightened as the number of defaults among
high-yield bonds began to rise. However, most recent defaults trace back to
1996-1998, a period when even marginal companies were able to find buyers for
their securities. Our research-intensive approach to bond selection is designed
to help us avoid weaker issuers.
Other trends affecting the high-yield market included buybacks and merger and
acquisition activity. When a company uses cash or adds debt to purchase its own
stock or to acquire another business, its ability to pay interest and redeem its
bonds when they mature may come into question. Such companies risk having their
bonds downgraded by the major rating agencies.
3
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NVEST HIGH INCOME FUND
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Q. Given that environment, what strategies did you pursue?
We added to sectors where we found improving conditions and increased the Fund's
commitment to defensive holdings -- those that enjoy relatively steady revenue
flows despite the ups and downs of the economy.
The energy industry is recovering from 1999's depressed levels, thanks to the
tripling of oil prices in the past 18 months. Gas prices are also rising quickly
and economic recovery overseas has added to demand. These industry trends and an
aggressive program of building its natural gas reserves is enabling Swift Energy
Company, an independent oil and gas company, to accelerate its capital
expenditure program while increasing its cash reserves.
Cable television has evolved from novelty to utility, producing steady cash
flows and solid earnings growth. Charter Communications and Adelphia Business
Solutions, the nation's fourth and fifth largest cable operators, respectively,
offer attractive upside potential as well as generous current yields. Some
leading waste management companies are strengthening their balance sheets by
paying down debt. We are taking advantage of the industry's strong defensive
characteristics to add to such holdings as Allied Waste.
We eliminated holdings in sectors that may be vulnerable in an economic
slowdown. For example, retailing, textiles and clothing and leisure activity
could all be hurt if consumer confidence slows significantly.
In the Philippines and in Mexico we purchased corporate and government bonds
payable in U.S. dollars. These nations' economies have been recovering smartly
from the international market upheavals of 1998.
Portfolio Mix -- 6/30/00
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
BBB 2.8%
BB 16.8%
B 72.2%
CCC 6.8%
Portfolio holdings and asset allocation will vary.
4
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NVEST HIGH INCOME FUND
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Q. What factors hurt performance the most in the past six months?
The Fund's underperformance during the first half of 2000 is tied to its
objective of seeking high current income. Since we emphasize high yields, Nvest
High Income Fund's holdings emphasize lower quality bonds. Throughout the
period, the markets were quality-conscious. The best returns came from higher
quality securities.
Performance in the telecommunications sector was lackluster, at best, as
companies were unable to attract adequate capital. Individual selections in the
auto parts, heavy equipment leasing and manufacturing industries also fell short
of our expectations during the first half of 2000.
Country Mix -- 6/30/00
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
United States 81.6%
Mexico 10.7%
United Kingdom 4.0%
Philippines 1.2%
Mauritius 2.5%
Portfolio holdings and asset allocation will vary.
Q. What is your current outlook?
We believe that higher interest rates will serve the Fed's intended purpose over
the next few quarters, and that economic growth will slow but we see little
near-term prospect of a recession. In our opinion, high-yield bond prices
already reflect the prospect of a slowing economy. Furthermore, as investors
compare the volatile stock market to the generous yields currently available on
lower-quality bonds, we believe more investors will turn to the high-yield
sector. Indeed, an improvement in investor confidence became apparent late in
the period. As always, sector and issue selection will be keys to Nvest High
Income Fund's performance.
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 High Income Fund may invest in lower rated bonds, which may offer higher
yields in return for more risk. It may also invest a portion of assets in
foreign and emerging market securities, which have special risks. The Fund may
also invest in U.S. government securities, which are guaranteed if held to
maturity; mutual funds that invest in these securities are not. These risks
effect your investment's value. See a prospectus for details.
5
<PAGE>
PORTFOLIO COMPOSITION
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Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- 90.3% of Total Net Assets
<TABLE>
<CAPTION>
Ratings (c)
-----------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto -- Parts 5.3%
$ 3,800,000 Advance Holding Corp., 0/12.875%, 4/15/2009 (d) ............... B- B- $ 1,615,000
2,200,000 Advance Stores Co., Inc., 10.250%, 4/15/2008 ................. Caa1 B- 1,826,000
4,000,000 CSK Auto, Inc., 11.000%, 11/01/2006 .......................... B2 B 3,580,000
------------
7,021,000
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Broadcasting -- 8.3%
9,000,000 Charter Communications Holdings, 0/9.920%, 4/01/2011 (d) ...... B2 B+ 5,130,000
9,390,000 Fox Family Worldwide, Inc., 0/10.25%, 11/01/2007 (d) .......... B1 B 5,892,225
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11,022,225
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Chemicals -- 3.0%
4,000,000 Lyondell Chemical Co., 10.875%, 5/01/2009 .................... B2 B+ 3,990,000
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Electrical Equipment -- 2.0%
2,750,000 Motors & Gears, Inc., 10.750%, 11/15/2006 .................... B3 B 2,660,625
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Energy -- 2.8%
3,700,000 Swift Energy Co., 10.250%, 8/01/2009 ......................... B2 B- 3,764,750
------------
Entertainment -- 0.9%
6,000,000 AMF Bowling Worldwide, Inc., 0/12.250%, 3/15/2006 (d) ......... B3 CCC+ 1,245,000
------------
Equipment Leasing -- 3.2%
2,700,000 United Rentals, Inc., 9.000%, 4/01/2009 ...................... B1 BB- 2,403,000
2,000,000 United Rentals, Inc., 9.250%, 1/15/2009 ...................... B1 BB- 1,815,000
------------
4,218,000
------------
Finance & Banking -- 0.9%
1,250,000 Finova Capital Corp. Medium Term Note, 6.824%, 3/09/2001 ..... Baa2 BBB+ 1,200,813
------------
Foreign Issues -- 18.3%
1,500,000 Alestra SA de CV, 144A, 12.125%, 5/15/2006 ................... B2 BB- 1,410,000
5,000,000 Alestra SA de CV, 144A, 12.625%, 5/15/2009 ................... B2 BB- 4,531,250
3,250,000 Altos Hornos de Mexico SA de CV, 11.875%, 4/30/2004 (e) (f) .. B3 D 1,308,125
5,000,000 Dolphin Telecom PLC, 0/14.000%, 5/15/2009 (d) ................. Caa2 CCC+ 1,775,000
3,700,000 Euramax International PLC, 11.250%, 10/01/2006 ............... B3 B 3,533,500
1,750,000 Philippine Long Distance Telephone Co., 10.500%, 4/15/2009 ... Ba2 BB+ 1,565,084
4,500,000 Pindo Deli Finance Mauritius Ltd., 10.250%, 10/01/2002 ....... B3 CCC+ 3,251,250
6,500,000 TFM SA, 0/11.750%, 6/15/2009 (d) .............................. B2 B+ 4,468,750
2,000,000 United Mexican States, 11.500%, 5/15/2026 .................... Baa3 BB+ 2,410,000
------------
24,252,959
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</TABLE>
6 See accompanying notes to financial statements.
<PAGE>
PORTFOLIO COMPOSITION -- continued
================================================================================
Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- continued
<TABLE>
<CAPTION>
Ratings (c)
-----------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrials -- 12.8%
$ 5,330,000 Continental Global Group, Inc., 11.000%, 4/01/2007 ........... B2 B- $ 1,559,025
3,000,000 Formica Corp., 10.875%, 3/01/2009 ............................ B3 B- 2,355,000
11,000,000 Huntsman ICI Chemicals, 144A, Zero Coupon, 12/31/2009 ......... B3 B+ 3,685,000
2,750,000 RBF Finance Co., 11.375%, 3/15/2009 .......................... Ba3 BB- 2,997,500
6,315,000 Stone Container Corp., 12.250%, 4/01/2002 ..................... B3 B- 6,346,575
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16,943,100
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Publishing -- 1.7%
4,000,000 Liberty Group Publishing, Inc., 0/11.625%, 2/01/2009 (d) ...... Caa2 CCC+ 2,240,000
------------
Restaurants -- 3.5%
4,750,000 Dominos, Inc., 10.375%, 1/15/2009 ............................ B3 B- 4,429,375
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Telecommunications -- 22.2%
6,500,000 Intermedia Communications, Inc., 0/12.250%, 3/01/2009 (d) ..... B3 CCC+ 3,981,250
4,250,000 Nextel International, Inc., 0/12.125%, 4/15/2008 (d) .......... Caa1 B- 2,783,750
2,600,000 Nextel Partners, Inc., 0/14.000%, 2/01/2009 (d) ............... B3 CCC+ 1,807,000
6,960,000 Nextlink Communications, Inc., 0/12.250%, 6/01/2009 (d) ....... B2 B 4,315,200
1,500,000 Nextlink Communications, Inc., 10.750%, 11/15/2008 ........... B2 B 1,485,000
3,500,000 NTL Communications Corp., 11.500%, 10/01/2008 ................ B3 B- 3,500,000
3,000,000 NTL, Inc., 0/9.750%, 4/01/2008 (d) ............................ B3 B- 1,882,500
4,715,000 RCN Corp., 0/11.250%, 10/15/2007 (d) .......................... B3 B- 2,946,875
4,615,000 RCN Corp., 0/9.800%, 2/15/2008 (d) ............................ B3 B- 2,549,787
2,400,000 Williams Communications Group, Inc., 10.700%, 10/01/2007 ..... B2 BB- 2,394,000
1,775,000 Williams Communications Group, Inc., 10.875%, 10/01/2009 ..... B2 BB- 1,743,938
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29,389,300
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Utilities -- 2.2%
2,957,679 Panda Funding Corp., 11.625%, 8/20/2012 ...................... Ba3 BB- 2,913,314
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Waste Management -- 3.2%
5,000,000 Allied Waste Industries, Inc., 10.000%, 8/01/2009 ............ B2 B+ 4,200,000
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Total Bonds and Notes (Identified Cost $141,143,133) .......... 119,490,461
------------
</TABLE>
See accompanying notes to financial statements. 7
<PAGE>
PORTFOLIO COMPOSITION -- continued
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Investments as of June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock 0.0%
Shares Description Value (a)
------------------------------------------------------------------------------------------------------------
<S> <C>
1,750 Ameriking, Inc. (f) ..................................................... $ 17,500
1,237 Mothers Work, Inc. (f) .................................................. 13,916
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Total Common Stock (Identified Cost $81,073) ............................ 31,416
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Preferred Stock -- 7.0%
------------------------------------------------------------------------------------------------------------
3,463 Adelphia Business Solutions, Inc. 12.875%, 10/15/2007, (pay-in-kind) .... 3,185,576
114,043 Ameriking, Inc. 13.000%, 12/01/2008, (pay-in-kind) ...................... 940,855
35,400 CSC Holdings, Inc. 11.125%, 04/01/2001, (pay-in-kind) ................... 3,734,700
55,476 Liberty Group Publishing, Inc. 14.750%, 02/01/2010, (pay-in-kind) ....... 1,206,598
30,737 Nebco Evans Holding Co. 11.250%, 03/01/2008, (pay-in-kind) .............. 11,527
15,000 Superior National Capital Trust, 144A, 10.75%, 12/1/2017, ............... 153,750
------------
Total Preferred Stock (Identified Cost $13,051,407) ..................... 9,233,006
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Total Investments 97.3% (Identified Cost $154,275,613) (b) .............. 128,754,883
Other assets less liabilities ........................................... 3,559,597
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Total Net Assets 100% ................................................... $132,314,480
============
(a) See Note 1a of Notes to the Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net unrealized
depreciation on investments based on cost for federal income
tax purposes of $154,275,613 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ................................ $ 855,872
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value .................................... (26,376,602)
------------
Net unrealized depreciation ........................................................ $(25,520,730)
============
</TABLE>
At December 31, 1999 the fund had a net tax basis capital loss
carryover of $1,938,176 of which $1,019,386 expires on December 31,
2004 and $918,790 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 June 30, 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 June 30, 2000. The
Fund's subadviser independently evaluates the Fund's portfolio
securities and in making investment decisions does not rely solely on
the ratings of agencies.
(d) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
(e) Issuer filed petition under Chapter 11 of Federal Bankruptcy Code.
(f) Non-income producing security.
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 $9,780,000 or
7.4% of net assets.
8 See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $154,275,613) ........................ $ 128,754,883
Cash ....................................................................... 20,604
Investment held as collateral for loaned securities ........................ 22,278,180
Receivable for:
Fund shares sold ......................................................... 182,635
Securities sold .......................................................... 3,057,604
Dividends and interest ................................................... 2,570,994
-------------
156,864,900
LIABILITIES
Payable for:
Collateral on securities loaned, at value ................................ $ 22,278,180
Securities purchased ..................................................... 1,202,959
Fund shares redeemed ..................................................... 337,706
Dividends declared ....................................................... 639,452
Accrued expenses:
Management fees .......................................................... 7,477
Deferred trustees' fees .................................................. 12,940
Accounting and administrative ............................................ 3,981
Other .................................................................... 67,725
-------------
24,550,420
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NET ASSETS ................................................................... $ 132,314,480
=============
Net Assets consist of:
Paid in capital .......................................................... $ 168,995,461
Overdistributed net investment income .................................... (551,851)
Accumulated net realized gains (losses) .................................. (10,608,400)
Unrealized appreciation (depreciation) on investments .................... (25,520,730)
-------------
NET ASSETS ................................................................... $ 132,314,480
=============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($63,109,558 / 8,333,243 shares of beneficial interest) ................... $ 7.57
==========
Offering price per share (100 / 95.50 of $7.57) .............................. $ 7.93*
==========
Net asset value and offering price of Class B shares
($61,820,305 / 8,157,261 shares of beneficial interest) ................... $ 7.58**
==========
Net asset value and offering price of Class C shares
($7,384,617 / 974,721 shares of beneficial interest) ....................... $ 7.58**
==========
</TABLE>
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements. 9
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends .............................................................. $ 689,856
Interest ............................................................... 7,719,631
Securities lending income .............................................. 29,575
------------
8,439,062
Expenses
Management fees ...................................................... $ 486,395
Service fees - Class A ............................................... 82,749
Service and distribution fees - Class B .............................. 323,087
Service and distribution fees - Class C .............................. 40,773
Trustees' fees and expenses .......................................... 6,073
Accounting and administrative ........................................ 21,885
Custodian ............................................................ 40,451
Transfer agent ....................................................... 124,197
Audit and tax services ............................................... 22,889
Legal ................................................................ 3,180
Printing ............................................................. 14,815
Registration ......................................................... 24,482
Miscellaneous ........................................................ 6,325
------------
Total expenses ......................................................... 1,197,301
------------
Net investment income .................................................. 7,241,761
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on investments - net .............................. (4,081,713)
Unrealized appreciation (depreciation) on investments - net ............ (8,645,164)
------------
Net gain (loss) on investment transactions ............................. (12,726,877)
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .................... $ (5,485,116)
============
</TABLE>
10 See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income .......................................................... $ 15,253,382 $ 7,241,761
Net realized gain (loss) on investments ........................................ (5,350,213) (4,081,713)
Net unrealized appreciation (depreciation) on investments ...................... (4,841,831) (8,645,164)
------------- -------------
Increase (decrease) in net assets from operations .............................. 5,061,338 (5,485,116)
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ...................................................................... (7,920,629) (3,675,174)
Class B ...................................................................... (6,647,632) (3,351,792)
Class C ...................................................................... (921,961) (422,229)
In excess of net investment income
Class A ...................................................................... (68,380) 0
Class B ...................................................................... (57,390) 0
Class C ...................................................................... (7,960) 0
------------- -------------
(15,623,952) (7,449,195)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ........................................ 23,429,833 (8,695,836)
------------- -------------
Total increase (decrease) in net assets .......................................... 12,867,219 (21,630,147)
NET ASSETS
Beginning of the period ........................................................ 141,077,408 153,944,627
------------- -------------
End of the period .............................................................. $ 153,944,627 $ 132,314,480
============= =============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the period .............................................................. $ (344,417) $ (551,851)
============= =============
</TABLE>
See accompanying notes to financial statements. 11
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
-------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period ................ $ 8.89 $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ................................... 0.88 0.84 0.87 0.92 0.89 0.43
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... 0.13 0.44 0.52 (1.08) (0.54) (0.71)
-------- -------- -------- -------- -------- --------
Total From Investment Operations ........................ 1.01 1.28 1.39 (0.16) 0.35 (0.28)
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net Investment Income .................... (0.88) (0.83) (0.87) (0.92) (0.90) (0.45)
Distributions in Excess of Net Investment Income ........ (0.04) (0.01) 0.00 0.00 (0.01) 0.00
-------- -------- -------- -------- -------- --------
Total Distributions ..................................... (0.92) (0.84) (0.87) (0.92) (0.91) (0.45)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period ...................... $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30 $ 7.57
======== ======== ======== ======== ======== ========
Total Return (%) (a) .................................... 11.8 14.9 15.4 (1.8) 4.0 (3.6)
Ratio of Operating Expenses to Average Net Assets (%) (b) 1.60 1.53 1.36 1.32 1.28 1.33(c)
Ratio of Net Investment Income to Average Net Assets (%) 9.71 9.32 9.03 9.81 10.22 10.81(c)
Portfolio Turnover Rate ................................. 30 134 99 75 89 33
Net Assets, End of the Period (000) ..................... $ 39,148 $ 42,992 $ 62,739 $ 73,023 $ 74,589 $ 63,110
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P.
Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to
the Fund.
(a) A sales charge is not reflected in total return calculations.
(b) The ratio of operating expenses to average net assets without giving effect
to voluntary expense limitations in effect in 1995 and 1996 would have been
(%) ................................................ 1.72 1.69 -- -- -- --
(c) Computed on an annualized basis.
</TABLE>
12 See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
-------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period ................ $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.30
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ................................... 0.83 0.79 0.80 0.85 0.82 0.40
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... 0.13 0.42 0.51 (1.08) (0.53) (0.70)
-------- -------- -------- -------- -------- --------
Total From Investment Operations ........................ 0.96 1.21 1.31 (0.23) 0.29 (0.30)
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net Investment Income .................... (0.81) (0.76) (0.80) (0.85) (0.83) (0.42)
Distributions in Excess of Net Investment Income ........ (0.05) (0.01) 0.00 0.00 (0.01) 0.00
-------- -------- -------- -------- -------- --------
Total Distributions ..................................... (0.86) (0.77) (0.80) (0.85) (0.84) (0.42)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period ...................... $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.30 $ 7.58
======== ======== ======== ======== ======== ========
Total Return (%) (a) .................................... 11.2 14.1 14.4 (2.5) 3.3 (3.8)
Ratio of Operating Expenses to Average Net Assets (%) (b) 2.25 2.19 2.11 2.07 2.03 2.08(c)
Ratio of Net Investment Income to Average Net Assets (%) 8.96 8.33 8.28 9.06 9.47 10.07(c)
Portfolio Turnover Rate ................................. 30 134 99 75 89 33
Net Assets, End of the Period (000) ..................... $ 10,625 $ 17,767 $ 42,401 $ 60,322 $ 70,218 $ 61,820
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P.
Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to
the Fund.
(a) A contingent deferred sales charge is not reflected in total return
calculations.
(b) The ratio of operating expenses to average net assets without giving effect
to voluntary expense limitations in effect in 1995 and 1996 would have been
(%) ................................................ 2.37 2.35 -- -- -- --
(c) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements. 13
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class C
--------------------------------------------------
March 2(a) Year Six Months
through Ended Ended
December 31, December 31, June 30,
--------- --------- ---------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period ....................... $ 9.96 $ 8.85 $ 8.30
--------- --------- ---------
Income From Investment Operations
Net Investment Income .......................................... 0.69 0.82 0.40
Net Realized and Unrealized Gain (Loss) on Investments ......... (1.08) (0.53) (0.70)
--------- --------- ---------
Total From Investment Operations ............................... (0.39) 0.29 (0.30)
--------- --------- ---------
Less Distributions
Distributions From Net Investment Income ....................... (0.72) (0.83) (0.42)
Distributions in Excess of Net Investment Income ............... 0.00 (0.01) 0.00
--------- --------- ---------
Total Distributions ............................................ (0.72) (0.84) (0.42)
--------- --------- ---------
Net Asset Value, End of the Period ............................. $ 8.85 $ 8.30 $ 7.58
========= ========= =========
Total Return (%) (b) ........................................... (4.1) 3.3 (3.8)
Ratio of Operating Expenses to Average Net Assets (%) .......... 2.07(c) 2.03 2.08(c)
Ratio of Net Investment Income to Average Net Assets (%) ....... 9.06(c) 9.47 10.07(c)
Portfolio Turnover Rate ........................................ 75 89 33
Net Assets, End of the Period (000) ............................ $ 7,732 $ 9,138 $ 7,385
</TABLE>
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P.
Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to
the Fund.
(a) Commencement of operations.
(b) A contingent deferred sales charge is not reflected in total return
calculations.
(c) Computed on an annualized basis.
14 See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
1. Significant Accounting Policies. The Fund is a series of Nvest Funds Trust
II, a Massachusetts business trust (the "Trust"), and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The Fund seeks high current income plus the
opportunity for capital appreciation to produce a high total return. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series is a "Fund").
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front end sales charge of 4.50%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before May
1, 1997). Class C shares do not pay a front end sales charge and do not convert
to any other class of shares, but they do pay a higher ongoing distribution fee
than Class A shares and may be subject to a contingent deferred sales charge if
those shares are redeemed within one year. 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 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. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on the
basis of valuations furnished by a pricing service, authorized by the Board of
Trustees, which service determines valuations for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. Short-term obligations with a
remaining maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser, and subadviser,
under the supervision of the Fund's Trustees.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the 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 the identified cost basis.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
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 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 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
generally accepted accounting principles. These differences primarily relate to
capital loss carryforwards and post October losses. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to capital accounts.
e. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. 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. Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. Purchases and Sales of Securities. For the six months ended June 30, 2000
purchases and sales of securities (excluding short-term investments) were
$44,703,739 and $44,173,771, respectively.
3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross
management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest
Management") at the annual rate of 0.70% of the first $200 million of the Fund's
average daily net assets and 0.65% of such assets in excess of $200 million,
reduced by the payment to the Fund's investment subadviser Loomis, Sayles &
Company L.P. ("Loomis Sayles") at the rate of 0.35% of the first $200 million of
the Fund's average daily net assets and 0.30% of such assets in excess of $200
million of the Fund's average daily net assets. 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 a subsidiary of Metropolitan Life Insurance Company (see Note
9).
Fees earned by Nvest Management and Loomis Sayles under the management
agreements in effect during the six months ended June 30, 2000 are as follows:
Fees Earned
-----------
Nvest Management $ 243,198
Loomis Sayles 243,197
---------
$ 486,395
=========
The effective annualized management fee for the six months ended June 30, 2000
was 0.70%.
b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
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 six months ended June
30, 2000, these expenses amounted to $21,885, and are shown separately in the
financial statements as accounting and administrative. The effective annualized
accounting and administrative expense for the six months ended June 30, 2000 was
0.034%.
c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plan relating to the Fund's Class B
and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest
Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest) a monthly
service fee at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class A shares, as reimbursement for expenses
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by Nvest Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 2000, the Fund paid Nvest Funds $82,749 in fees under the
Class A Plan.
Under the Class B and Class C Plans, the Fund pays Nvest Funds a monthly service
fee at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in
providing personal services to investors in Class B and Class C shares and/or
the maintenance of shareholder accounts. For the six months ended June 30, 2000,
the Fund paid Nvest Funds $80,772 and $10,193 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 a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in
connection with the marketing or sale of Class B and Class C shares. For the six
months ended June 30, 2000, the Fund paid Nvest Funds $242,315 and $30,580 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 six months ended June
30, 2000 amounted to $334,719.
d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to
the Fund and Boston Financial Data Services ("BFDS") serves as a sub-transfer
agent for the Fund. NSC receives account fees for Class A, Class B and Class C
shareholder accounts. NSC and BFDS are also reimbursed by the Fund for
out-of-pocket expenses. For the six months ended June 30, 2000, the Fund paid
NSC $91,713 as compensation for its services as transfer agent.
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, Nvest, NSC or their affiliates. Each other
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
Trustee receives a retainer fee at the annual rate of $40,000 and meeting
attendance fees of $3,500 for each meeting of the Board of Trustees attended.
Each committee member receives an additional retainer fee at the annual rate of
$6,000 while each committee chairman receives a retainer fee (beyond the $6,000
fee) at the annual rate of $4,000. These fees are allocated to the various Nvest
Funds based on a formula that takes into account, among other factors, the
relative net assets of each Fund.
A deferred compensation plan is available to the Trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund or
certain other Nvest Funds on the normal payment date. Deferred amounts remain in
the Funds until distributed in accordance with the Plan.
4. Concentration of Credit; Lower Rated Securities. The Fund invests in
securities offering high current income which generally will be rated below
investment grade by recognized rating agencies. Certain of these lower rated
securities are regarded as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligations
and generally involve more credit risk than securities in higher rating
categories. In addition, the trading market for lower rated securities may be
less liquid than the market for higher-rated securities.
5. Capital Shares. At June 30, 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:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, 1999 Ended June 30, 2000
--------------------------- ---------------------------
Class A Shares Amount Shares Amount
------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 2,776,755 $ 24,331,756 1,189,844 $ 9,412,267
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 596,642 5,169,476 296,550 2,309,474
--------- ------------ --------- ------------
3,373,397 29,501,232 1,486,394 11,721,741
Shares repurchased ......................................... (2,630,575) (22,779,736) (2,141,599) (17,046,901)
--------- ------------ --------- ------------
Net increase (decrease) .................................... 742,822 $ 6,721,496 (655,205) $ (5,325,160)
--------- ------------ --------- ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, 1999 Ended June 30, 2000
--------------------------- ---------------------------
Class B Shares Amount Shares Amount
------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 3,309,644 $ 29,017,220 1,023,572 $ 8,045,178
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 307,591 2,663,895 165,394 1,288,840
--------- ------------ --------- ------------
3,617,235 31,681,115 1,188,966 9,334,018
Shares repurchased ......................................... (1,975,114) (17,078,385) (1,486,860) (11,715,412)
--------- ------------ --------- ------------
Net increase (decrease) .................................... 1,642,121 $ 14,602,730 (297,894) $ (2,381,394)
--------- ------------ --------- ------------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, 1999 Ended June 30, 2000
--------------------------- ---------------------------
Class C Shares Amount Shares Amount
------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 490,356 $ 4,353,871 138,382 $ 1,098,304
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 62,774 533,304 33,878 264,046
--------- ------------ --------- ------------
553,130 4,887,175 172,260 1,362,350
Shares repurchased ......................................... (325,690) (2,781,568) (298,401) (2,351,632)
--------- ------------ --------- ------------
Net increase (decrease) .................................... 227,440 $ 2,105,607 (126,141) $ (989,282)
--------- ------------ --------- ------------
Increase derived from capital shares transactions ............ 2,612,383 $ 23,429,833 (1,079,240) $ (8,695,836)
========= ============ ========== ============
</TABLE>
6. 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 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 six months ended June 30,
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 June
30, 2000 the Fund had on loan securities having a market value of $21,718,629
collateralized by cash in the amount of $22,278,180 which was invested in a
short-term instrument.
8. Concentration of Risk. The Fund had the following geographic concentration in
excess of 10% of its total net assets at June 30, 2000: Mexico 10.7 % and United
States 81.6%. The Fund pursues its objectives by investing in domestic and
foreign securities. There are certain risks involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. These risks include those resulting from future adverse political
or economic developments and the possible imposition of currency exchange
blockages or other foreign governmental laws or restrictions.
9. Subsequent Event. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management is
the investment management arm of France's Caisse des Depots et Consignations,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, management and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
19
<PAGE>
================================================================================
NVEST MUNICIPAL INCOME FUND
NVEST MASSACHUSETTS TAX FREE INCOME FUND
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
Supplement dated August 21, 2000
to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts
Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California
Prospectuses, each dated May 1, 2000
John Maloney has become co-manager of the Funds, joining James Welch. Mr.
Maloney, Vice President at Back Bay Advisors, has been with the company since
1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts
and has 17 years of investment experience.
20
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund GOVERNMENT INCOME FUNDS
Bullseye Fund Limited Term U.S. Government Fund
Equity Income Fund Government Securities Fund
SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS*
Star Small Cap Fund Cash Management Trust
Kobrick Emerging Growth Fund Tax Exempt Money Market Trust
* Investments in money market funds are not
insured or guaranteed by the FDIC or any
government agency.
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
Visit our Web site at www.nvestfunds.com
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
[LOGO] Nvest Funds(SM)
Where The Best Minds Meet(R)
HP58-0600
[LOGO] Printed On Recycled Paper
<PAGE>
<PAGE>
SEMIANNUAL REPORT
================================================================================
[LOGO] Nvest Funds(SM)
Where The Best Minds Meet(R)
--------------------------------------------------------------------------------
Nvest Short Term
Corporate Income Fund
Where
The Best
Minds Meet(R)
-----------------
June 30, 2000
-----------------
<PAGE>
PRESIDENT'S MESSAGE
================================================================================
August 2000
--------------------------------------------------------------------------------
[PHOTO]
John T. Hailer
President and Chief
Executive Officer
Nvest Funds
"No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes."
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months -- three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
Your choice of investment tools
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Nvest Star fund is composed of four separate segments
run by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions.
No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes.
Nvest is poised for global growth
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
/s/ John T. Hailer
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
<PAGE>
NVEST SHORT TERM CORPORATE INCOME FUND
================================================================================
Investment Results Through June 30, 2000
--------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing Nvest Short Term Corporate Income Fund's performance to a
benchmark index provide you with a general sense of how your Fund performed. To
put this information in context, it may be helpful to understand the special
differences between the two. Your 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 GRAPH IN THE PRINTED MATERIAL.]
October 1991 through June 2000
NAV MSC LB Mutual Fd Short
-----------------------------------------------------------
6/00 14,685 14,248 17,517
6/99 14,053 13,631 16,294
6/98 13,724 13,312 15,532
6/97 13,034 12,643 14,427
6/96 12,243 11,876 13,432
6/95 11,588 11,241 12,683
6/94 10,936 10,608 11,528
6/93 10,789 10,465 11,366
6/92 10,282 9,974 10,398
6/91 10,000 9,700 10,000
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
<PAGE>
NVEST SHORT TERM CORPORATE INCOME FUND
================================================================================
Average Annual Total Returns -- 6/30/00
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A (Inception 10/18/91) 6 Months 1 Year 5 Years Since Inception
<S> <C> <C> <C> <C>
Net Asset Value(1,4) 1.93% 3.34% 4.60% 4.52%
With Maximum Sales Charge(2,4) -1.17 0.25 3.96 4.15
---------------------------------------------------------------------------------------------------------------
Class B (Inception 9/13/93) 6 Months 1 Year 5 Years Since Inception
Net Asset Value(1,4) 1.56% 2.57% 3.83% 3.54%
With CDSC(3,4) -3.39 -2.30 3.51 3.54
---------------------------------------------------------------------------------------------------------------
Class C (Inception 12/7/98) 6 Months 1 Year Since Inception
Net Asset Value(1,4) 1.42% 2.42% 1.86%
With CDSC(3,4) 0.43 1.45 1.86
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Since Since Since
Fund's Fund's Fund's
Class A Class B Class C
Comparative Performance 6 Months 1 Year 5 Years Inception Inception Inception
<S> <C> <C> <C> <C> <C> <C>
LB Mutual Fund Short (1-5)
Inv. Grade Debt Index(5) 2.71% 4.31% 6.04% 6.65% 5.85% 3.48%
Morningstar Short Term Bond Average(6) 2.88 4.32 5.24 5.58 4.86 3.34
Lipper Short Term Investment Grade Avg.(7) 2.67 4.40 5.28 5.59 4.93 3.74
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 3.00%.
(3) These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares. Class C share performance
assumes a 1.00% CDSC when you sell shares within one year of purchase.
(4) This fund waived certain fees and expenses during the period indicated and
the Fund's average annual total return would have been lower had these fees
not been waived.
(5) Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index is an
unmanaged index including all publicly issued, fixed-rate, nonconvertible
investment-grade domestic corporate debt with maturities of 1 to 5 years.
You may not invest directly in an index. Class A since-inception return is
calculated from 10/31/91. Class B since-inception return is calculated from
9/30/93. Class C since-inception return is calculated from 12/31/98.
(6) Morningstar Short Term Bond Average is the average performance without
sales charges of all mutual funds with a similar investment objective as
calculated by Morningstar, Inc. Class A since-inception return is
calculated from 10/31/91. Class B since-inception return is calculated from
9/30/93. Class C since-inception return is calculated from 12/31/98.
(7) Lipper Short Term Investment Grade Average is the average performance
without sales charges of all mutual funds with a similar current investment
style or objective as determined by Lipper Inc. Class A since-inception
return is calculated from 10/31/91. Class B since-inception return is
calculated from 9/30/93. Class C since-inception return is calculated from
12/31/98.
2
<PAGE>
NVEST SHORT TERM CORPORATE INCOME FUND
================================================================================
Interview with Your Portfolio Managers
--------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
Scott Nicholson
Richard Raczkowski
Back Bay Advisors, L.P.
Q. How did Nvest Short Term Corporate Income Fund perform during the first
half of 2000?
For the six months ended June 30, 2000, Nvest Short Term Corporate Income
provided a total return of 1.93% based on the net asset value of Class A shares.
The Fund's return included $0.21 per share in dividends reinvested during the
period. For the same period the Fund's benchmark, Lehman Brothers Mutual Fund
Short (1-5) Investment Grade Debt Index, returned 2.71%. The Fund lagged its
benchmark primarily as a result of reversals experienced by two of its financial
holdings, both of which remain in the portfolio because we believe turnarounds
are likely.
The 30-Day yield on Class A shares of Nvest Short Term Corporate Income Fund was
6.27% as of June 30, 2000. Your yield depends on when you bought your shares
and what you paid for them.
Q. What was the investment environment like during the period?
The fixed-income markets continued to languish during the first quarter of 2000,
as investors remained focused on the stock market, extending last year's trend.
During the second quarter, strong turbulence in the equity markets drove many
investors back to fixed-income securities, but their primary target was the
top-rated government sector. Thanks to a booming economy, the government has
been issuing relatively little new debt and using budget surpluses to buy back
old issues with longer maturities. But while renewed demand and diminished
supply combined to boost prices of Treasury securities, demand on the corporate
side remained weak despite an influx of new issues. The net result was a
widening "spread" -- the difference in yield -- between government and corporate
bonds. Yield spreads that existed at the end of June typically only occur during
harsh economic times, not during a booming economy.
Meanwhile, in May the Federal Reserve Board raised rates for the third time this
year -- the sixth time in the past 12 months. The May hike raised nominal yields
on corporate bonds to levels not seen for several years, sending bond prices
down. This effect was greatest in the lower rated sector.
3
<PAGE>
NVEST SHORT TERM CORPORATE INCOME FUND
================================================================================
--------------------------------------------------------------------------------
Q. What strategies did you use to manage the portfolio in this environment?
We raised the portfolio's credit rating from an average of A at the end of 1999
(as measured by Standard & Poor's) to A+ as of June 30, 2000. Corporate
securities accounted for 71.6% of assets at the end of June, down from 82.7% at
the beginning of the year, while AAA-rated government and government agency
securities and cash equivalents rose to 28.4% of the Fund's total assets. In an
effort to reduce Nvest Short Term Corporate Income Fund's sensitivity to
declining interest rates, we also shortened the Fund's duration to 1.73 years at
the end of June, compared with 2.12 years at the beginning of the year. Duration
is an estimate of how much a bond's price is likely to fluctuate in response to
changing interest rates. The shorter the duration, the lower the volatility and
vice versa.
Q. You said that some holdings had a negative impact on my Fund's performance.
Which were these and which securities performed well?
In addition to the broad trends affecting the market as a whole, Nvest Short
Term Corporate Income Fund's performance was impacted when a few of our holdings
were downgraded. Finova Capital, a commercial lender, reported large loan
write-offs as its chairman was retiring, and the giant insurance company,
Conseco, stumbled badly when it diversified into consumer lending. Prices of
these companies' bonds dropped sharply and finance companies as a group went
under a cloud. The Fund's Kansas Gas & Electric bonds were also downgraded when
its holding company split in two, leaving the majority of its debt with the
entity in which the Fund was an investor. We believe that turnarounds are likely
in each case, and continue to hold these securities.
Positive performance came from the Fund's mortgage-backed securities, as well as
from our holdings in Lockheed Martin and Raytheon, two defense industry
companies that are in a recovery mode.
4
<PAGE>
NVEST SHORT TERM CORPORATE INCOME FUND
================================================================================
--------------------------------------------------------------------------------
Portfolio Mix -- 6/30/00
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Corporate & Other Bonds & Notes 71.6%
Federal Agencies 16.3%
U.S. Government 6.0%
Short Term & Other 6.1%
Portfolio holdings and asset allocation will vary.
Q. What's your current outlook?
We look for a price recovery in the corporate sector. Yield spreads are still
very wide, historically, and the economic data released in June was
comparatively weak. The prospect of renewed inflation -- always a concern for
the Fed as well as for bondholders -- is heightened when the economy is running
at high speed. However, we are waiting for further evidence of a slowdown before
significantly extending your Fund's duration or increasing its corporate
exposure. And even then, we will maintain your Fund's emphasis on bonds with
strong credit quality and liquidity, because slower growth is likely to
adversely effect corporate profits.
There is substantial money on the sidelines, much of which may be poised to
re-enter the fixed-income markets. We are optimistic that, once the economy's
future direction becomes clearer, corporate bonds will recover, providing
attractive total returns for Nvest Short Term Corporate Income Fund
shareholders.
This portfolio managers' commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes.
Nvest Short Term Corporate Income Fund invests primarily in short-term corporate
securities, including lower rated bonds that may offer higher yields in return
for more risk and mortgage securities that are subject to prepayment risk. The
Fund may also invest in foreign and emerging market securities which have
special risks. It may also invest in securities issued by the U.S. government
and Treasury securities; although the U.S. government guarantees such securities
if held to maturity, mutual funds that invest in these securities are not
guaranteed. These risks affect your investment's value. See a prospectus for
details. Frequent portfolio turnover may increase your risk of greater tax
liability, which could lower your return from this Fund.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- 93.9% of Total Net Assets
<TABLE>
<CAPTION>
Ratings (c)
---------------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed -- 6.6%
$ 1,500,000 Americredit Automobile, 7.150%, 8/12/2004.................. Aaa AAA $ 1,495,785
1,000,000 Green Tree Financial Corp. 6.670%, 7/15/2030 .............. NA AAA 989,680
2,000,000 WFS Financial Owner Trust 7.750%, 11/20/2004 .............. Aaa AAA 2,013,120
------------
4,498,585
------------
Banks -- 5.1%
1,500,000 Bank of America, 7.875%, 5/16/2005......................... Aa2 A+ 1,519,683
2,000,000 Wells Fargo & Co., 6.625%, 7/15/2004....................... Aa2 A+ 1,952,546
------------
3,472,229
------------
Broadcast Media -- 1.5%
1,000,000 Continental Cablevision, Inc., 8.500%, 9/15/2001........... A2 AA- 1,013,944
------------
Computer Software & Services -- 1.5%
1,000,000 Sun Microsystems, Inc., 7.000%, 8/15/2002.................. Baa1 BBB+ 994,995
------------
Consumer Goods & Services -- 2.9%
2,000,000 Black & Decker Corp., 6.625%, 11/15/2000................... Baa2 BBB 1,996,718
------------
Electric Utilities -- 6.1%
2,500,000 Houston Lighting & Power Co., 8.150%, 5/01/2002............ A3 BBB- 2,532,358
1,675,672 Kansas Gas & Electric Co., 6.760%, 9/29/2003............... Ba2 BB- 1,606,684
------------
4,139,042
------------
Federal Agencies -- 16.3%
480,735 Federal Home Loan Mortgage Corp., 7.290%, 3/1/2025 (d)...... Aaa AAA 494,330
1,500,000 Federal Home Loan Mortgage Corp., 7.350%, 2/28/2003........ Aaa AAA 1,505,490
1,371,016 Federal Home Loan Mortgage Corp., 7.370%, 10/15/2023 (d).... Aaa AAA 1,374,444
185,215 Federal Home Loan Mortgage Corp., 7.480%, 12/1/2025 (d)..... Aaa AAA 188,514
1,974,564 Federal Home Loan Mortgage Corp., 7.500%, 8/1/2009......... Aaa AAA 1,980,329
426,318 Federal Home Loan Mortgage Corp., 7.600%, 12/1/2022 (d)..... Aaa AAA 433,578
305,469 Federal National Mortgage Association, 6.000%, 9/1/2023(d).. Aaa AAA 292,297
656,322 Federal National Mortgage Association, 6.470%, 1/1/2020(d).. Aaa AAA 643,708
222,039 Federal National Mortgage Association, 6.540%, 6/1/2019(d).. Aaa AAA 217,772
296,898 Federal National Mortgage Association, 7.020%, 7/1/2023(d).. Aaa AAA 302,836
219,506 Federal National Mortgage Association, 7.090%, 5/1/2020(d).. Aaa AAA 222,113
154,169 Federal National Mortgage Association, 7.140%, 8/1/2017(d).. Aaa AAA 155,736
2,080,372 Federal National Mortgage Association, 7.500%, 8/1/2013.... Aaa AAA 2,083,638
368,295 Federal National Mortgage Association, 7.540%, 5/1/2025(d).. Aaa AAA 375,373
818,332 Federal National Mortgage Association, 7.940%, 1/1/2024(d).. Aaa AAA 841,990
------------
11,112,148
------------
Finance -- 14.7%
1,000,000 Conseco, Inc., 7.600%, 6/21/2001........................... Ba1 BB- 780,000
2,000,000 Conseco, Inc., 7.875%, 12/15/2000.......................... Ba1 BB- 1,770,000
1,000,000 Daimler Chrysler North America Holding, 7.125%, 4/10/2003.. A1 A+ 995,876
1,500,000 Finova Capital Corp., 7.250%, 11/08/2004................... Baa2 BBB+ 1,322,478
</TABLE>
6 See accompanying notes to financial statements.
<PAGE>
PORTFOLIO COMPOSITION -- CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- continued
<TABLE>
<CAPTION>
Ratings (c)
-------------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance -- continued
$ 1,000,000 Ford Motor Credit Co., 7.500%, 6/15/2003................. A2A -- $ 996,209
1,200,000 Ford Motor Credit Co., 6.541%, 7/16/2002................. A2 A 1,201,733
1,500,000 General Motors Acceptance Corp., 7.625%, 6/15/2004....... A2 -- 1,503,165
1,500,000 Lehman Brothers Holdings, Inc. 7.750%, 1/15/2005......... A3 A 1,487,161
------------
10,056,622
------------
Food & Beverages -- 3.5%
2,500,000 Aramark Services, Inc., 6.750%, 8/01/2004................ Baa3 BBB- 2,371,505
------------
Industrials -- 9.7%
1,500,000 International Paper Co., 7.670%, 7/08/2002............... Baa1 BBB+ 1,499,644
1,000,000 Lockheed Martin Corp., 6.850%, 5/15/2001................. Baa3 BBB- 995,629
2,150,000 Norfolk Southern Corp., 6.950%, 5/01/2002................ Baa1 BBB 2,133,497
2,000,000 Raytheon Co., 7.900%, 3/01/2003.......................... Baa2 BBB- 2,010,698
------------
6,639,468
------------
Machinery -- 2.9%
2,000,000 John Deere Capital Corp., 7.000%, 10/15/2002 ............ A2 A+ 1,983,538
------------
Retail-Department Store -- 5.8%
2,000,000 Dayton Hudson Corp., 6.400%, 2/15/2003 .................. A2 A- 1,959,094
2,000,000 Federated Department Stores, Inc., 8.500%, 6/15/2003 .... Baa1 BBB+ 2,034,608
------------
3,993,702
------------
Retail-Food & Drug -- 5.4%
2,700,000 Dole Foods, Inc., 6.750%, 7/15/2000 ..................... Baa3 BBB- 2,697,724
1,000,000 Rite Aid Corp., 144A, 6.000%, 12/15/2000 ................ B3 B- 972,500
------------
3,670,224
------------
Telecommunications -- 5.9%
1,300,000 Deutsche Telekom International Finance BV,
7.750%, 6/15/2005 ..................................... Aa2 AA- 1,311,037
1,000,000 Sprint Capital Corp., 7.625%, 6/10/2002 ................. Baa1 BBB+ 999,290
1,700,000 Vodafone Airtouch PLC, 144A, 6.962%, 12/19/2001 ......... A2 A- 1,698,407
------------
4,008,734
------------
U.S. Government -- 6.0%
1,500,000 United States Treasury Notes 6.750%, 5/15/2005 .......... Aaa AAA 1,534,920
2,500,000 United States Treasury Notes 8.000%, 5/15/2001 .......... Aaa AAA 2,530,850
------------
4,065,770
------------
Total Bonds and Notes (Identified Cost $65,355,348)............... 64,017,224
------------
</TABLE>
See accompanying notes to financial statements. 7
<PAGE>
PORTFOLIO COMPOSITION -- CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
Short Term Investments -- 3.9%
<TABLE>
<CAPTION>
Principal
Amount Description Value (a)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 2,700,000 Household Finance Corp. 6.880%, 7/03/2000..................... $ 2,698,968
------------
Total Short Term Investments (Identified Cost $2,698,968)..... 2,698,968
------------
Total Investments -- 97.8% (Identified Cost $68,054,316) (b).. 66,716,192
Other assets less liabilities................................. 1,467,434
------------
Total Net Assets -- 100%...................................... $ 68,183,626
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation
on investments based on cost for federal income tax purposes of
$68,054,316 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess value over tax cost......................................... $ 118,748
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value...................................... (1,456,872)
------------
Net unrealized depreciation ............................................. $ (1,338,124)
============
At December 31, 1999 the Fund had a capital loss carryover of
approximately $17,601,473 of which $5,625,994 expires on December 31,
2002, $6,075,626 expires on December 31, 2003, $2,134,629 expires on
December 31, 2004, $455,288 expires on December 31, 2005, $1,444,376
expires on December 31, 2006, and $1,865,560 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
June 30, 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 June 30, 2000. The Fund's subadviser
independently evaluates the Fund's portfolio securities and in making
investment decisions does not rely solely on the ratings of agencies.
(d) Variable rate mortgage backed securities. The interest rates change on
these instruments monthly based on changes in a designated base rate. The
rates shown were those in effect at June 30, 2000.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $2,670,907 or 3.92% of the
net assets.
</TABLE>
8 See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $68,054,316) ................... $ 66,716,192
Cash ............................................................... 44,004
Receivable for:
Fund shares sold ................................................... 28,367
Securities sold .................................................... 2,132,833
Dividends and interest ............................................. 821,359
------------
69,742,755
LIABILITIES
Payable for:
Securities purchased ............................................... $ 1,297,738
Fund shares redeemed ............................................... 54,101
Dividends declared ................................................. 110,652
Accrued expenses:
Management fees .................................................... 30,671
Deferred trustees' fees ............................................ 16,469
Transfer agent ..................................................... 10,460
Accounting and administrative ...................................... 3,966
Other ........................................................... 35,072
------------
1,559,129
------------
NET ASSETS ............................................................ $ 68,183,626
============
Net Assets consist of:
Paid in capital .................................................... $ 88,771,706
Undistributed net investment income ................................ 117,403
Accumulated net realized gains (losses) ............................ (19,367,359)
Unrealized appreciation (depreciation) on investments .............. (1,338,124)
------------
NET ASSETS ............................................................ $ 68,183,626
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($64,330,082/9,273,004 shares of beneficial interest) .............. $ 6.94
============
Offering price per share (100/97 of $6.94) ........................... $ 7.15*
============
Net asset value and offering price of Class B shares
($3,401,183/491,011 shares of beneficial interest) ................. $ 6.93**
============
Net asset value and offering price of Class C shares
($452,361/65,331 shares of beneficial interest) .................... $ 6.92**
============
</TABLE>
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements. 9
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest .................................................... $ 2,575,489
Expenses
Management fees .......................................... $ 196,987
Service fees - Class A ................................... 84,644
Service and distribution fees - Class B .................. 17,382
Service and distribution fees - Class C .................. 2,199
Trustees' fees and expenses .............................. 4,635
Accounting and administrative ............................ 10,713
Custodian ................................................ 34,770
Transfer agent ........................................... 50,878
Audit and tax services ................................... 15,189
Legal .................................................... 1,474
Printing ................................................. 7,058
Registration ............................................. 19,550
Miscellaneous ............................................ 6,704
-----------
Total expenses .............................................. 452,183
Less expenses waived by the investment adviser and subadviser (163,960) 288,223
----------- -----------
Net investment income ....................................... 2,287,266
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on Investments - net ................... (1,422,890)
Unrealized appreciation (depreciation) on Investments - net . 423,298
-----------
Net gain (loss) on investment transactions .................. (999,592)
-----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......... $ 1,287,674
===========
</TABLE>
10 See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
(unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ............................... $ 5,027,620 $ 2,287,266
Net realized gain (loss) on investments ............. (1,915,031) (1,422,890)
Unrealized appreciation (depreciation) on investments (1,507,524) 423,298
------------ ------------
Increase (decrease) in net assets from operations ... 1,605,065 1,287,674
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ......................................... (4,845,836) (1,984,901)
Class B ......................................... (188,779) (89,075)
Class C ......................................... (22,276) (11,354)
------------ ------------
(5,056,891) (2,085,330)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ............. (16,246,001) (7,983,643)
------------ ------------
Total increase (decrease) in net assets ................ (19,697,827) (8,781,299)
------------ ------------
NET ASSETS
Beginning of the period ............................. 96,662,752 76,964,925
------------ ------------
End of the period ................................... $ 76,964,925 $ 68,183,626
============ ============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the period ................................... $ (84,533) $ 117,403
============ ============
</TABLE>
See accompanying notes to financial statements. 11
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
---------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period ... $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income (Loss) ............... 0.47 0.43 0.47(b) 0.38 0.41 0.23
Net Realized and Unrealized Gain
(Loss) on Investments ...................... 0.14 (0.01) (0.02) (0.09) (0.28) (0.09)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ........... 0.61 0.42 0.45 0.29 0.13 0.14
--------- --------- --------- --------- --------- ---------
Less Distributions
Dividends From Net Investment Income ....... (0.44) (0.42) (0.43) (0.38) (0.42) (0.21)
--------- --------- --------- --------- --------- ---------
Total Distributions ........................ (0.44) (0.42) (0.43) (0.38) (0.42) (0.21)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of the Period ......... $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01 $ 6.94
========= ========= ========= ========= ========= =========
Total Return (%)(a) ........................ 8.6 5.8 6.2 4.0 1.9 1.9
Ratio of Operating Expenses to
Average Net Assets (%) .................... 0.89 0.94 0.98 1.05 1.22 1.22(c)
Ratio of Operating Expenses to Average
Net Assets After Expense Reductions (%) (d) 0.66 0.70 0.70 0.70 0.70 0.76(c)
Ratio of Net Investment Income to
Average Net Assets (%) .................... 6.29 6.39 6.27 5.93 5.88 6.43(c)
Portfolio Turnover Rate (%) ................ 73 54 49 105 139 53
Net Assets, End of the Period (000) ........ $ 331,112 $ 222,809 $ 196,928 $ 92,669 $ 72,680 $ 64,330
</TABLE>
(a) A sales charge is not reflected in total return calculations.
(b) Per share net investment income does not reflect the periods
reclassification of permanent differences between book and tax basis net
investment income. See Note 1d to the Financial Statements.
(c) Computed on an annualized basis.
(d) Expense ratios have been adjusted for the expense limitations described in
Note 4 to the Fiancial Statements.
12 See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period .. $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income (Loss) .............. 0.41 0.37 0.41(b) 0.33 0.36 0.20
Net Realized and Unrealized Gain
(Loss) on Investments ..................... 0.14 (0.02) (0.02) (0.09) (0.28) (0.09)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations .......... 0.55 0.35 0.39 0.24 0.08 0.11
--------- --------- --------- --------- --------- ---------
Less Distributions
Dividends From Net Investment Income ...... (0.38) (0.36) (0.37) (0.33) (0.37) (0.18)
--------- --------- --------- --------- --------- ---------
Total Distributions ....................... (0.38) (0.36) (0.37) (0.33) (0.37) (0.18)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of the Period ........ $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00 $ 6.93
========= ========= ========= ========= ========= =========
Total Return (%)(a) ....................... 7.8 4.9 5.4 3.4 1.1 1.6
Ratio of Operating Expenses to
Average Net Assets (%) ................... 1.65 1.69 1.73 1.80 1.97 1.97(c)
Ratio of Operating Expenses to Average
Net Assets After Expense Reductions (%)(d) 1.41 1.45 1.45 1.45 1.45 1.52(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................... 5.54 5.64 5.52 5.18 5.13 5.66(c)
Portfolio Turnover Rate (%) ............... 73 54 49 105 139 53
Net Assets, End of the Period (000) ....... $ 2,368 $ 2,821 $ 2,961 $ 3,761 $ 3,796 $ 3,401
</TABLE>
(a) A contingent deferred sales charge is not reflected in total return
calculations.
(b) Per share net investment income does not reflect the periods
reclassification of permanent differences between book and tax basis net
investment income. See Note 1d to the Financial Statements.
(c) Computed on an annualized basis.
(d) Expense ratios have been adjusted for the expense limitations described in
Note 4 to the Fiancial Statements.
See accompanying notes to financial statements. 13
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------
December 7, 1998(a)
through Year Ended Six Months Ended
December 31, December 31, June 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period ............... $ 7.28 $ 7.29 $ 7.00
----------- ----------- -----------
Income From Investment Operations
Net Investment Income .................................. 0.01 0.36 0.19
Net Realized and Unrealized Gain (Loss) on
Investments .......................................... 0.01(b) (0.28) (0.09)
----------- ----------- -----------
Total From Investment Operations ....................... 0.02 0.08 0.10
----------- ----------- -----------
Less Distributions
Dividends From Net Investment Income ................... (0.01) (0.37) (0.18)
----------- ----------- -----------
Total Distributions .................................... (0.01) (0.37) (0.18)
----------- ----------- -----------
Net Asset Value, End of the Period ..................... $ 7.29 $ 7.00 $ 6.92
=========== =========== ===========
Total Return (%) (c) ................................... 0.3 1.2 1.4
Ratio of Operating Expenses to Average Net Assets (%) .. 1.80(d) 1.97 1.97(d)
Ratio of Operating Expenses to Average Net Assets
After Expense Reductions (%) (e) ..................... 1.45(d) 1.45 1.52(d)
Ratio of Net Investment Income to Average Net Assets (%) 5.18(d) 5.13 5.70(d)
Portfolio turnover rate ................................ 105 139 53
Net Assets, End of the Period (000) .................... $ 233 $ 489 $ 452
</TABLE>
(a) Commencement of operations.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net gain/(loss) on investments for the period ended December 31,
1998, due to the timing of purchases and redemptions of Fund shares in
relation to fluctuating values of the investments of the Fund.
(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) Expense ratios have been adjusted for the expense limitations described in
Note 4 to the Fiancial Statements.
14 See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
1. Significant Accounting Policies. The Fund is a series of Nvest Funds Trust
II, a Massachusetts business trust (the "Trust"), and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The Fund seeks a high level of current income
consistent with preservation of capital. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of the Trust in multiple series
(each such series is a "Fund").
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front end sales charge of 3.00%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before May
1, 1997). Class C shares do not pay a front end sales charge and do not convert
to any class of shares, but they do pay a higher ongoing distribution fee than
Class A shares and may be subject to a contingent deferred sales charge if those
shares are redeemed within one year. 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 for investment companies. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
a. Security Valuation. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser and subadviser,
under the supervision of the Fund's Trustees.
b. Security Transactions and Related Income. Security transactions are accounted
for on the trade date. Interest income is recorded on the 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 the 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 all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
d. Dividends and Distributions to Shareholders. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences primarily relate to
differing treatment of mortgage-backed securities for book and tax purposes.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to the capital account.
e. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price, including interest. The subadviser is responsible for
determining that the value of the collateral is at all times at least equal to
the repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. Purchases and Sales of Securities. For the six months ended June 30, 2000
purchases and sales of securities (excluding short-term investments) were as
follows:
Purchases Sales
----------------------------------- -------------------------------------
U.S. Government Other U.S. Government Other
----------------- ---------------- ----------------- -----------------
$ 9,572,846 $ 27,056,345 $ 6,689,918 $ 40,921,701
3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross
management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest
Management"), at the annual rate of 0.55% of the first $200 million of the
Fund's average daily net assets, 0.51% of the next $300 million and 0.47% of
such assets in excess of $500 million reduced by the payment to the Fund's
investment subadviser, Back Bay Advisors L.P. ("Back Bay") at the rate of 0.275%
of the first $200 million of the Fund's average daily net assets, 0.255% of the
next $300 million and 0.235% of such assets in excess of $500 million. Certain
officers and directors of Nvest Management are also officers or Trustees of the
Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest
Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance
Company (see Note 7). Fees earned by Nvest Management and Back Bay under the
management and subadvisory agreements in effect during the six months ended June
30, 2000 are as follows:
Fees Earned
-----------
Nvest Management $ 98,494
Back Bay 98,493
---------
$ 196,987
=========
The effective annualized management fee before the expense limitations for the
six months ended June 30, 2000 was 0.55 %. As a result of the expense
limitations as described in Note 4, the effective annualized management fee for
the six months ended June 30, 2000 was 0.09%.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a group fee for these
services equal to the annual rate of 0.035% of the first $5 billion of Nvest
Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest
Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net
assets in excess of $10 billion. For the six months ended June 30, 2000, these
expenses amounted to $10,713 and are shown separately in the financial
statements as accounting and administrative. The effective annualized accounting
and administrative expense for the six months ended June 30, 2000 was 0.034%.
c. Service and Distribution Expense. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays Nvest Funds Distributor,L.P. ("Nvest
Funds"), 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
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by Nvest Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 2000, the Fund paid Nvest Funds $84,644 in fees under the
Class A Plan. If the expenses of Nvest Funds that are otherwise reimbursable
under the Class A Plan incurred in any year exceed the amounts payable by the
Fund under the Class A Plan, the unreimbursed amount (together with unreimbursed
amounts from prior years) may be carried forward for reimbursement in future
years in which the Class A Plan remains in effect. The amount of unreimbursed
expenses as of June 30, 2000 is $1,929,283.
Under the Class B and Class C Plans, the Fund pays Nvest Funds 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 (including certain payments to securities dealers, who may be
affiliated with Nvest Funds) incurred by Nvest Funds in providing personal
services to investors in Class B and Class C shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 2000, the Fund paid
Nvest Funds $4,346 and $550 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 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 in
connection with the marketing or sale of Class B and Class C shares. For the six
months ended June 30, 2000, the Fund paid Nvest Funds $13,036 and $1,649 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 six months ended June
30, 2000 amounted to $18,914.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer
agent for the Fund. NSC receives account fees for shareholder accounts. NSC and
BFDS are also reimbursed for out-of-pocket expenses. For the six months ended
June 30, 2000, the Fund paid NSC $45,963 as compensation for its services as
transfer agent.
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, Nvest, NSC or their affiliates. Each other Trustee
receives a retainer fee at the annual rate of $40,000 and meeting attendance
fees of $3,500 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$6,000 while each committee chairman receives a retainer fee (beyond the $6,000
fee) at the annual rate of $4,000. These fees are allocated to the various Nvest
funds based on a formula that takes into account, among other factors, the
relative net assets of each Fund.
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have had, had it been invested in the Fund or other
certain Nvest funds on the normal payment date. Deferred amounts remain in the
funds until distributed in accordance with the Plan.
4. Expense Limitations. Nvest Management has given a binding undertaking and
Back Bay has voluntarily agreed until further notice to defer their respective
management and subadvisory fees and, if necessary, Nvest Management has agreed
to bear certain expenses associated with the Fund to the extent necessary, to
limit the Fund's expenses to the annual rates of 0.90%, 1.65% and 1.65% of the
average net assets of the Fund's Class A, Class B and Class C shares,
respectively. The Fund is obligated to pay such deferred fees in later periods
to the extent the Fund's expenses fall below the annual rates of 0.90%, 1.65%
and 1.65% of the average net assets of the Fund's Class A, Class B and Class C
shares, respectively, provided however, that the Fund is not obligated to pay
any such deferred fees more than one year after the end of the fiscal year in
which the fee was deferred. Nvest Management's undertaking will be in effect for
the life of the Fund's current prospectus. Prior to this, from May 1, 1999 to
April 30, 2000 expenses were limited to 0.70% of Class A average net assets,
1.45% of Class B average net assets, and 1.45% of Class C average net assets.
From May 1, 1995 through May 31, 1995 expenses were voluntarily limited to 0.65%
of Class A average net assets and 1.40% of Class B average net assets. From
April 1, 1992 through April 30, 1995 expenses were voluntarily limited to 0.60%
of Class A average net assets and 1.35% of Class B average net assets.
As a result of the Fund's expenses exceeding the expense limitations during the
six months ended June 30, 2000, Back Bay reduced its management fee of $98,493
by $81,980 and Nvest Management reduced its management fee of $98,494 by
$81,980.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
5. Capital Shares. At June 30, 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:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------------------------ ------------------------------
Class A Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 1,454,036 $ 10,417,593 525,403 $ 3,659,891
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 488,060 3,486,240 203,616 1,413,628
------------ ------------ ------------ ------------
1,942,096 13,903,833 729,019 5,073,519
Shares repurchased .................................. (4,266,090) (30,605,047) (1,825,561) (12,667,371)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. (2,323,994) $(16,701,214) (1,096,542) $ (7,593,852)
------------ ------------ ------------ ------------
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------------------------ ------------------------------
Class B Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 235,614 $ 1,675,047 103,093 $ 713,084
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............. 22,872 162,890 11,653 80,787
------------ ------------ ------------ ------------
258,486 1,837,937 793,871 114,746
Shares repurchased .................................. (232,265) (1,655,906) (166,008) (1,151,476)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 26,221 $ 182,031 (51,262) $ (357,605)
------------ ------------ ------------ ------------
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------------------------ ------------------------------
Class C Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 111,022 $ 794,662 17,570 $ 122,281
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............. 2,997 21,311 1,700 11,789
------------ ------------ ------------ ------------
114,019 815,973 19,270 134,070
Shares repurchased .................................. (76,113) (542,791) (23,826) (166,256)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 37,906 $ 273,182 (4,556) $ (32,186)
------------ ------------ ------------ ------------
Increase (decrease) derived from
capital shares transactions ....................... (2,259,867) $(16,246,001) (1,152,360) $ (7,983,643)
============ ============ ============ ============
</TABLE>
6. Security Lending. The Fund has entered into an agreement with a third party
to lend its securities. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. The Fund receives fees for lending its securities. For the
six months ended June 30, 2000 the Fund did not enter into any securities
lending transactions.
7. Subsequent Event. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
is the investment management arm of France's Caisse des Depots et Consignations,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, management and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
20
<PAGE>
================================================================================
NVEST MUNICIPAL INCOME FUND
NVEST MASSACHUSETTS TAX FREE INCOME FUND
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
Supplement dated August 21, 2000
to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts
Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California
Prospectuses, each dated May 1, 2000
John Maloney has become co-manager of the Funds, joining James Welch. Mr.
Maloney, Vice President at Back Bay Advisors, has been with the company since
1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts
and has 17 years of investment experience.
21
<PAGE>
SAVING FOR RETIREMENT
================================================================================
An Early Start Can Make a Big Difference
--------------------------------------------------------------------------------
With today's life spans, you may be retired for 20 years or more after you
complete your working career. Living these retirement years the way you've
dreamed of will require considerable financial resources. While it's never too
late to start a retirement savings program, it's certainly never too early: The
sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulated the greater retirement nest egg? For
the answer, look at the chart.
Two Hypothetical Investments
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Investor A Investor B
Age 65 $214,295 $157,909
Assumes an 8% fixed rate of return. This illustration does not reflect the
effect of any taxes. Results are not indicative of the past or future results of
any 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.
22
<PAGE>
REGULAR INVESTING PAYS
================================================================================
Five Good Reasons to Invest Regularly
--------------------------------------------------------------------------------
1. It's an easy way to build assets.
2. It's convenient and effortless.
3. It requires a low minimum to get started.
4. It can help you reach important long-term goals like financing retirement
or college funding.
5. It can help you benefit from the ups and downs of the market.
With Investment Builder, Nvest Funds' automatic investment program, you can
invest as little as $100 a month in your Nvest fund automatically -- without
even writing a check. And, as you can see from the chart below, your monthly
investments can really add up over time.
The Power of Monthly Investing
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
100 $200 $500
25 Years $91,236 $182,472 $456,181
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
<PAGE>
================================================================================
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
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund GOVERNMENT INCOME FUNDS
Bullseye Fund Limited Term U.S. Government Fund
Equity Income Fund Government Securities Fund
SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS*
Star Small Cap Fund Cash Management Trust
Kobrick Emerging Growth Fund Tax Exempt Money Market Trust
* Investments in money market funds are not
insured or guaranteed by the FDIC or any
government agency.
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
Visit our Web site at www.nvestfunds.com
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
[LOGO] Nvest Funds(SM)
Where The Best Minds Meet(R)
SI58-0600
[LOGO] Printed On Recycled Paper
<PAGE>
<PAGE>
SEMIANNUAL REPORT
================================================================================
[LOGO] NvestFunds(SM)
Where The Best Minds Meet(R)
--------------------------------------------------------------------------------
Nvest Limited Term
U.S. Government Fund
Where
The Best
Minds Meet(R)
-------------
June 30, 2000
-------------
<PAGE>
PRESIDENT'S MESSAGE
================================================================================
August 2000
--------------------------------------------------------------------------------
[PHOTO]
John T. Hailer
President and Chief
Executive Officer
Nvest Funds
"No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes."
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months -- three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
Your choice of investment tools
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Star fund is composed of four separate segments run
by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions.
No matter how you react to shifting markets, don't let short-term events derail
your long-range program. Consult your financial representative before you make
any changes.
Nvest is poised for global growth
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
/s/ John T. Hailer
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
<PAGE>
NVEST LIMITED TERM U.S. GOVERNMENT FUND
================================================================================
Investment Results Through June 30, 2000
--------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing Nvest Limited Term U.S. Government Fund's performance to a
benchmark index provide you with a general sense of how your Fund performed. To
put this information in context, it may be helpful to understand the special
differences between the two. Your 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 GRAPH IN THE PRINTED MATERIAL.]
June 1990 through June 2000
Lehman Intmdt Gov't
NAV MSC Int Gov't
----------------------------------------------------
6/00 18,075 17,537 19,949
6/99 17,322 16,802 19,126
6/98 16,946 16,437 18,314
6/97 15,746 15,273 16,898
6/96 14,839 14,394 15,802
6/95 14,267 13,839 15,036
6/94 13,269 12,871 13,700
6/93 13,334 12,934 13,726
6/92 12,310 11,941 12,473
6/91 10,958 10,629 11,053
6/90 10,000 9,700 10,000
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
<PAGE>
NVEST LIMITED TERM U.S. GOVERNMENT FUND
================================================================================
Average Annual Total Returns -- 6/30/00
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A (Inception 1/3/89) 6 Months 1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Net Asset Value1 2.86% 3.47% 4.67% 6.10%
With Maximum Sales Charge(2) -0.23 0.34 4.03 5.78
------------------------------------------------------------------------------------------------------------
Class B (Inception 9/27/93) 6 Months 1 Year 5 Years Since Inception
Net Asset Value(1) 2.54% 2.80% 3.98% 3.42%
With CDSC(3) -2.45 -2.07 3.66 3.42
------------------------------------------------------------------------------------------------------------
Class C (Inception 12/30/94) 6 Months 1 Year 5 Years Since Inception
Net Asset Value(1) 2.54% 2.80% 3.98% 4.76%
With CDSC(3) 1.54 1.82 3.98 4.76
------------------------------------------------------------------------------------------------------------
Class Y (Inception 3/31/94) 6 Months 1 Year 5 Years Since Inception
Net Asset Value(1) 3.32% 4.11% 5.08% 5.24%
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Since Since Since
Fund's Fund's Fund's
Class B Class C Class Y
Comparative Performance 6 Months 1 Year 5 Years 10 Years Incept. Incept. Incept.
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Interm. Gov't. Bond Index(4) 3.49% 4.48% 5.82% 7.15% 5.37% 6.92% 6.11%
Morningstar Short Gov't. Average(5) 2.73 4.01 5.02 6.31 4.52 5.83 5.06
Lipper Short Int. U.S. Gov't. Average(6) 2.65 3.70 4.98 6.45 4.44 5.75 5.10
------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Chart
These returns represent past performance and do not guarantee future results.
Share price and returns will vary and you may have a gain or loss when you sell
your shares. Recent returns may be higher or lower than those shown. Class Y
shares are available to certain institutional investors only.
(1) These results include reinvestment of any dividends and capital gains, but
do not include a sales charge.
(2) These results include reinvestment of any dividends and capital gains, and
the maximum sales charge of 3.00%.
(3) These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares. Class C share performance
assumes a 1.00% CDSC when you sell shares within one year of purchase.
(4) Lehman Intermediate Government Bond Index is an unmanaged index of bonds
issued by the U.S. government and its agencies with maturities of 1 to 10
years. You may not invest directly in an index. Class B since inception
return is calculated from 9/30/93.
(5) Morningstar Short Government Average is the average performance without
sales charges of all mutual funds with similar investment objectives as
calculated by Morningstar, Inc. Class B since inception return is
calculated from 9/30/93.
(6) Lipper Short Intermediate U.S. Government Average is the average
performance without sales charges of all 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
<PAGE>
NVEST LIMITED TERM U.S. GOVERNMENT FUND
================================================================================
Interview with Your Portfolio Managers
--------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
Scott Nicholson,
James Welch
Members of
subadviser team,
Back Bay Advisors, L.P.
Q. How did the Fund perform during the first half of 2000?
Nvest Limited Term U.S. Government Fund posted a total return of 2.86% at net
asset value on Class A shares for the six months ending June 30, 2000. The
Fund's return included $0.33 per share in dividends reinvested during this
period. By comparison, your Fund's benchmark, the Lehman Intermediate Government
Bond Index, had a return of 3.49% for the same period. Although your Fund's
return was below its benchmark for the period, bear in mind that the index
includes bonds maturing in 1-10 years, whereas Nvest Limited Term U.S.
Government Fund's average maturity at the end of June was 5.6 years.
Q. What was the investment environment like in the first six months of 2000?
The bond market held up well despite the Federal Reserve Board's continued
program of short-term interest-rate hikes. Market observers were heartened by
the Fed's attempts to slow growth and dampen inflationary pressures. Investors
also became more interested in the relative stability offered by bonds after the
stock market experienced significant volatility for the first time in several
years.
Overall, though, the performance of U.S. Treasury securities -- especially
longer-maturity Treasuries -- overshadowed other sectors of the fixed-income
market. Vibrant economic growth in the U.S. led to a budget surplus, reducing
the need for the federal government to issue debt to finance government
programs. The U.S. Treasury instituted a series of buybacks of high-yielding,
longer-term U.S. Treasury bonds, and trimmed its calendar of new issues. This
reduced supply, coupled with strong demand, pushed yields on long-term Treasury
bonds lower and prices higher. As yields on long-term government bonds declined
and short-term yields rose due to Fed short-term interest-rate hikes, the
Treasury yield curve became inverted -- short-term rates rose above long-term
rates.
3
<PAGE>
NVEST LIMITED TERM U.S. GOVERNMENT FUND
================================================================================
--------------------------------------------------------------------------------
Q. What was your strategy as this transpired?
In addition to Treasury securities, Nvest Limited Term U.S. Government Fund can
invest in U.S. government agency bonds, mortgage-backed securities, corporate
bonds, and asset-backed securities (bonds backed by receipts from auto and other
loans). Our emphasis on Treasuries during the period benefited the Fund. In
addition, we employed a "barbell" strategy with our Treasury investments. That
is, part of the portfolio focused on longer-term Treasuries -- capturing price
appreciation as yields fell -- and part was invested in short-term Treasuries --
reaping high yields from short-term notes. We avoided the intermediate-term
Treasury bonds that did not perform as well.
Our decision to de-emphasize U.S. government agency securities also benefited
the Fund. Agency securities came under pressure during the period, as members of
Congress and Treasury officials began to question their implied government
guarantees. Although securities issued by agencies, such as the Federal National
Mortgage Agency (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), are not backed by the full faith and credit of the U.S.
government, they do enjoy the implicit backing of the government because they
were created by an act of Congress. The Fund's holdings in these agencies had
been reduced to zero when they experienced their worst performance. We used the
proceeds from the sale of agency securities to add to the Fund's position in
mortgage-backed securities. Because rising interest rates resulted in less
refinancing of existing mortgages, these securities performed better than other
non-Treasury issues.
Portfolio Mix -- 6/30/00
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE GRAPH IN THE PRINTED MATERIAL.]
Government Agencies 50.5%
Treasuries 26.6%
Corporate & Other 3.3%
Asset-Backed Securities 15.2%
Yankees 4.4%
Portfolio holdings and asset allocation will vary.
4
<PAGE>
NVEST LIMITED TERM U.S. GOVERNMENT FUND
================================================================================
--------------------------------------------------------------------------------
Q. What is your current outlook?
While the stock market has dominated financial headlines in the past few years,
we believe that 2000 will witness the re-emergence of the fixed-income market.
The Fed continues to raise rates -- causing more stock market uncertainty -- but
is doing so prudently. We think the lion's share of the Fed's rate-hike program
may be behind us.
Once the Fed is done, the bond market in general, and Treasuries in particular,
should be poised for a rally. As a result, we plan to continue to emphasize
those market sectors that we believe will provide the best combination of
current income and high quality for shareholders of Nvest Limited Term U.S.
Government 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 Limited Term U.S. Government Fund may invest primarily in securities
issued or backed by the federal government, including Treasury securities, which
are guaranteed if held to maturity; mutual funds that invest in these securities
are not. It may also invest a portion of assets in foreign securities, which
have special risks and in mortgage securities that are subject to prepayment
risk. These risks affect the value of your investment. See a prospectus for
details.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- 99.0% of Total Net Assets
<TABLE>
<CAPTION>
Ratings (c)
----------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed -- 15.2%
$ 2,000,000 Americredit Automobile, 7.150%, 8/12/2004 ........................ Aaa AAA $ 1,994,380
5,000,000 Green Tree Financial Corp., 6.670%, 7/15/2030 .................... Aaa AAA 4,948,400
5,500,000 Household Home Equity Loan Trust, 6.950%, 10/20/2023 ............. Aaa AAA 5,450,995
5,000,000 Huntington Auto Trust, 7.330%, 7/15/2004 ......................... Aaa AAA 5,001,550
5,000,000 WFS Financial Owner Trust, 7.220%, 9/20/2004 ..................... Aaa AAA 4,987,500
------------
22,382,825
------------
Banks -- 2.3%
3,300,000 Bank of America, 7.875%, 5/16/2005 ............................... Aa2 A+ 3,343,303
------------
Government Agencies -- 50.5%
54,518 Federal Home Loan Mortgage Corp., 7.500%, 6/1/2026 ............... Aaa AAA 53,972
21,740 Federal Home Loan Mortgage Corp., 10.000%, 7/1/2019 .............. Aaa AAA 22,891
3,011,938 Federal Home Loan Mortgage Corp., 11.500%,
with various maturities to 2020, (d) (e) ......................... Aaa AAA 3,278,061
5,000,000 Federal National Mortgage Association, 6.625%, 1/15/02 ........... Aaa AAA 4,978,100
3,803,756 Federal National Mortgage Association, 7.000%, 12/1/2022 (e) ..... Aaa AAA 3,673,021
12,655,594 Federal National Mortgage Association, 7.500%, 8/1/2013 ......... Aaa AAA 12,671,920
8,670,029 Government National Mortgage Association, 7.000%, 10/15/2028 ..... Aaa AAA 8,431,950
39,865,885 Government National Mortgage Association, 8.000%,
with various maturities to 2030 (d) .............................. Aaa AAA 40,317,167
40,622 Government National Mortgage Association, 12.500%,
with various maturities to 2015 (d) .............................. Aaa AAA 45,738
672,450 Government National Mortgage Association, 16.000%,
with various maturities to 2013 (d) .............................. Aaa AAA 798,044
252,628 Government National Mortgage Association, 17.000%,
with various maturities to 2012 (d) .............................. Aaa AAA 300,235
------------
74,571,099
------------
U.S. Government -- 26.6%
5,500,000 United States Treasury Bonds, 9.250%, 2/15/2016 .................. Aaa AAA 7,137,130
4,000,000 United States Treasury Bonds, 12.000%, 8/15/2013 ................. Aaa AAA 5,400,000
5,344,700 United States Treasury Notes, 3.625%, 7/15/2002 (f) .............. Aaa AAA 5,307,929
2,087,760 United States Treasury Notes, 3.875%, 1/15/2009 (f) .............. Aaa AAA 2,055,796
4,000,000 United States Treasury Notes, 7.000%, 7/15/2006 .................. Aaa AAA 4,145,000
15,000,000 United States Treasury Notes, 8.000%, 5/15/2001 .................. Aaa AAA 15,196,875
------------
39,242,730
------------
</TABLE>
6 See accompanying notes to financial statements.
<PAGE>
PORTFOLIO COMPOSITION -- CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
Bonds and Notes -- continued
<TABLE>
<CAPTION>
Ratings (c)
----------------
Principal Standard
Amount Description Moody's & Poor's Value (a)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee -- 4.4%
$ 4,960,000 Inter-American Development Bank Bonds, 12.250%, 12/15/2008 ........ Aaa AAA $ 6,545,930
------------
Total Bonds and Notes (Identified Cost $147,201,919) ............... 146,085,887
------------
Total Investments - 99.0% (Identified Cost $147,201,919) (b) ....... 146,085,887
Other assets less liabilities ...................................... 1,445,210
------------
Total Net Assets - 100% ............................................ $147,531,097
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net unrealized
depreciation on investments based on cost for federal income tax
purposes of $147,201,919 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess value over tax cost .......................................... $ 321,157
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value ....................................... (1,437,189)
------------
Net unrealized depreciation ..................................................... $ (1,116,032)
============
</TABLE>
At December 31, 1999 the Fund had a capital loss carryover of
approximately $45,664,662 of which $26,963,634 expires on
December 31, 2002, $1,001,296 expires on December 31, 2003,
$4,342,078 expires on December 31, 2004, $2,731,339 expires on
December 31, 2005 and $10,626,315 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 June 30, 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 June 30, 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 mortgage backed securities of the
Federal Home Loan Mortgage Corporation and Government National
Mortgage Association are interests in separate pools of
mortgages. All separate investment in securities of these issuers
which have the same coupon rate have been aggregated for the
purpose of presentation in the schedule of investments.
(e) A portion of this position has been segregated as collateral in
connection with the Fund's derivative investments during the
period.
(f) Variable Rate Securities. The rates shown were those in effect at
June 30, 2000.
See accompanying notes to financial statements. 7
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $147,201,919) ........................ $ 146,085,887
Cash ....................................................................... 698,168
Investments held as collateral for loaned securities ....................... 23,394,375
Receivable for:
Fund shares sold ......................................................... 76,406
Accrued interest ......................................................... 1,608,013
-------------
171,862,849
LIABILITIES
Payable for:
Collateral on securities loaned, at value ................................ $ 23,394,375
Securities purchased ..................................................... 673,579
Dividends declared ....................................................... 150,982
Accrued expenses:
Management fees .......................................................... 7,858
Deferred trustees' fees .................................................. 21,126
Accounting and administrative ............................................ 8,768
Other .................................................................... 75,064
-------------
24,331,752
-------------
NET ASSETS .................................................................... $ 147,531,097
=============
Net Assets consist of:
Paid in capital .......................................................... $ 198,824,531
Undistributed net investment income ...................................... 468,131
Accumulated net realized gains (losses) .................................. (50,645,533)
Unrealized appreciation (depreciation) on investments .................... (1,116,032)
-------------
NET ASSETS .................................................................... $ 147,531,097
=============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($125,737,823 / 11,477,251 shares of beneficial interest) ................... $ 10.96
=========
Offering price per share (100 / 97 of $10.96) ................................. $ 11.30*
=========
Net asset value and offering price of Class B shares
($11,678,023 /1,067,626 shares of beneficial interest) ...................... $ 10.94**
=========
Net asset value and offering price of Class C shares
($6,659,559 / 608,383 shares of beneficial interest) ........................ $ 10.95**
=========
Net asset value, offering and redemption price of Class Y shares
($3,455,692 / 313,688 shares of beneficial interest) ........................ $ 11.02
=========
</TABLE>
* 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.
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................................................. $ 6,083,986
Securities lending income ............................................................ 27,226
-----------
6,111,212
Expenses
Management fees .................................................................... $ 515,676
Service and distribution fees - Class A ............................................ 235,756
Service and distribution fees - Class B ............................................ 63,853
Service and distribution fees - Class C ............................................ 39,577
Trustees' fees and expenses ........................................................ 6,490
Accounting and administrative ...................................................... 28,184
Custodian .......................................................................... 52,476
Transfer agent - Class A, Class B, Class C ......................................... 135,400
Transfer agent - Class Y ........................................................... 19,933
Audit and tax services ............................................................. 20,715
Legal .............................................................................. 3,934
Printing ........................................................................... 16,162
Registration ....................................................................... 21,812
Miscellaneous ...................................................................... 4,679
-----------
Total expenses ........................................................................ 1,164,647
-----------
Net investment income ................................................................. 4,946,565
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net .................................................................. (3,805,182)
Written options - net .............................................................. (30,531)
Futures contracts - net ............................................................ (24,675)
-----------
Total realized gain (loss) on investments,written options and futures contracts .... (3,860,388)
-----------
Unrealized appreciation (depreciation) on:
Investments - net .................................................................. 3,177,281
-----------
Net gain (loss) on investment transactions ............................................ (683,107)
-----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ................................... $ 4,263,458
===========
</TABLE>
See accompanying notes to financial statements. 9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
(unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................................................... $ 12,169,938 $ 4,946,565
Net realized gain (loss) on investments, written options and futures contracts .......... (9,210,131) (3,860,388)
Unrealized appreciation (depreciation) on investments, written options
and futures contracts ................................................................. (4,766,837) 3,177,281
------------- -------------
Increase (decrease) in net assets from operations ....................................... (1,807,030) 4,263,458
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................................................... (9,933,189) (3,942,056)
Class B ............................................................................... (840,673) (333,596)
Class C ............................................................................... (573,411) (206,965)
Class Y ............................................................................... (460,940) (100,664)
------------- -------------
(11,808,213) (4,583,281)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................................. (40,341,564) (32,646,033)
------------- -------------
Total increase (decrease) in net assets .................................................... (53,956,807) (32,965,856)
NET ASSETS
Beginning of the period ................................................................. 234,453,760 180,496,953
------------- -------------
End of the period ....................................................................... $ 180,496,953 $ 147,531,097
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ....................................................................... $ 104,847 $ 468,131
============= =============
</TABLE>
10 See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 11.49 $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................................ 0.86 0.81 0.72 0.67 0.66 0.37
Net Realized and Unrealized Gain (Loss) on Investments 0.59 (0.54) 0.09 0.06 (0.74) (0.05)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ..................... 1.45 0.27 0.81 0.73 (0.08) 0.32
--------- --------- --------- --------- --------- ---------
Less Distributions
Distributions From Net Investment Income ............. (0.84) (0.82) (0.72) (0.67) (0.65) (0.33)
--------- --------- --------- --------- --------- ---------
Total Distributions .................................. (0.84) (0.82) (0.72) (0.67) (0.65) (0.33)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ....................... $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97 $ 10.96
========= ========= ========= ========= ========= =========
Total Return (%) (a) ................................. 13.0 2.4 7.3 6.5 (0.7) 2.9
Ratio of Operating Expenses to Average
Net Assets (%) ....................................... 1.22 1.25 1.28 1.31 1.33 1.39(c)
Ratio of Net Investment Income to Average
Net Assets (%) ....................................... 7.18 7.13 6.40 5.81 5.91 6.30(c)
Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200
Net Assets, End of Period (000) ...................... $ 361,520 $ 276,178 $ 222,185 $ 194,032 $ 149,756 $ 125,738
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 11.48 $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................................ 0.76 0.73 0.65 0.60 0.59 0.34
Net Realized and Unrealized Gain (Loss) on Investments 0.61 (0.54) 0.08 0.07 (0.75) (0.06)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ..................... 1.37 0.19 0.73 0.67 (0.16) 0.28
--------- --------- --------- --------- --------- ---------
Less Distributions
Distributions From Net Investment Income ............. (0.76) (0.74) (0.65) (0.60) (0.58) (0.29)
--------- --------- --------- --------- --------- ---------
Total Distributions .................................. (0.76) (0.74) (0.65) (0.60) (0.58) (0.29)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ....................... $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95 $ 10.94
========= ========= ========= ========= ========= =========
Total Return (%) (b) ................................. 12.3 1.7 6.5 5.9 (1.4) 2.5
Ratio of Operating Expenses to Average
Net Assets (%) ..................................... 1.87 1.90 1.93 1.96 1.98 2.04(c)
Ratio of Net Investment Income to Average
Net Assets (%) ..................................... 6.53 6.48 5.75 5.16 5.26 5.65(c)
Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200
Net Assets, End of Period (000) ...................... $ 18,056 $ 18,503 $ 16,060 $ 18,116 $ 14,601 $ 11,678
</TABLE>
(a) A sales charge is not reflected in total return calculations.
(b) A contingent deferred sales charge is not reflected in total return
calculations.
(c) Computed on an annualized basis.
See accompanying notes to financial statements. 11
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 11.48 $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................................ 0.64 0.75 0.65 0.60 0.59 0.37
Net Realized and Unrealized Gain (Loss) on Investments 0.64 (0.57) 0.09 0.07 (0.75) (0.09)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ..................... 1.28 0.18 0.74 0.67 (0.16) 0.28
--------- --------- --------- --------- --------- ---------
Less Distributions
Dividends From Net Investment Income ................. (0.65) (0.74) (0.65) (0.60) (0.58) (0.29)
Distributions in Excess of Net Investment Income ..... (0.01) 0.00 0.00 0.00 0.00 0.00
--------- --------- --------- --------- --------- ---------
Total Distributions .................................. (0.66) (0.74) (0.65) (0.60) (0.58) (0.29)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ....................... $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96 $ 10.95
========= ========= ========= ========= ========= =========
Total Return (%) (a) ................................. 11.4 1.6 6.6 5.9 (1.4) 2.5
Ratio of Operating Expenses to Average
Net Assets (%) ...................................... 1.87 1.90 1.93 1.96 1.98 2.04(b)
Ratio of Net Investment Income to Average Net
Assets (%) ........................................... 6.53 6.48 5.75 5.16 5.26 5.65(b)
Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200
Net Assets, End of Period (000) ...................... $ 5,936 $ 14,903 $ 15,699 $ 13,962 $ 9,054 $ 6,660
</TABLE>
(a) A contingent deferred sales charge is not reflected in total return
calculations.
(b) Computed on an annualized basis.
12 See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
<CAPTION>
Class Y
--------------------------------------------------------------------------
Six Months
Year Ended December 31, Ended
------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 11.51 $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................................ 0.86 0.85 0.76 0.72 0.70 0.95
Net Realized and Unrealized Gain (Loss) on Investments 0.63 (0.54) 0.08 0.06 (0.74) (0.58)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ..................... 1.49 0.31 0.84 0.78 (0.04) 0.37
--------- --------- --------- --------- --------- ---------
Less Distributions
Distributions From Net Investment Income ............. (0.87) (0.86) (0.76) (0.71) (0.69) (0.35)
--------- --------- --------- --------- --------- ---------
Total Distributions .................................. (0.87) (0.86) (0.76) (0.71) (0.69) (0.35)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ....................... $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00 $ 11.02
========= ========= ========= ========= ========= =========
Total Return (%) ..................................... 13.3 2.8 7.5 6.9 (0.3) 3.3
Ratio of Operating Expenses to Average
Net Assets (%) ..................................... 0.87 0.90 0.93 0.96 0.98 0.94(a)
Ratio of Net Investment Income to Average
Net Assets (%) ..................................... 7.53 7.48 6.75 6.16 6.26 7.26(a)
Portfolio Turnover Rate (%) .......................... 247 327 533 1,351 400 200
Net Assets, End of Period (000) ...................... $ 5,723 $ 5,313 $ 5,262 $ 8,345 $ 7,086 $ 3,456
</TABLE>
(a) Computed on an annualized basis.
See accompanying notes to financial statements. 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
1. Significant Accounting Policies. The Fund is a series of Nvest Funds Trust
II, a Massachusetts business trust (the "Trust"), and is registered under the
Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end
management investment company. The Fund seeks a high current return consistent
with preservation of capital. The Declaration of Trust permits the Trustees to
issue an unlimited number of shares of the Trust in multiple series (each such
series is a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front end sales charge of 3.00%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before May
1, 1997). Class C shares do not pay a front end sales charge and do not convert
to any class of shares, but they do pay a higher ongoing distribution fee than
Class A shares and may be subject to a contingent deferred sales charge if those
shares are redeemed within one year. Class Y shares do not pay a front end sales
charge, a contingent deferred sales charge or service and distribution fees.
They are intended for institutional investors with a minimum of $1,000,000 to
invest. Expenses of the Fund are borne pro rata by the holders of all classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution and transfer agent fees applicable to
such class), and votes as a class only with respect to its own Rule 12b-1 Plan.
Shares of each class would receive their pro rata share of the net assets of the
Fund, if the Fund were liquidated. In addition, the Trustees approve separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States for investment companies. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
a. Security Valuation. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser and subadviser,
under the supervision of the Fund's Trustees.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on the trade date. Interest income is recorded on the 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 the identified cost basis.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
c. Options. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to the
Fund is that the change in value of options contracts may not correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty is unable to perform.
The maximum loss for purchased options is limited to the premium initially paid
for the option. For options written by the Fund, the maximum loss is not limited
to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
d. Interest Rate Futures Contracts. The Fund may purchase or sell interest rate
futures contracts to hedge against changes in the values of securities the Fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price (or to deliver an
amount of cash) on a future date. Upon entering into such a contract, the
purchasing Fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the Fund may not be able to close out its futures positions
due to an illiquid secondary market.
e. Federal Income Taxes. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its 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 generally accepted accounting
principles. These differ-
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
ences relate primarily to differing treatments for income recognition for
mortgage-backed securities. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to capital accounts.
g. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. The Fund's subadviser is responsible
for determining that the value of the collateral is at all times at least equal
to the repurchase price. Repurchase agreements could involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
2. Purchases and Sales of Securities. For the six months ended June 30, 2000,
purchases and sales of securities (excluding short-term investments) were as
follows:
Purchases Sales
----------------------------- -----------------------------
U.S. Government Other U.S. Government Other
--------------- ------------ --------------- ------------
$294,561,910 $27,064,467 $316,178,148 $37,806,554
Transactions in written options for the six months ended June 30, 2000 are
summarized as follows:
Written Options
-------------------------
Number of Premiums
Contracts Received
--------- --------
Open at December 31, 1999 ............ 0 $ 0
Contracts opened ..................... (50) (34,906)
Contracts closed ..................... 50 34,906
-------- --------
Open at June 30, 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 0.65% 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 Advisors are wholly owned
subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of
Metropolitan Life Insurance Company (see Note 6). Fees earned by Nvest
Management and Back Bay Advisors under the management and subadvisory agreements
in effect during the six months ended June 30, 2000 are as follows:
Fees Earned
-----------
Nvest Management $ 257,838
Back Bay 257,838
---------
$ 515,676
=========
The effective annualized management fee for the six months ended June 30, 2000
was 0.65%.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a group fee for these
services equal to the annual rate of 0.035% of the first $5 billion of Nvest
Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest
Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net
assets in excess of $10 billion. For the six months ended June 30, 2000, these
expenses amounted to $28,184, and are shown separately in the financial
statements as accounting and administrative. The effective annualized accounting
and administrative expense for the six months ended June 30, 2000 was 0.034%.
c. Service and Distribuion Fees. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted Service and Distribution Plans relating to the Fund's Class A
shares (the "Class A Plan") and Service and Distribution Plans relating to the
Fund's Class B shares (the "Class B Plan") and Class C shares (the "Class C
Plan").
Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest
Funds"), 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
(including certain payments to securities dealers who may be affiliated with
Nvest Funds) incurred by Nvest Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. Also under the
Class A Plan, the Fund pays Nvest Funds a monthly distribution fee at the annual
rate of 0.10% of the average daily net assets attributable to the Fund's Class A
shares as reimbursement for expenses (including certain payments to securities
dealers who may be affiliated with Nvest Funds) incurred by Nvest Funds in
connection with the marketing or sale of Class A shares.
For the six months ended June 30, 2000, the Fund paid Nvest Funds $168,397 in
service fees and $67,359 in distribution fees under the Class A Plan. If the
expenses of Nvest Funds that are otherwise reimbursable, as service fees or
distribution fees, respectively, under the Class A Plan incurred in any year
exceed the amounts of such fees payable by the Fund under the Class A Plan, the
unreimbursed amounts (together with unreimbursed amounts from prior years) may
be carried forward for reimbursement in future years in which the Class A Plan
remains in effect. The amount of unreimbursed expense carried forward into 2000
is $2,272,723 (reimbursable as distribution fees).
Under the Class B and Class C Plans, the Fund pays Nvest Funds monthly service
fees at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class B shares and Class C shares, as compensation for services
provided and expenses (including certain payments to securities dealers who may
be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal
services to investors in Class B and Class C shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 2000, the Fund paid
Nvest Funds $15,963 and $9,894 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 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 in connection
with the marketing or sale of Class B and Class C shares. For the six months
ended June 30, 2000, the Fund paid Nvest Funds $47,890 and $29,683 in
distribution fees under the Class B and Class C Plans, respectively.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
Commissions (including contingent deferred sales charges) on Fund shares paid to
Nvest Funds by investors in shares of the Fund during the six months ended June
30, 2000 amounted to $71,237.
d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to
the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer
agent for the Fund. NSC receives account fees for Class A, Class B and Class C
shareholder accounts. NSC and BFDS are also reimbursed by the Fund for
out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of
average daily net assets. For the six months ended June 30, 2000, the Fund paid
NSC $120,504 as compensation for its services as transfer agent.
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, Nvest, NSC or their affiliates. Each other Trustee
receives a retainer fee at the annual rate of $40,000 and meeting attendance
fees of $3,500 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$6,000 while each committee chairman receives a retainer fee (beyond the $6,000
fee) at the annual rate of $4,000. These fees are allocated to the various Nvest
Funds based on a formula that takes into account, among other factors, the
relative net assets of each Fund.
A deferred compensation plan is available to the Trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund or
certain other Nvest Funds on the normal payment date. Deferred amounts remain in
the Funds until distributed in accordance with the Plan.
4. Capital Shares. At June 30, 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:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
---------------------------- ----------------------------
Class A Shares Amount Shares Amount
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ........................................................ 4,310,455 $ 48,747,149 1,288,804 $ 14,063,513
Shares issued in connection with the reinvestment of:
Distributions from net investment income ......................... 711,288 8,028,741 292,044 3,189,938
------------ ------------ ------------ ------------
5,021,743 56,775,890 1,580,848 17,253,451
Shares repurchased ................................................. (7,948,175) (89,760,622) (3,757,029) (41,013,075)
------------ ------------ ------------ ------------
Net increase (decrease) ............................................ (2,926,432) $(32,984,732) (2,176,181) $(23,759,624)
------------ ------------ ------------ ------------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
---------------------------- ----------------------------
Class B Shares Amount Shares Amount
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ........................................................ 470,492 $ 5,337,955 94,290 $ 1,029,699
Shares issued in connection with the reinvestment of:
Distributions from net investment income ......................... 63,521 715,455 26,456 288,663
------------ ------------ ------------ ------------
534,013 6,053,410 120,746 1,318,362
Shares repurchased ................................................. (751,056) (8,497,037) (386,205) (4,208,937)
------------ ------------ ------------ ------------
Net increase (decrease) ............................................ (217,043) $ (2,443,627) (265,459) $ (2,890,575)
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
---------------------------- ----------------------------
Class C Shares Amount Shares Amount
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ........................................................ 2,004,195 $ 22,667,643 404,455 $ 4,421,615
Shares issued in connection with the reinvestment of:
Distributions from net investment income ......................... 39,746 448,945 14,089 153,766
------------ ------------ ------------ ------------
2,043,941 23,116,588 418,544 4,575,381
Shares repurchased ................................................. (2,411,539) (27,272,883) (636,280) (6,944,158)
------------ ------------ ------------ ------------
Net increase (decrease) ............................................ (367,598) $ (4,156,295) (217,736) $ (2,368,777)
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
---------------------------- ----------------------------
Class Y Shares Amount Shares Amount
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ........................................................ 131,028 $ 1,487,903 49,530 $ 541,035
Shares issued in connection with the reinvestment of:
Distributions from net investment income ......................... 40,672 459,988 9,883 108,316
------------ ------------ ------------ ------------
171,700 1,947,891 59,413 649,351
Shares repurchased ................................................. (238,738) (2,704,801) (389,926) (4,276,408)
------------ ------------ ------------ ------------
Net increase (decrease) ............................................ (67,038) $ (756,910) (330,513) $ (3,627,057)
------------ ------------ ------------ ------------
Increase (decrease) derived from capital shares transactions ....... (3,578,111) $(40,341,564) (2,989,889) $(32,646,033)
============ ============ ============ ============
</TABLE>
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 June
30, 2000 the Fund had on loan securities having a market value of $22,938,551
collateralized by cash in the amount of $23,394,375 which was invested in a
short-term instrument.
6. Subsequent Event. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management is
the investment management arm of France's Caisse des Depots et Consignations,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, manage-
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
ment and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
20
<PAGE>
--------------------------------------------------------------------------------
NVEST MUNICIPAL INCOME FUND
NVEST MASSACHUSETTS TAX FREE INCOME FUND
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
Supplement dated August 21, 2000
to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts
Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California
Prospectuses, each dated May 1, 2000
John Maloney has become co-manager of the Funds, joining James Welch. Mr.
Maloney, Vice President at Back Bay Advisors, has been with the company since
1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts
and has 17 years of investment experience.
21
<PAGE>
SAVING FOR RETIREMENT
================================================================================
An Early Start Can Make a Big Difference
--------------------------------------------------------------------------------
With today's life spans, you may be retired for 20 years or more after you
complete your working career. Living these retirement years the way you've
dreamed of will require considerable financial resources. While it's never too
late to start a retirement savings program, it's certainly never too early: The
sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulated the greater retirement nest egg? For
the answer, look at the chart.
Two Hypothetical Investments
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Investor A Investor B
Age 65 $214,295 $157,909
Assumes an 8% fixed rate of return. This illustration does not reflect the
effect of any taxes. Results are not indicative of the past or future results of
any 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.
22
<PAGE>
REGULAR INVESTING PAYS
================================================================================
Five Good Reasons to Invest Regularly
--------------------------------------------------------------------------------
1. It's an easy way to build assets.
2. It's convenient and effortless.
3. It requires a low minimum to get started.
4. It can help you reach important long-term goals like financing retirement
or college funding.
5. It can help you benefit from the ups and downs of the market.
With Investment Builder, Nvest Funds' automatic investment program, you can
invest as little as $100 a month in your Nvest fund automatically -- without
even writing a check. And, as you can see from the chart below, your monthly
investments can really add up over time.
The Power of Monthly Investing
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
100 $200 $500
25 Years $91,236 $182,472 $456,181
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
<PAGE>
================================================================================
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
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund GOVERNMENT INCOME FUNDS
Bullseye Fund Limited Term U.S. Government Fund
Equity Income Fund Government Securities Fund
SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS*
Star Small Cap Fund Cash Management Trust
Kobrick Emerging Growth Fund Tax Exempt Money Market Trust
*Investments in money market funds are not
insured or guaranteed by the FDIC or any
government agency."
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
Visit our Web site at www.nvestfunds.com
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
[LOGO] NvestFunds(SM)
Where The Best Minds Meet(R)
LT58-0600
[LOGO] Printed On Recycled Paper
<PAGE>
<PAGE>
SEMIANNUAL REPORT
================================================================================
[LOGO] NvestFunds(SM)
Where The Best Minds Meet(R)
--------------------------------------------------------------------------------
Nvest Massachusetts
Tax Free Income Fund
Where
The Best
Minds Meet(R)
Please read the prospectus
supplement on page 20.
-------------
June 30, 2000
-------------
<PAGE>
PRESIDENTS MESSAGE
================================================================================
AUGUST 2000
--------------------------------------------------------------------------------
[PICTURE OF JOHN HAILER GOES HERE]
John
T. Hailer President and
Chief Executive Officer
Nvest Funds
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months - three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
YOUR CHOICE OF INVESTMENT TOOLS
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Nvest Star fund is composed of four separate segments
run by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions. No matter how you react to
shifting markets, don't let short-term events derail your long-range program.
Consult your financial representative before you make any changes.
NVEST IS POISED FOR GLOBAL GROWTH
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
[JOHN HAILER'S SIGNATURE APPEARS HERE]
"No matter how you react to shifting markets, don't let short-term events derail
your long- range program. Consult your financial representative before you make
any changes."
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
NVEST MASSACHUSETTS TAX FREE INCOME FUND
================================================================================
INVESTMENT RESULTS THROUGH JUNE 30, 2000
--------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing Nvest Massachusetts Tax Free Income Fund's performance with
a benchmark index provide you with a general sense of how your Fund performed.
To put this information in context, it may be helpful to understand the special
differences between the two. Your 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
[Growth of $10,000 chart goes here]
NAV MSC Lehman Municipal
--------------------------------------------------------
6/00 18,161 17,389 19,927
6/99 18,045 17,278 19,300
6/98 17,786 17,030 18,781
6/97 16,490 15,789 17,285
6/96 15,284 14,634 15,857
6/95 14,354 13,744 14,870
6/94 13,335 12,768 13,669
6/93 13,583 13,006 13,641
6/92 12,081 11,567 12,184
6/91 10,792 10,333 10,901
6/90 10,000 9,575 10,000
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
<PAGE>
NVEST MASSACHUSETTS TAX FREE INCOME FUND
================================================================================
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/00
--------------------------------------------------------------------------------
CLASS A (Inception 3/23/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1),(4).............. 3.47% 0.64% 4.82% 6.14%
With Maximum Sales Charge(2),(4) ... -0.94 -3.66 3.92 5.68
SINCE
CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR 5 YEARS INCEPTION
Net Asset Value(1),(4) ............. 3.09% -0.08% 4.12% 3.13%
With CDSC(3),(4) ................... -1.91 -4.84 3.79 3.13
<TABLE>
<CAPTION>
SINCE
FUND'S
CLASS B
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
Lehman Municipal Bond Index(5) 4.48% 3.25% 5.88% 7.06% 5.15%
Morningstar Muni Single State Long Avg.(6) 3.34 1.78 4.39 6.05 3.90
Lipper MA Municipal Debt Average(7) 3.99 0.87 4.73 6.44 3.99
</TABLE>
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.
YIELDS AS OF 6/30/00
--------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-day Yield(8) 5.07% 4.66%
Taxable Equivalent Yield(9) 8.92 8.20
NOTES TO CHARTS
1 These results include reinvestment of any dividends and capital gains, but
do not include a sales charge.
2 These results include reinvestment of any dividends and capital gains, and
the maximum sales charge of 4.25%.
3 These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares.
4 The Fund waived certain fees and expenses during the period indicated and
its average total return would have been lower had these fees not been
waived.
5 Lehman Municipal Bond Index is an unmanaged composite measure of the
performance of the municipal bond market. You may not invest directly in an
index. Class B since-inception return is calculated from 9/30/93.
6 Morningstar Muni Single State Long Average is the average performance
without sales charges of all mutual funds with similar investment
objectives as calculated by Morningstar, Inc. Class B since-inception
return is calculated from 9/30/93.
7 Lipper Massachusetts Municipal Debt Average is the average performance
without sales charges of all 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.
8 SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines.
9 Taxable equivalent yield is based on the maximum combined federal and MA
income tax of 43.13%. A portion of income may be subject to federal, state
or alternative minimum tax. Capital gains, if any, are subject to capital
gains tax.
2
<PAGE>
NVEST MASSACHUSETTS TAX FREE INCOME FUND
================================================================================
INTERVIEW WITH YOUR PORTFOLIO MANAGER
--------------------------------------------------------------------------------
[PICTURE OF JAMES WELCH GOES HERE]
James Welch
Back Bay Advisors, L.P.
Q. How did Massachusetts Tax Free Income Fund perform over the past six months?
The return on Class A shares of Nvest Massachusetts Tax Free Income Fund was
3.47% at net asset value for the six months ended June 30, 2000, including $0.41
per share in reinvested dividends. For the same period, the Fund's benchmark,
Lehman Municipal Bond Index, returned 4.48%. Bear in mind that the Lehman Index
reflects municipal bond performance throughout the country, including states
with lower ratings than Massachusetts, which pay higher rates to compensate
investors for greater risk. Throughout the period, we maintained a relatively
conservative portfolio structure as part of our efforts to smooth out the price
volatility of the market. This strategy worked well while interest rates were
rising, but it detracted from performance as rates fell in June.
The 30-Day yield on Class A shares of your Fund was 5.07% as of June 30, 2000,
which is equivalent to a taxable yield of 8.92%, based on the maximum combined
federal and Massachusetts income tax rate of 43.13%.
Q. What was the investment environment for Massachusetts municipal bonds during
the period?
Continuing in its proactive battle against inflation, the Federal Reserve Board
implemented a series of short-term interest rate hikes during the first six
months of 2000. Despite these tightening efforts, the environment for
fixed-income investments in general was surprisingly positive. The economy
continued to grow at a brisk pace while inflation remained relatively dormant.
The fixed-income market was also bolstered in the early part of the period by
the U.S. Treasury Department's announcement that it was buying back long-term
debt. This created a strong demand for long-term Treasuries, driving up prices,
and leading to an inverted yield curve -- where yields on short-term bonds rise
above long-term bond yields.
3
<PAGE>
NVEST MASSACHUSETTS TAX FREE INCOME FUND
================================================================================
Meanwhile, the Massachusetts municipal bond market benefited from strong state
and national economies. Revenues from sales, real estate taxes and other taxes
soared, improving the state's fiscal strength. Finally, as yields of long-term
Treasuries fell, so too did yields on long-term municipals. This drop in yields
(and corresponding increase in prices) meant that long-term municipal bonds
outperformed short- and intermediate-term municipal bonds.
Q. Did supply and demand impact the Massachusetts municipal market?
Yes. During the period, the supply of high-quality, tax-exempt issues fell short
of demand, further supporting prices. In contrast to several years ago, state
and local governments are enjoying record budget surpluses, reducing the need
for municipalities to issue new debt to fund new projects. At the same time, the
stock market's intense volatility caused many investors to focus on wealth
preservation rather than wealth creation -- increasing demand for quality
investments, particularly municipal securities issued in Massachusetts and other
states with high bond ratings.
Q. What strategies did you use in managing the Fund?
Throughout the period, we took advantage of the Commonwealth's healthy fiscal
position, emphasizing bonds whose interest payments are derived from general
state or municipal revenues, such as taxes.
Pre-Refunded securities played an
important role. These are securities for which a bond issuer floats a second
bond in order to pay off the first bond before the call date, lowering the
borrower's costs. Relative price stability made these holdings top contributors
to your Fund's performance early in the year, but they worked against us in
June.
We maintained the Fund's focus on the education and housing sectors, which
are continuing to reap the rewards of a booming economy. Health care -- a major
industry in the state -- also continued to be well represented in the portfolio.
Although the sector has yet to make a complete recovery, it has made a solid
improvement from last year's depressed levels. However, we continue to be
watchful of the Big Dig highway project in metropolitan Boston. If the Federal
government ever withdraws funding, the Commonwealth would face enormous costs.
4
<PAGE>
NVEST MASSACHUSETTS TAX FREE INCOME FUND
================================================================================
CREDIT QUALITY COMPOSITION 6/30/00
[PIE CHART DEPICTING BREAKDOWN OF COMPOSITION]
AAA 49.7%
AA 3.6%
A 17.4%
BBB 14.4%
BB 6.8%
B/NOT RATED 8.1%
AVERAGE CREDIT QUALITY = AA
AVERAGE PORTFOLIO MATURITY = 18.1 YEARS
QUALITY IS BASED ON RATINGS PROVIDED BY STANDARD & POOR'S.
PORTFOLIO HOLDINGS AND ASSET ALLOCATION WILL VARY.
Q. What is your current outlook?
Our overall outlook for Massachusetts municipal bonds -- and for the bond market
in general -- remains favorable. We expect the difference between long- and
short-term yields to continue to narrow. This would benefit funds with longer
average maturities.
We also expect continued stock market volatility, which should make investors
continue to seek the relative safety -- and superior after-tax yields -- of
municipal securities. This should generate steady demand and price support for
municipal bonds.
This portfolio manager's commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes.
Nvest Massachusetts Tax Free Income Fund may invest a portion of assets in
lower-rated bonds that offer higher yields in return for more risk. Some income
may be subject to federal and Massachusetts state taxes. Capital gains are fully
taxable. Investors may be subject to the alternative minimum tax (AMT). This
fund is non-diversified, meaning it concentrates its assets in fewer securities,
which can significantly affect your fund's performance and the value of your
investment. See a prospectus for details. The portfolio may also include U.S.
government securities, which are guaranteed if held to maturity; mutual funds
that invest in these securities are not.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of June 30, 2000
(unaudited)
TAX EXEMPT OBLIGATIONS-- 98.5% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (C)
-------------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
-------------------------------------------------------------------------------------------------------
GUAM-- 1.6%
<S> <C> <C> <C> <C>
$1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/1/2010 -- BBB $1,583,385
---------
MASSACHUSETTS MUNICIPAL -- 8.8%
4,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA
insured) Aaa AAA 4,459,960
1,500,000 Wholesale Electric, 6.750%, 7/01/2008 Baa2 BBB+ 1,568,970
2,500,000 Wholesale Electric, 6.750%, 7/01/2011 Baa2 BBB+ 2,603,375
---------
8,632,305
---------
MASSACHUSETTS STATE DEVELOPMENT FINANCE AGENCY-- 12.9%
2,300,000 Boston University, Series P, 6.000%, 5/15/2029 A3 BBB+ 2,265,684
3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 -- -- 2,757,270
2,000,000 Ogden Haverhill A Rmk, 6.700%, 12/01/2014 -- BBB 2,026,880
3,000,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/1/2019 A2 -- 2,793,870
3,150,000 Revenue Bond, 5.900%, 11/01/2018 Ba2 -- 2,843,001
---------
12,686,705
----------
MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY-- 38.4%
1,500,000 Beverly Hospital Rib, 6.520%, 6/18/2020, (MBIA insured)(d) Aaa AAA 1,475,145
3,000,000 Boston University Rib, Series L, 8.635%, 10/01/2031,
(MBIA insured)(d) Aaa AAA 3,191,460
2,000,000 Catholic Health East Series B, 5.000%, 11/15/2018,
(AMBAC insured) Aaa AAA 1,805,720
1,750,000 Charlton Memorial Hospital, Series B, Pre-Refunded,
7.250%, 7/01/2013 -- A 1,831,480
3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 A1 A 2,957,130
880,000 Educational Loan Revenue Bond, Issue D-Series A,
7.250%, 1/01/2009, (AMBAC insured) Aaa AAA 902,994
1,000,000 Faulkner Hospital, Series C, Pre-Refunded, 6.000%, 7/1/2013 Baa1 -- 1,052,370
2,500,000 Harvard University Issue Series W, 6.000%, 7/01/2035 Aaa AAA 2,579,125
3,000,000 Harvard University, Series N, 6.250%, 4/01/2020 Aaa AAA 3,264,780
2,400,000 Medical Center of Central Mass., CIass A, Pre-Refunded,
7.000%, 7/1/2012 A3 AAA 2,507,208
1,000,000 New England Baptist Hospital, Series B, Pre-Refunded,
7.300%, 7/01/2011 Baa1 AAA 1,047,040
1,220,000 New England Deaconess Hospital, Series D, Pre-Refunded, 6.875%,
4/01/2022, (AMBAC insured) Aaa AAA 1,288,662
1,190,000 New England Medical Center, Series F, 6.625%,
7/01/2025, (FGIC insured) Aaa AAA 1,223,629
6,000,000 Nichols College Issue, Series C, 6.000%, 10/01/2017 -- BBB- 5,520,000
1,275,000 Saints Memorial Medical Center, Series A, 5.750%, 10/1/2006 Ba2 -- 1,154,678
3,340,000 Saints Memorial Medical Center, Series A, 6.000%, 10/1/2023 Ba2 2,616,189
3,000,000 Student Loan Revenue Bond Sub-Issue H, 6.900%, 11/1/2009 A3 AA 3,275,310
---------
37,692,920
----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
TAX EXEMPT OBLIGATIONS-- CONTINUED
RATINGS (C)
-------------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
-----------------------------------------------------------------------------------------------------------
MASSACHUSETTS STATE HOUSING FINANCE AGENCY-- 9.7%
<S> <C> <C> <C> <C>
$2,000,000 Residential Development, Series A, 6.900%, 11/15/2024,
(FNMA insured) Aaa AAA $ 2,083,720
2,500,000 Residential Development, Series E, 6.250%, 11/15/2012,
(FNMA insured) Aaa AAA 2,593,125
1,300,000 Residential Development, Series I, 6.900%, 11/15/2025,
(FNMA insured) Aaa AAA 1,357,642
2,925,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 Aa A+ 3,022,373
500,000 Single Family Mortgage, Series 32, 6.600%, 12/01/2026 Aa A+ 511,455
---------
9,568,315
---------
MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY-- 9.3%
2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 -- AAA 2,144,900
5,000,000 Newton Group Properties LLC Project, 8.000%, 9/01/2027 -- -- 5,110,600
2,000,000 Phillips Academy Issue, 5.375%, 9/01/2023 Aaa AAA 1,892,280
---------
9,147,780
---------
MASSACHUSETTS STATE TURNPIKE AUTHORITY-- 3.2%
6,000,000 Metropolitan Highway System, Capital Appreciation,
Senior Series C, Zero Coupon, 1/01/2016, (MBIA insured) Aaa AAA 2,467,800
1,000,000 Rail Connections, Inc. Capital Appreciation, Series B,
Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2016 Baa3 BBB 354,150
1,000,000 Rail Connections, Inc. Capital Appreciation, Series B,
Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2017 Baa3 BBB 328,080
-------
3,150,030
---------
MASSACHUSETTS STATE WATER RESOURCES AUTHORITY-- 3.7%
3,240,000 Series A (FGIC insured), 6.500%, 7/15/2019 Aaa AAA 3,602,848
---------
PUERTO RICO-- 4.6%
3,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 Baa1 A 3,276,900
1,000,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 Aaa AAA 1,257,660
---------
4,534,560
---------
PUERTO RICO COMMONWEALTH-- 0.9%
1,000,000 Public Improvement (FSA insured), 5.000%, 7/01/2028 Aaa AAA 896,790
---------
PUERTO RICO COMMONWEALTH HIGHWAY TRANSPORTATION-- 2.1%
2,000,000 Series B, 6.000%, 7/01/2026 Baa1 A 2,024,000
---------
3,045,000 Public Financial Authority, Series A, Pre-Refunded,
7.250%, 10/01/2018 -- AAA 3,284,215
---------
Total Tax Exempt Obligations (Identified Cost $97,241,226) 96,803,853
----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
SHORT TERM INVESTMENT-- 0.4%
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION VALUE (A)
------------------------------------------------------------------------------------------------
<S> <C> <C>
335,000 Household Finance Corp., 6.880%, 7/03/2000 $ 334,872
-----------
Total Short Term Investment (Identified Cost $334,872) 334,872
-----------
Total Investments-- 98.9% (Identified Cost $97,576,098) (b) 97,138,725
Other assets less liabilities 1,107,089
---------
Total Net Assets-- 100% $98,245,814
===========
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation
on investments based on cost of $97,576,098 for federal income tax purposes
was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $ 1,970,245
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (2,407,618)
----------
Net unrealized depreciation $ (437,373)
===============
</TABLE>
At December 31, 1999, the fund had a capital loss carry forward of
$2,588,254 expiring December 31, 2007.
(c) The ratings shown are believed to be the most recent ratings available at
June 30, 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 June 30, 2000. The Fund's advisor independently
evaluates the Fund's portfolio securities and in making investment
decisions does not rely solely on the ratings of agencies.
(d) Inverse floating rate security. The rate disclosed is as of June 30, 2000.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC -- American Municipal Bond Assurance Corp.
FGIC -- Financial Guarantee Insurance Company
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corp.
Rib -- Residual interest bond
8
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value (Identified Cost $97,576,098) $ 97,138,725
Cash 3,509
Receivable for:
Fund shares sold 1,781
Accrued interest 1,629,963
---------
98,773,978
LIABILITIES
Payable for:
Fund shares redeemed $ 255,455
Dividends declared 119,099
Accrued expenses:
Management fees 89,084
Deferred trustees' fees 15,037
Transfer agent 20,411
Accounting and administrative 5,563
Other expenses 23,515
------
528,164
-------
NET ASSETS $ 98,245,814
===============
Net Assets consist of:
Paid in capital $ 102,332,858
Undistributed net investment income 107,354
Accumulated net realized gain (loss) (3,757,025)
Unrealized appreciation (depreciation) on investments (437,373)
--------
NET ASSETS $ 98,245,814
===============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($89,912,234 / 5,761,011 shares of beneficial interest) $ 15.61
============
Offering price per share (100 / 95.75 of $15.61) $ 16.30*
============
Net asset value and offering price of Class B shares
($8,333,580 / 535,144 shares of beneficial interest) $ 15.57**
============
* 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.
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest $ 3,272,008
Expenses
Management fees $ 299,529
Service and distribution fees - Class A 160,279
Service and distribution fees - Class B 42,421
Trustees' fees and expenses 5,260
Accounting and administrative 17,105
Custodian 38,722
Transfer agent 112,778
Audit and tax services 24,630
Legal 2,055
Printing 10,340
Registration 3,683
Miscellaneous 2,913
-----
Total expenses 719,715
Less expenses waived by the investment adviser and subadviser (159,193) 560,522
-------- -------
Net investment income 2,711,486
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments-- net 201,950
Written options-- net (48,950)
Futures contracts-- net 6,631
-----
Total realized gain (loss) on investments, written options and futures contracts 159,631
-------
Unrealized appreciation (depreciation) on:
Investments-- net 480,073
-------
Net gain (loss) on investment transactions 639,704
-------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 3,351,190
==============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
-------------------------------------
FROM OPERATIONS
<S> <C> <C> <C>
Net investment income $ 5,857,566 $ 2,711,486
Net realized gain (loss) on investments, written options and futures contracts (1,501,419) 159,631
Net unrealized appreciation (depreciation) on investments, written options
and futures contracts (9,260,469) 480,073
---------- -------
Increase (decrease) in net assets from operations (4,904,322) 3,351,190
---------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (5,480,730) (2,379,651)
Class B (397,448) (194,102)
Net realized gain on investments
Class A (216,698) 0
Class B (19,179) 0
In excess of net realized gain on investments
Class A (7,135) 0
Class B (631) 0
---- -
(6,121,821) (2,573,753)
---------- ----------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS (5,765,846) (8,675,528)
---------- ----------
Total increase (decrease) in net assets (16,791,989) (7,898,091)
NET ASSETS
Beginning of the period 122,935,894 106,143,905
----------- -----------
End of the period $ 106,143,905 $ 98,245,814
=============== ===============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the period $ (30,379) $ 107,354
============== ===============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
FINANCIAL HIGNLIGHTS
================================================================================
For a share outstanding throughout the period
(unaudited)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------
1995 1996 1997 1998 1999 2000
------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 15.10 $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ............. 0.88 0.87 0.86 0.86 0.82 0.44
Net Realized and Unrealized Gain (Loss)
on Investments .................... 1.76 (0.35) 0.63 (0.04) (1.50) 0.10
---- ----- ---- ----- ----- ----
Total From Investment Operations .. 2.64 0.52 1.49 0.82 (0.68) 0.54
---- ---- ---- ---- ----- ----
Less Distributions
Dividends From Net Investment Income (0.89) (0.87) (0.86) (0.85) (0.83) (0.41)
Distributions From Net Realized Gains 0.00 0.00 0.00 (0.08) (0.03) 0.00
Distributions in Excess of Net
Realized Gains .................... 0.00 0.00 0.00 0.00 0.00 (b) 0.00
---- ---- ---- ---- ---- ----
Total Distributions ............... (0.89) (0.87) (0.86) (0.93) (0.86) (0.41)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period .... $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48 $ 15.61
======= ========= ======= ======= ======= =======
Total Return (%) (a) .............. 17.8 3.2 9.3 4.9 (4.1) 3.5
Ratio of Operating Expenses to Average
Net Assets (%) .................... 1.24 1.27 1.29 1.31 1.31 1.38(c)
Ratio of Operating Expenses to Average
Net Assets After Expense
Reductions (%) (d) .............. 0.85 0.90 1.00 1.00 1.00 1.07(c)
Ratio of Net Investment Income to
Average Net Assets (%) ............ 5.46 5.31 5.17 4.93 5.02 5.47(c)
Portfolio Turnover Rate (%) ....... 127 140 132 125 73 23
Net Assets, End of Period (000) $120,229 $112,934 $113,869 $113,910 $ 97,270 $ 89,912
</TABLE>
(a) A sales charge is not reflected in total return calculations.
(b) Amount is less than $0.01.
(c) Computed on an annualized basis.
(d) Expense ratios have been adjusted for the expense limitations
described in Note 4 to the Financial Statements.
See accompanying notes to financial statements.
12
<PAGE>
FINANCIAL HIGNLIGHTS
================================================================================
For a share outstanding throughout the period
(unaudited)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------
1995 1996 1997 1998 1999 2000
--------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 15.08 $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ............. 0.78 0.75 0.76 0.74 0.71 0.38
Net Realized and Unrealized Gain (Loss)
on Investments .................... 1.74 (0.34) 0.62 (0.03) (1.49) 0.11
---- ----- ---- ----- ----- ----
Total From Investment Operations .. 2.52 0.41 1.38 0.71 (0.78) 0.49
---- ---- ---- ---- ----- ----
Less Distributions
Dividends From Net Investment Income (0.78) (0.76) (0.76) (0.74) (0.72) (0.37)
Distributions From Net Realized Gains 0.00 0.00 0.00 (0.08) (0.03) 0.00
Distributions in Excess of Net
Realized Gains .................... 0.00 0.00 0.00 0.00 0.00 (b) 0.00
---- ---- ---- ---- ---- ----
Total Distributions ............... (0.78) (0.76) (0.76) (0.82) (0.75) (0.37)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period .... $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45 $ 15.57
======= ======= ======= ======= ======= =======
Total Return (%) (a) .............. 17.0 2.6 8.6 4.2 (4.7) 3.1
Ratio of Operating Expenses to Average
Net Assets (%) .................... 1.89 1.92 1.94 1.96 1.96 2.03(c)
Ratio of Operating Expenses to Average
Net Assets After Expense
Reductions (%)(d) ................. 1.50 1.55 1.65 1.65 1.65 1.72(c)
Ratio of Net Investment Income to
Average Net Assets (%) ............ 4.81 4.66 4.52 4.28 4.37 4.82(c)
Portfolio Turnover Rate (%) ....... 127 140 132 125 73 23
Net Assets, End of Period (000) ... $ 6,697 $ 7,442 $ 7,399 $ 9,026 $ 8,874 $ 8,334
</TABLE>
(a) A contingent deferrred sales charge is not reflected in total return
calculations.
(b) Amount is less than $0.01.
(c) Computed on an annualized basis.
(d) Expense ratios have been adjusted for the expense limitations
described in Note 4 to the Financial Statements.
See accompanying notes to financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust
II, a Massachusetts business trust (the "Trust"), which is registered under the
Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end
management investment company. The Fund seeks a high level of current income
exempt from federal income tax and Massachusetts personal income tax. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series is a "Fund").
The Fund offers both Class A and Class B shares. Class A shares are sold with a
maximum front end sales charge of 4.25%. Class B shares do not pay a front end
sales charge, but pay a higher ongoing distribution fee than Class A shares for
eight years (at which point they automatically convert to Class A shares), and
are subject to a contingent deferred sales charge if those shares are redeemed
within six years of purchase (or five years if purchased before May 1, 1997).
Expenses of the Fund are borne pro rata by the holders of both classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund was liquidated. In addition, the Trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States for investment companies. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
A. SECURITY VALUATION. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser and subadviser,
under the supervision of the Fund's Trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted
for on the trade date. Interest income is recorded on the accrual basis.
Interest income is increased by the accretion of original issue discount.
Interest income is reduced by the amortization of premium. In determining net
gain or loss on securities sold, the cost of securities has been determined on
the identified cost basis.
C. OPTIONS. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
For options purchased to hedge the Fund's investments, the potential risk to the
Fund is that the change in value of options contracts may not correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty is unable to perform.
The maximum loss for purchased options is limited to premium initially paid for
the option. For options written by the Fund, the maximum loss is not limited to
the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest rate
futures contracts to hedge against changes in the values of securities the Fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price (or to deliver an
amount of cash) on a future date. Upon entering into such a contract, the
purchasing Fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as "variation margin," and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the Fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its 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 generally accepted accounting
principles. These differences are primarily due to differing treatments of
market discount for book and tax purposes. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. The Fund's subadviser is responsible
for determining that the value of the collateral is at all times at least equal
to the repurchase price. Repurchase agreements could involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 2000
purchases and sales of securities (excluding short-term investments) were $
22,922,991 and $ 31,790,519, respectively.
Transactions in written options for the six months ended June 30, 2000 are
summarized as follows:
WRITTEN OPTIONS
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
Open at December 31, 1999 0 $ 0
Contracts opened (300) (40,988)
Contracts closed 300 40,988
--- ------
Open at June 30, 2000 0 $ 0
=== ==== = =========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest
Management") at the annual rate of 0.60% of the first $100 million of the Fund's
average daily net assets and 0.50% of such assets in excess of $100 million
reduced by payments to the Fund's investment subadviser, Back Bay Advisors L.P.
("Back Bay"), at the rate of 0.30% of the first $100 million of the Fund's
average daily net assets and 0.25% of such assets in excess of $100 million.
Certain officers and directors of Nvest Management are also officers or Trustees
of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of
Nvest Companies, L.P. ("Nvest"), which is a subsidiary of Metropolitan Life
Insurance Company (see Note 7).
Fees earned by Nvest Management and Back Bay under the management and
subadvisory agreements in effect during the period ended June 30, 2000 are as
follows:
Fees Earned
-----------
Nvest Management $ 149,765
Back Bay 149,764
-------
$ 299,529
=======
The effective annualized management fee before the expense limitation for the
six months ended June 30, 2000 was 0.60%. As a result of the expense limitations
as described in Note 4, the effective annualized management fee for the six
months ended June 30, 2000 was 0.28%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a group fee for these
services equal to the annual rate of 0.035% of the first $5 billion of Nvest
Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest
Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net
assets in excess of $10 billion. For the six months ended June 30, 2000, these
expenses amounted to $17,105, and are shown separately in the financial
statements as accounting and administrative. The effective annualized accounting
and administrative expense was 0.034%.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service and Distribution Plan relating to the Fund's Class A
shares (the "Class A Plan") and a Service and Distribution Plan relating to the
Fund's Class B shares (the "Class B Plan").
Under the Plans, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds"),
the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service
fee at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class A and Class B shares, as reimbursement for services provided
and expenses (including certain payments to securities dealers, who may be
affiliated with Nvest Funds) incurred by Nvest Funds in providing personal
services to investors in Class A and Class B shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 2000, the Fund paid
Nvest Funds $114,485 and $10,605 in service fees for Class A and Class B shares,
respectively.
Also under the Plans, the Fund pays Nvest Funds monthly distribution fees at the
annual rate of 0.10% of the average daily net assets attributable to the Fund's
Class A shares and 0.75% of the average daily net assets attributable to the
Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of
Class A and Class B shares, respectively. For the six months ended June 30,
2000, the Fund paid Nvest Funds $45,794 and $31,816 in distribution fees for
Class A and Class B shares, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
Nvest Funds by investors in shares of the Fund during the six months ended June
30, 2000, amounted to $45,178.
D. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer
agent for the Fund. NSC receives account fees for shareholder accounts. NSC and
BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the six
months ended June 30, 2000, the Fund paid NSC $112,777 as compensation for its
services as transfer agent.
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, Nvest, NSC or their affiliates. Each other Trustee
receives a retainer fee at the annual rate of $40,000 and meeting attendance
fees of $3,500 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$6,000 while each committee chairman receives a retainer fee (beyond the $6,000
fee) at the annual rate of $4,000. These fees are allocated to the various Nvest
Funds based on a formula that takes into account, among other factors, the
relative net assets of each Fund.
A deferred compensation plan is available to the Trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund or
certain other Nvest Funds on the normal payment date. Deferred amounts remain in
the funds until distributed in accordance with the Plan.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
4. EXPENSE LIMITATIONS. Nvest Management has given a binding undertaking and
Back Bay has voluntarily agreed until further notice to defer their respective
management and subadvisory fees and, if necessary, Nvest Management has agreed
to bear certain expenses associated with the Fund, to the extent necessary to
limit the Fund's expenses to the annual rates of 1.20% and 1.85% of the average
net assets of the Fund's Class A and B shares, respectively. The Fund is
obligated to pay such deferred fees in later periods to the extent the Fund's
expenses fall below the annual rates of 1.20% and 1.85% of the average net
assets of the Fund's Class A and Class B shares, respectively, provided however,
that the Fund is not obligated to pay any such deferred fees more than one year
after the end of the fiscal year in which the fee was deferred. Nvest
Management's undertaking will be in effect for the life of the Fund's current
prospectus. Prior to this from May 1, 1999 to April 30, 2000 expenses were
limited to 1.00% of Class A average net assets and 1.65% of Class B average net
assets. From September 1, 1996, Back Bay and Nvest Management voluntarily agreed
to reduce management fees in order to limit the Fund's expenses to an annual
rate of 0.85% of the Fund's Class A average daily net assets and 1.50% of the
Fund's Class B average daily net assets.
As a result of the Fund's expenses exceeding the expense limitations during the
six months ended June 30, 2000, Back Bay reduced its subadvisory fee by $79,597
and Nvest Management reduced its advisory fee by $79,596.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the Commonwealth of Massachusetts and its political subdivisions,
agencies and public authorities to obtain funds for various public purposes. The
Fund is more susceptible to factors adversely affecting issuers of Massachusetts
municipal securities than is a comparable municipal bond fund that is not so
concentrated. Uncertain economic and fiscal conditions may affect the ability of
issuers of Massachusetts municipal securities to meet their financial
obligations. The Fund had the following industry concentrations, excluding
Pre-Refunded securities in excess of 10% on June 30, 2000 as a percentage of the
Fund's total net assets: Education (20.0%), Housing (13.0%) and Utilities
(19.3%). The Fund had investments in securities of issuers insured by Municipal
Bond Investors Assurance Corporation (MBIA) which aggregate 13.2% of its total
net assets at June 30, 2000.
6. CAPITAL SHARES. At June 30, 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:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
--------------------- ----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
-------- --------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 663,953 $ 10,865,107 203,345 $ 3,132,721
Shares issued in connection with the reinvestment of:
Dividends from net investment income 239,584 3,917,370 113,475 1,755,614
Distributions from net realized gain 11,207 178,976 0 0
------ ------- - -
914,744 14,961,453 316,820 4,888,335
Shares repurchased (1,324,332) (21,432,568) (839,241) (12,958,578)
---------- ----------- -------- -----------
Net increase (decrease) (409,588) $ (6,471,115) (522,421) $ (8,070,243)
-------- ------------ -------- ------------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For Six Months Ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
--------------------- ----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
-------- --------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 129,045 $ 2,117,061 37,215 $ 575,162
Shares issued in connection with the reinvestment of:
Dividends from net investment income 17,640 287,560 8,325 128,495
Distributions from net realized gain 1,005 16,013 0 0
----- ------ - -
147,690 2,420,634 45,540 703,657
Shares repurchased (104,697) (1,715,365) (84,803) (1,308,942)
-------- ---------- ------- ----------
Net increase (decrease) 42,993 $ 705,269 (39,263) $ (605,285)
------ ------------ ------- ------------
Increase (decrease) derived from capital share transactions (366,595) $ (5,765,846) (561,684) $ (8,675,528)
======== ============ ======== ============
</TABLE>
7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management is
the investment management arm of France's Caisse des Depots et Consignations,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, management and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
19
<PAGE>
NVEST MUNICIPAL INCOME FUND
NVEST MASSACHUSETTS TAX FREE INCOME FUND
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
Supplement dated August 21, 2000
to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax
Free Income Fund and Nvest Intermediate Term Tax Free Fund of California
Prospectuses, each dated May 1, 2000
John Maloney has become co-manager of the Funds, joining James Welch. Mr.
Maloney, Vice President at Back Bay Advisors, has been with the company since
1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts
and has 17 years of investment experience.
20
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund
Bullseye Fund GOVERNMENT INCOME FUNDS
Equity Income Fund Limited Term U.S. Government Fund
Government Securities Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund MONEY MARKET FUNDS*
Kobrick Emerging Growth Fund Cash Management Trust
Tax Exempt Money Market Trust
*Investments in the money market
funds are not insured or
gauranteed by the FDIC or any
government agency.
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
[Nvest Funds Logo appears here]
MA58-0600
Printed On Recycled Paper
<PAGE>
<PAGE>
SEMIANNUAL REPORT
[NVEST FUNDS LOGO GOES HERE]
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
[WHERE THE BEST MINDS MEET ARTWORK GOES HERE]
JUNE 30, 2000
PLEASE READ THE PROSPECTUS SUPPLEMENT ON PAGE 20.
<PAGE>
PRESIDENTS MESSAGE
================================================================================
AUGUST 2000
--------------------------------------------------------------------------------
[PICTURE OF JOHN HAILER GOES HERE]
John
T. Hailer President and
Chief Executive Officer
Nvest Funds
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months - three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
YOUR CHOICE OF INVESTMENT TOOLS
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Nvest Star fund is composed of four separate segments
run by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions. No matter how you react to
shifting markets, don't let short-term events derail your long-range program.
Consult your financial representative before you make any changes.
NVEST IS POISED FOR GLOBAL GROWTH
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
"No matter how you react to shifting markets, don't let short-term events derail
your long- range program. Consult your financial representative before you make
any changes."
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
================================================================================
INVESTMENT RESULTS THROUGH JUNE 30, 2000
--------------------------------------------------------------------------------
PUTTING PERFORMANCE IN PERSPECTIVE
The charts comparing Nvest Intermediate Term Tax Free Fund of California's
performance with a benchmark index provide you with a general sense of how your
Fund performed. To put this information in context, it may be helpful to
understand the special differences between the two. Your 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
[GROWTH AT $10,000 CHART GOES HERE]
APRIL 1993 (INCEPTION) THROUGH JUNE 2000
NAV MSC Lehman Municipal
--------------------------------------------------------
6/00 13,862 13,515 14,935
6/99 13,547 13,209 14,465
6/98 13,221 12,890 14,076
6/97 12,397 12,087 12,955
6/96 11,530 11,241 11,885
6/95 10,676 10,410 11,145
6/94 10,160 9,906 10,244
6/93 9,966 9,717 10,224
6/93 10,000 9,750 10,000
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
<PAGE>
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
================================================================================
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/00
--------------------------------------------------------------------------------
<TABLE>
CLASS A (INCEPTION 4/23/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
Net Asset Value(1),(4) 3.64% 2.32% 5.36% 5.07%
With Maximum Sales Charge(2),(4) 1.03 -0.29 4.83 4.71
CLASS B (INCEPTION 9/13/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1),(4) 3.14% 1.43% 4.56% 3.41%
With CDSC(3),(4) -1.86 -3.43 4.23 3.41
SINCE SINCE
FUND'S FUND'S
CLASS A CLASS B
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C>
Lehman Municipal Bond Index(5) 4.48% 3.25% 5.88% 5.66% 5.15%
Morningstar Muni CA Interm. Avg.(6) 4.32 3.44 6.24 4.85 4.41
Lipper CA Interm. Municipal Debt Avg.(7) 4.06 3.78 5.10 4.74 4.29
</TABLE>
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.
YIELDS AS OF 6/30/00
--------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-Day Yield(4),(8) 4.79% 4.19%
Taxable Equivalent Yield(4),(9) 8.75 7.65
NOTES TO CHARTS
1 These results include reinvestment of any dividends and capital gains, but
do not include a sales charge.
2 These results include reinvestment of any dividends and capital gains, and
the maximum sales charge of 2.50%.
3 These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares.
4 The Fund waived certain fees and expenses during the period indicated and
the Fund's average annual total returns and yields would have been lower
had these not been waived.
5 Lehman Municipal Bond Index is an unmanaged composite measure of the
performance of the municipal bond market. You may not invest directly in an
index. Class A since-inception return is calculated from 4/30/93. Class B
since-inception return is calculated from 9/30/93.
6 Morningstar Muni CA Intermediate Debt Average is the average performance
without sales charges of all mutual funds with a similar investment
objective as calculated by Morningstar, Inc. Class A since-inception return
is calculated from 4/30/93. Class B since-inception return is calculated
from 9/30/93.
7 Lipper California Intermediate Average is the average performance without
sales charges of all mutual funds with a similar current investment style
or objective as determined by Lipper Inc. Class A since-inception return is
calculated from 4/30/93. Class B since-inception return is calculated from
9/30/93.
8 SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines.
9 Taxable equivalent yield is based on the maximum combined federal and
California state income tax bracket of 45.22%. A portion of income may be
subject to federal, state and/or alternative minimum tax. Capital gains, if
any, are subject to capital gains tax.
2
<PAGE>
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
================================================================================
INTERVIEW WITH YOUR PORTFOLIO MANAGER
--------------------------------------------------------------------------------
[PICTURE OF JAMES WELCH GOES HERE]
James Welch
Back Bay Advisors, L.P.
Q. How did Nvest Intermediate Term Tax Free Fund of California perform over the
past six months?
The return on Class A shares of Nvest Intermediate Term Tax Free Fund of
California was 3.64% at net asset value for the six months ended June 30, 2000,
including $0.18 per share in reinvested dividends. For the same period, the
Fund's benchmark, Lehman Municipal Bond Index, returned 4.48%. Bear in mind that
the Lehman Index reflects municipal bond performance throughout the country,
including states with lower ratings than California, which pay higher rates to
compensate investors for greater risk. Throughout the period, we maintained a
relatively conservative portfolio structure as part of our efforts to smooth out
the price volatility of the market. This strategy worked well while interest
rates were rising, but it detracted from performance as rates fell in June.
The 30-Day yield on Class A shares of your Fund was 4.79% as of June 30, 2000,
which is equivalent to a taxable yield of 8.75%, based on the maximum combined
federal and California income tax rate of 45.22%.
Q. What was the investment environment for California municipal bonds during the
period?
Continuing in its proactive battle against inflation, the Federal Reserve Board
implemented a series of interest-rate hikes during the first six months of 2000.
Despite these tightening efforts, the environment for fixed-income investments
in general was surprisingly positive. The economy continued to grow at a brisk
pace, while inflation remained relatively dormant.
The fixed-income market was also bolstered in the early part of the period by
the U.S. Treasury Department's announcement that it was buying back long-term
debt. This created a huge demand for long-term Treasuries, driving up prices,
and leading to an inverted yield curve -- where yields on short-term bonds rise
above yields on long-term bonds.
Meanwhile, the California economy continued to be one of the healthiest in the
nation. From high tech to manufacturing to various service industries, nearly
every sector of the economy enjoyed vigorous growth. As a result, tax revenues
soared, improving the creditworthiness of municipalities.
3
<PAGE>
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
================================================================================
Q. How did supply and demand impact the California municipal market?
Over the past six months, the supply of high quality, tax-exempt issues fell
dramatically short of demand, driving up prices. In fact, supply ran about 40%
lower than the same period last year, for several reasons.
In contrast to several years ago, state and local governments are enjoying
record budget surpluses, reducing the need for municipalities to issue new debt
to finance projects. At the same time, demand for municipal securities increased
during the second quarter of 2000, as investors began to shift assets out of the
volatile equity market into the relatively stable bond market, particularly
municipal securities. Investors were handsomely rewarded. During most of the
period, municipal bond yields were at historically high levels compared with
U.S. Treasury yields. On an after-tax basis, AAA-rated municipal bonds provided
returns far superior to U.S. Treasuries.
Q. What strategies did you use in managing the Fund?
Throughout the period we took advantage of California's healthy fiscal position,
emphasizing general obligation bonds, whose interest payments are derived from
state or municipal tax revenues. Prerefunded securities also played a role.
These are securities for which a bond issuer floats a second bond in order to
pay off the first bond before the call date, lowering the borrowing costs.
Relative price stability made these holdings top contributors to your Fund's
performance early in the year, but they worked against us in June.
We also maintained our emphasis on airport bonds which are benefiting from the
booming travel industry, as well as the housing sector, which continues to
benefit from a strong economy.
Q. What is your outlook for California municipal bonds?
We expect California's investment environment to remain attractive. The
state's economy is flourishing, which should produce rising tax receipts
for municipalities.
4
<PAGE>
NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
================================================================================
CREDIT QUALITY COMPOSITION 6/30/00
[PIE CHART DEPICTING BREAKDOWN OF COMPOSITION]
AAA 47.2%
AA 11.3%
A 14.6%
BBB 17.0%
B/NOT RATED 9.9%
AVERAGE CREDIT QUALITY = AA
AVERAGE PORTFOLIO MATURITY = 10.9 YEARS
QUALITY IS BASED ON RATINGS PROVIDED BY STANDARD & POOR'S.
PORTFOLIO HOLDINGS AND ASSET ALLOCATION WILL VARY.
However, we believe that the Fed may raise interest rates again later in the
year. The upcoming election, too, is likely to unsettle the financial markets
because investors dislike change. Nonetheless, we expect investors to continue
to seek the relative safety -- and superior after-tax yields -- of municipal
securities, creating steady demand and price support for Nvest Intermediate Term
Tax Free Fund of California.
The portfolio manager's commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes.
Nvest Intermediate Term Tax Free Fund of California may invest a portion of
assets in lower-rated bonds that offer higher yields in return for more risk.
Some income may be subject to federal and California state taxes. Capital gains
are fully taxable. Investors may be subject to the Alternative Minimum Tax
(AMT). This Fund is non-diversified, meaning it concentrates its assets in fewer
securities, which can significantly affect your Fund's performance and the value
of your investment. See a prospectus for details. The portfolio may also include
U.S. government securities, which are guaranteed if held to maturity; mutual
funds that invest in these securities are not.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of June 30, 2000
(unaudited)
TAX EXEMPT OBLIGATIONS-- 98.0% OF TOTAL NET ASSETS
<TABLE>
RATINGS (C)
--------------------------------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
-----------------------------------------------------------------------------------------------------------------------
CALIFORNIA--85.2%
<S> <C> <C> <C> <C>
$ 1,250,000 Anaheim Public Financing Authority, Series C, 6.000%,
9/01/2016, (FSA insured) ........................................ Aaa AAA $1,349,737
945,000 Berkeley Health Facility, Pre-Refunded Revenue Bond,
6.500%, 12/01/2011, (d) ......................................... A2 A+ 992,921
1,000,000 California Health Facilities Finance Authority Revenue
Bond, 6.125%, 12/01/2019 ........................................ A2 NA 1,009,500
1,120,000 California Housing Finance Agency Revenue Bond,
6.250%, 8/01/2016 ............................................... Aa2 AA- 1,154,239
1,195,000 California Housing Finance Agency Revenue Bond,
7.050%, 8/01/2027 ............................................... Aa2 AA- 1,224,600
2,000,000 California Pollution Control Finance Authority Revenue
Bond, 7.150%, 2/01/2011 ......................................... Ba1 BBB 2,031,180
1,500,000 California Pollution Control Financing Authority,
Series A Revenue Bond, 5.900%, 6/01/2014 ........................ A1 A+ 1,596,795
1,000,000 California State, 5.250%, 6/01/2015 ............................. Aa3 AA- 996,880
1,000,000 California State General Obligation Bond, 7.000%,
6/01/2002, (FGIC insured) ....................................... Aaa AAA 1,048,770
1,000,000 California State Public Works Board, Lease Revenue
Bond, 5.500%, 6/01/2010 ......................................... Aa3 A+ 1,053,000
1,000,000 California State Public Works Board, Lease Revenue
Bond, 5.500%, 6/01/2014, (MBIA insured) ......................... Aaa AAA 1,040,450
1,000,000 California Statewide Community Development Authority
Certificate of Participation, 5.375%, 4/01/2017 ................. -- BBB 858,760
1,850,000 California Statewide Community Development Authority
Certificate of Participation, 7.125%, 11/01/2016 ................ -- -- 1,895,214
1,540,000 Duarte, California Certificate of Participation,
Pre-Refunded Revenue Bond, 6.125%, 4/01/2013 .................... Baa1 AAA 1,638,699
1,000,000 Fresno, California Unified School District, 6.400%,
8/01/2016, (MBIA insured) ....................................... Aaa AAA 1,121,430
2,030,000 Fresno, California Unified School District Certificate
of Participation, 7.250%, 3/01/2007 ............................. A3 -- 2,104,907
500,000 Irvine Ranch California Water District, 4.250%,
8/01/2009, (d) .................................................. VMIG1 A1+ 500,000
See accompanying notes to financial statements.
6
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
TAX EXEMPT OBLIGATIONS-- CONTINUED
RATINGS (C)
--------------------------------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
-----------------------------------------------------------------------------------------------------------------------
CALIFORNIA--CONTINUED
$ 1,000,000 Los Angeles, California Department of Water and Power,
Revenue Bond, 6.000%, 2/15/2016 ................................. Aa3 A+ $1,026,690
1,050,000 Los Angeles, California State Building Authority,
5.500%, 10/01/2017, (FGIC insured) .............................. Aaa AAA 1,055,145
1,515,000 Pleasanton Financing Authority, 5.600%, 9/02/2000 ............... Baa1 -- 1,517,727
1,000,000 Sacramento Utility District Electric Revenue Bond,
5.145%, 11/15/2006, (FSA insured) (d) ........................... Aaa AAA 1,061,690
1,000,000 Sacramento Utility District Electric Revenue Bond,
5.375%, 11/15/2006, (FSA insured) (d) ........................... Aaa AAA 1,000,000
2,000,000 San Diego California Unified School District, 7/1/2017 .......... Aaa AAA 759,780
2,000,000 San Diego Port Facilities Revenue Bond, 6.600%, 12/1/2002 ....... -- -- 2,045,600
1,000,000 Southern California Rapid Transit District Certificate
of Participation, 7.500%, 7/01/2005, (MBIA insured) ............. Aaa AAA 1,041,040
2,000,000 Valley Health Systems, Series A Revenue Bond, 6.500%, 5/15/2015 . -- BBB- 1,852,700
2,000,000 West & Central Basin Financing Authority, Series C
Revenue Bond, 5.820%, 8/01/2006, (AMBAC insured) ................ Aaa AAA 2,064,080
---------
35,041,534
----------
PUERTO RICO--11.1%
1,000,000 Puerto Rico Commonwealth Aqueduct & Sewer Authority,
6.250%, 7/01/2012 ............................................... Baa1 A 1,098,400
1,000,000 Puerto Rico Commonwealth General Obligation Bond,
5.500%, 7/01/2013, (FSA insured) ................................ Aaa AAA 1,041,500
1,010,000 Puerto Rico Commonwealth General Obligation Bond,
6.500%, 7/01/2015, (FSA insured) ................................ Aaa AAA 1,144,370
1,250,000 Puerto Rico Public Finance Corporation Revenue Bond,,
5.375%, 6/01/2015, (AMBAC insured) .............................. Aaa AAA 1,271,125
---------
4,555,395
---------
US VIRGIN ISLANDS--1.7%
685,000 U.S. Virgin Islands Public Finance Authority
Pre-Refunded Revenue Bond, 7.750%, 10/01/2006 ................... -- -- 712,373
---------
Total Tax Exempt Obligations
(Identified Cost $39,604,947) 40,309,302
----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
PORTFOLIO COMPOSITION - CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
TAX EXEMPT OBLIGATIONS-- CONTINUED
<TABLE>
PRINCIPAL
AMOUNT DESCRIPTION VALUE (A)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments--98.0% (Identified Cost $39,604,947)(b) $ 40,309,302
Other assets less liabilities 801,729
-------
Total Net Assets--100% $ 41,111,031
===============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net unrealized appreciation
on investments based on cost of $39,604,947 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 $ 975,005
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value (270,650)
--------
Net unrealized appreciation $ 704,355
================
</TABLE>
At December 31, 1999, the Fund had a net capital loss carryforward of
$1,657,968 of which $522,150 expires on December 31, 2002 and $1,135,818
expires on December 31, 2007. These may be available to offset future
realize capital gains, if any, to the extent provided by regulations.
(c) The ratings shown are believed to be the most recent ratings available at
June 30, 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 June 30, 2000. The Fund's subadviser independently
evaluates the Fund's portfolio securities and in making investment
decisions does not rely solely on the ratings of agencies.
(d) Variable rate demand note or floating rate security. The rate disclosed is
as of June 30, 2000
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC American Municipal Bond Assurance Corp.
FGIC Financial Guarantee Insurance Company
FSA Financial Security Assurance
MBIA Municipal Bond Investors Assurance Corp.
See accompanying notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
ASSETS
<S> <C> <C>
Investments at value (Identified cost $39,604,947) ...................... $ 40,309,302
Receivable for:
Funds shares sold .................................................. 682
Securities sold .................................................... 299,788
Interest ........................................................... 632,656
-------
41,242,428
LIABILITIES
Payable for:
Fund shares redeemed ............................................... $ 8,478
Dividends declared ................................................. 58,464
Custodian bank ..................................................... 1,024
Accrued expenses:
Management fees .................................................... 19,866
Deferred trustees' fees ............................................ 14,578
Transfer agent ..................................................... 4,185
Accounting and administrative ...................................... 2,302
Other .............................................................. 22,500
------
131,397
-------
NET ASSETS ...................................................................... $ 41,111,031
===============
Net Assets consist of:
Paid in capital .................................................... $ 43,074,766
Undistributed net investment income ................................ 49,168
Accumulated net realized gain (loss) ............................... (2,717,258)
Unrealized appreciation (depreciation) on investments .............. 704,355
---------------
NET ASSETS $ 41,111,031
===============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($33,318,804 / 4,486,808 shares of beneficial interest) ................. $ 7.43
==============
Offering price per share (100 / 97.50 of $7.43) ......................... $ 7.62*
==============
Net asset value and offering price of Class B shares
($7,792,227 / 1,052,897 shares of beneficial interest) .................. $ 7.40**
==============
</TABLE>
* Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
INVESTMENT INCOME
<S> <C> <C>
Interest $ 1,224,890
Expenses
Management fees $ 107,901
Service fees - Class A 41,737
Service and distribution fees - Class B 38,578
Trustees' fees and expenses 3,991
Accounting and administrative 6,400
Custodian 32,265
Transfer agent 12,925
Audit and tax services 22,543
Legal 803
Printing 7,868
Registration 4,478
Miscellaneous 2,182
-----
Total expenses 281,671
Less expenses waived by the investment adviser and subadviser (78,037) 203,634
------- -------
Net investment income 1,021,256
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net (671,692)
Written options - net (28,094)
Futures contracts - net (7,281)
------
Total realized gain (loss) on investments, written options and futures contracts (707,067)
--------
Unrealized appreciation (depreciation) on:
Investments - net 1,091,471
Net gain (loss) on investment transactions 384,404
-------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 1,405,660
===============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
(unaudited)
<TABLE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
---------------------------------------
FROM OPERATIONS
<S> <C> <C>
Net investment income $ 2,158,692 $ 1,021,256
Net realized gain (loss) on investments, written options and futures contracts (735,270) (707,067)
Unrealized appreciation (depreciation) on investments (2,181,742) 1,091,471
---------- ---------
Increase (decrease) in net assets from operations (758,320) 1,405,660
-------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (1,867,844) (794,222)
Class B (376,425) (155,890)
-------- --------
(2,244,269) (950,112)
---------- --------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS 1,878,106 (2,827,438)
--------- ----------
Total increase (decrease) in net assets (1,124,483) (2,371,890)
NET ASSETS
Beginning of the period 44,607,404 43,482,921
---------- ----------
End of the period $ 43,482,921 $ 41,111,031
=============== ===============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the period $ (21,976) $ 49,168
=============== ===============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
Class A
---------------------------------------------------------------
Year Ended December 31, Six Months Ended
---------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.08 $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ............. 0.39 0.39 0.39 0.37 0.37 0.19
Net Realized and Unrealized Gain (Loss) On
Investments ....................... 0.57 0.00 0.20 (0.03) (0.48) 0.08
---- ---- ---- ----- ----- ----
Total From Investment Operations .. 0.96 0.39 0.59 0.34 (0.11) 0.27
---- ---- ---- ---- ----- ----
Less Distributions
Dividends From Net Investment Income (0.39) (0.38) (0.38) (0.38) (0.38) (0.18)
----- ----- ----- ----- ----- -----
Total Distributions ............... (0.39) (0.38) (0.38) (0.38) (0.38) (0.18)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period .... $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34 $ 7.43
======= ======= ======= ======= ======= =======
Total Return (%) (a) .............. 13.9 5.3 8.0 4.5 (1.5) 3.6
Ratio of Operating Expenses to Average Net
Assets (%) ........................ 1.31 1.34 1.33 1.35 1.24 1.23(b)
Ratio of Operating Expenses to Average Net
Assets After Expense Reductions (%)(c) 0.70 0.75 0.85 0.85 0.85 0.85(b)
Ratio of Net Investment Income to Average Net
Assets (%) ........................ 5.24 5.18 5.06 4.79 4.79 5.12(b)
Portfolio Turnover Rate (%) ....... 167 161 120 215 140 59
Net Assets, End of Period (000) ... $32,707 $35,972 $32,057 $35,348 $35,593 $33,319
</TABLE>
(a) A sales charge is not reflected in total return calculations.
(b) Computed on an annualized basis.
(c) Expense ratios have been adjusted for the expense limitations described in
Note 4 to the Financial Statements.
See accompanying notes to financial statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period
(unaudited)
<TABLE>
Class B
---------------------------------------------------------------
Year Ended December 31, Six Months Ended
---------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.07 $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ............. 0.33 0.33 0.34 0.32 0.31 0.16
Net Realized and Unrealized Gain (Loss) On
Investments ....................... 0.56 0.01 0.20 (0.03) (0.48) 0.07
---- ---- ---- ----- ----- ----
Total From Investment Operations .. 0.89 0.34 0.54 0.29 (0.17) 0.23
---- ---- ---- ---- ----- ----
Less Distributions
Dividends From Net Investment Income (0.33) (0.33) (0.33) (0.33) (0.32) (0.15)
----- ----- ----- ----- ----- -----
Total Distributions ............... (0.33) (0.33) (0.33) (0.33) (0.32) (0.15)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period .... $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32 $ 7.40
======= ======= ======= ======= ======= =======
Total Return (%) (a) .............. 12.9 4.6 7.2 3.7 (2.2) 3.1
Ratio of Operating Expenses to Average Net
Assets (%) ........................ 2.06 2.09 2.08 2.10 1.99 1.97(b)
Ratio of Operating Expenses to Average Net
Assets After Expense Reductions (%) 1.45 1.50 1.60 1.60 1.60 1.60(b)
Ratio of Net Investment Income to Average Net
Assets (%) ........................ 4.49 4.43 4.31 4.04 4.04 4.37(b)
Portfolio Turnover Rate (%) ....... 167 161 120 215 140 59
Net Assets, End of Period (000) ... $ 5,617 $ 7,590 $ 8,881 $ 9,259 $ 7,889 $ 7,792
</TABLE>
(a) A contingent deferred sales charge is not reflected in total return
calculations.
(b) Computed on an annualized basis.
(c) Expense ratios have been adjusted for the expense limitations described in
Note 4 to the Financial Statements.
See accompanying notes to financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust
II, a Massachusetts business trust (the "Trust"), which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The Fund seeks a high level of current income
exempt from federal income tax and California personal income tax. The
Declaration of Trust permits the trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series is a "Fund").
The Fund offers both Class A and Class B shares. Class A shares are sold with a
maximum front end sales charge of 2.50%. Class B shares do not pay a front end
sales charge, but pay a higher ongoing distribution fee than Class A shares for
eight years (at which point they automatically convert to Class A shares), and
are subject to a contingent deferred sales charge if those shares are redeemed
within six years of purchase (or five years if purchased before May 1, 1997).
Expenses of the Fund are borne pro rata by the holders of both classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund were liquidated. In addition, the Trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States for investment companies. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
A. SECURITY VALUATION. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser, and subadviser,
under the supervision of the Fund's Trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted
for on the trade date. Interest income is recorded on the accrual basis.
Interest income is increased by the accretion of original issue discount and
market discount. Interest income is reduced by the amortization of premium. In
determining net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
C. OPTIONS. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
For options purchased to hedge the Fund's investments, the potential risk to the
Fund is that the change in value of options contracts may not correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty is unable to perform.
The maximum loss for purchased options is limited to premium initially paid for
the option. For options written by the Fund, the maximum loss is not limited to
the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may enter into interest rate
futures contracts to hedge against changes in the values of tax exempt municipal
securities the Fund owns or expects to purchase. An interest rate futures
contract is an agreement between two parties to buy and sell a security for a
set price (or to deliver an amount of cash) on a future date. Upon entering into
such a contract, the purchasing Fund is required to pledge to the broker an
amount of cash, U.S. Government securities or other high quality debt securities
equal to the minimum "initial margin" requirements of the exchange. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as "variation margin," and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the Fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its 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 generally accepted accounting
principles. These differences relate primarily to differing treatments of
capital loss carryforwards, futures transactions and post October losses.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. The subadviser is responsible for determining that the
value of the collateral is at all times at least equal to the repurchase price.
Repurchase agreements could involve certain risks in the event of default
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
or insolvency of the other party including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 2000
purchases and sales of securities (excluding short-term investments) were
$23,801,812 and $27,097,701, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays a
gross management fee to its investment adviser, Nvest Funds Management, L.P.
("Nvest Management") at the annual rate of 0.525% of the first $200 million of
the Fund's average daily net assets, 0.50% of the next $300 million and 0.475%
of such assets in excess of $500 million reduced by the payment to the Fund's
investment subadviser Back Bay Advisors, L.P. ("Back Bay") at the rate of
0.2625% of the first $200 million of the Fund's average daily net assets, 0.25%
of the next $300 million and 0.2375% of such assets in excess of $500 million.
Certain officers and directors of Nvest Management are also officers or Trustees
of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of
Nvest Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life
Insurance Company (see Note 7). Fees earned by Nvest Management and Back Bay
under the management and subadvisory agreements in effect during the six months
ended June 30, 2000 are as follows:
Fees Earned
-----------
Nvest Management $ 53,951
Back Bay 53,950
------
$ 107,901
=======
The effective annualized management fee before the expense limitation for the
six months ended June 30, 2000 was 0.525%. As a result of the expense limitation
as described in Note 4, the effective annualized management fee for the six
months ended June 30, 2000 was 0.145%
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a group fee for these
services equal to the annual rate of 0.035% of the first $5 billion of Nvest
Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest
Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net
assets in excess of $10 billion. For the six months ended June 30, 2000, these
expenses amounted to $6,400, and are shown separately in the financial
statements as accounting and administrative. The effective annualized accounting
and administrative expense for the six months ended June 30, 2000 was 0.034%.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Fund has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest
Funds"), 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
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by Nvest Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 2000, the Fund paid
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
Nvest Funds $41,737 in fees under the Class A Plan. If the expenses of Nvest
Funds that are otherwise reimbursable under the Class A Plan incurred in any
year exceed the amounts payable by the Fund under the Class A Plan, the
unreimbursed amount (together with unreimbursed amounts from prior years) may be
carried forward for reimbursement in future years in which the Class A Plan
remains in effect. The amount of unreimbursed expenses at June 30, 2000 is
$179,456.
Under the Class B Plan, the Fund pays Nvest Funds 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 (including
certain payments to securities dealers, who may be affiliated with Nvest Funds)
incurred by Nvest Funds in providing personal services to investors in Class B
shares and/or the maintenance of shareholder accounts. For the six months ended
June 30, 2000, the Fund paid Nvest Funds $9,644 in service fees under the Class
B Plan.
Also under the Class B Plan, the Fund pays Nvest Funds 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
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of
Class B shares. For the six months ended June 30, 2000, the Fund paid Nvest
Funds $28,934 in distribution fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid to
Nvest Funds by investors of shares of the Fund during the six months ended June
30, 2000 amounted to $12,175.
D. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer
agent for the Fund. NSC receives account fees for shareholder accounts. NSC and
BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the six
months ended June 30, 2000, the Fund paid NSC $17,069 as compensation for its
services as transfer agent.
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, Nvest, NSC or their affiliates. Each other Trustee
receives a retainer fee at the annual rate of $40,000 and meeting attendance
fees of $3,500 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$6,000 while each committee chairman receives a retainer fee (beyond the $6,000
fee) at the annual rate of $4,000. These fees are allocated to the various Nvest
Funds based on a formula that takes into account, among other factors, the
relative net assets of each Fund.
A deferred compensation plan is available to the Trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund or
certain other Nvest Funds on the normal payment date. Deferred amounts remain in
the Funds until distributed in accordance with the Plan.
4. EXPENSE LIMITATIONS. Nvest Management has given a binding undertaking and
Back Bay has voluntarily agreed until further notice to defer their respective
management and subadvisory fees and, if necessary, Nvest Management has agreed
to bear certain expenses associated with the Fund, to the extent necessary to
limit the
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
Fund's expenses to the annual rates of 0.85% and 1.60% of the average net assets
of the Fund's Class A and B shares, respectively. The Fund is obligated to pay
such deferred fees in later periods to the extent the Fund's expenses fall below
the annual rates of 0.85%, and 1.60% of average net assets of the Fund's Class A
and Class B shares, respectively, provided however, that the Fund is not
obligated to pay any such deferred fees more than one year after the end of the
fiscal year in which the fee was deferred. Nvest Management's undertaking will
be in effect for the life of the Fund's current prospectus. Prior to September
1, 1996, Back Bay and Nvest Management voluntarily agreed to reduce management
fees in order to limit the Fund's expenses to an annual rate of 0.70% of the
Fund's Class A average daily net assets and 1.45% of the Fund's Class B average
daily net assets.
As a result of the Fund's expenses exceeding the expense limitations during the
six months ended June 30, 2000, Back Bay reduced its subadvisory fees by $39,018
and Nvest Management reduced its advisory fees by $39,019.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of California and its political subdivisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is more
susceptible to factors adversely affecting issuers of California municipal
securities than is a comparable municipal bond fund that is not as concentrated.
Uncertain economic and fiscal conditions may affect the ability of issuers of
California municipal securities to meet their financial obligations. The Fund
had the following industry concentrations in excess of 10% on June 30, 2000 as a
percentage of the Fund's total net assets: Finance (13.7%), Healthcare (13.6%),
Education (12.2%), and Municipal (11.1%).
6. CAPITAL SHARES. At June 30, 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:
<TABLE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
CLASS A SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,383,925 $ 18,347,369 204,108 $ 1,500,704
Shares issued in connection with the reinvestment of:
Dividends from net investment income 145,308 1,107,226 70,009 514,778
------- --------- ------ -------
2,529,233 19,454,595 274,117 2,015,482
Shares repurchased (2,193,681) (16,773,597) (636,068) (4,659,375)
---------- ----------- -------- ----------
Net increase (decrease) 335,552 $ 2,680,998 (361,951) $ (2,643,893)
------- ------------ -------- -------------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
<TABLE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
CLASS B SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 202,511 $ 1,524,313 28,593 $ 209,650
Shares issued in connection with the reinvestment of:
Dividends from net investment income 28,996 220,717 13,155 96,391
------ ------- ------ ------
231,507 1,745,030 41,748 306,041
Shares repurchased (339,124) (2,547,922) (66,951) (489,586)
-------- ---------- ------- --------
Net increase (decrease) (107,617) $ (802,892) (25,203) $ (183,545)
-------- ------------ ------- ------------
Increase (decrease) derived from capital shares transactions 227,935 $ 1,878,106 (387,154) $ (2,827,438)
======= ================ ======== ============
</TABLE>
7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management is
the investment management arm of France's Caisse des Depots et Consignations,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, management and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
19
<PAGE>
NVEST MUNICIPAL INCOME FUND
NVEST MASSACHUSETTS TAX FREE INCOME
FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
Supplement dated August 21, 2000
to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax
Free Income Fund and Nvest Intermediate Term Tax Free Fund of California
Prospectuses, each dated May 1, 2000
John Maloney has become co-manager of the Funds, joining James Welch. Mr.
Maloney, Vice President at Back Bay Advisors, has been with the company since
1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts
and has 17 years of investment experience.
20
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund
Bullseye Fund GOVERNMENT INCOME FUNDS
Equity Income Fund Limited Term U.S. Government Fund
Government Securities Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund MONEY MARKET FUNDS*
Kobrick Emerging Growth Fund Cash Management Trust
Tax Exempt Money Market Trust
*Investments in the money market
funds are not insured or
gauranteed by the FDIC or any
government agency.
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
[Nvest Funds Logo appears here]
CA58-0600
Printed On Recycled Paper
<PAGE>
<PAGE>
<PAGE>
SEMIANNUAL REPORT
[NVEST FUNDS LOGO GOES HERE]
--------------------------------------------------------------------------------
NVEST GROWTH AND INCOME FUND
[WHERE THE BEST MINDS MEET ARTWORK GOES HERE]
JUNE 30, 2000
<PAGE>
PRESIDENTS MESSAGE
================================================================================
AUGUST 2000
--------------------------------------------------------------------------------
[PICTURE OF JOHN HAILER GOES HERE]
John
T. Hailer President and
Chief Executive Officer
Nvest Funds
In an effort to protect the U.S. economy from the specter of renewed inflation,
the Federal Reserve Board has raised interest rates six times in the past 12
months - three times during the first six months of 2000. Because higher
interest rates cut into corporate profits and make financial assets less
attractive, the markets have been undergoing a period of heightened volatility.
YOUR CHOICE OF INVESTMENT TOOLS
Investors react to volatility in different ways. Some seek safer harbors; others
define risk as opportunity and add selectively to their portfolios. Regardless
of which type of investor you may resemble, remember that Nvest funds cover a
wide spectrum of investments, from conservative to aggressive. These include a
comprehensive family of equity and fixed-income funds that may complement your
current holdings, as well as funds that combine different investment styles in a
single portfolio.
For example, Nvest Star funds' multi-manager approach can help you through
periods of market volatility by offering you greater diversification than
single-manager funds. Each Nvest Star fund is composed of four separate segments
run by managers with distinct investment disciplines -- a strategy that allows
investors to benefit from different investment styles and diversified portfolio
holdings, seeking superior long-term results with reduced risk. We search for
the strongest candidates to manage each segment, using approaches that
complement one another in varying market conditions. No matter how you react to
shifting markets, don't let short-term events derail your long-range program.
Consult your financial representative before you make any changes.
NVEST IS POISED FOR GLOBAL GROWTH
As you may know, Nvest Companies is under agreement to be acquired by CDC Asset
Management, a leading French institutional money management company and a major
global financial institution. CDC's expertise in European stock and bond markets
will be a resource for the premier U.S. investment management teams who manage
our funds. Nvest Funds will continue to operate independently, but with broader
resources to bring you attractive, innovative products and services. Since your
vote will be required, you will receive proxy information in September. In the
meantime, if you would like more information, you are welcome to call your
financial representative or us, or visit our web site, www.nvestfunds.com.
"No matter how you react to shifting markets, don't let short-term events derail
your long- range program. Consult your financial representative before you make
any changes."
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
NVEST GROWTH AND INCOME FUND
================================================================================
INVESTMENT RESULTS THROUGH JUNE 30, 2000
--------------------------------------------------------------------------------
PUTTING PERFORMANCE IN PERSPECTIVE
The charts comparing Nvest Growth and Income Fund's performance with a benchmark
index provide you with a general sense of how your Fund performed. To put this
information in context, it may be helpful to understand the special differences
between the two. Your 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
JUNE 1990 THROUGH JUNE 2000
[GROWTH OF $10,000 CHART GOES HERE
NAV MSC S&P 500
------------------------------------------------
6/00 39,820 37,531 51,283
6/99 42,120 39,698 47,821
6/98 36,398 34,305 38,968
6/97 27,479 25,899 29,954
6/96 20,391 19,218 22,249
6/95 17,218 16,228 17,668
6/94 13,932 13,131 14,023
6/93 13,853 13,057 13,826
6/92 12,311 11,603 12,174
6/91 10,749 10,131 10,739
6/90 10,000 9,425 10,000
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
<PAGE>
NVEST GROWTH AND INCOME FUND
================================================================================
AVERAGE ANNUAL TOTAL RETURNS--6/30/00
--------------------------------------------------------------------------------
CLASS A (INCEPTION 5/6/31) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) -4.37% -5.46% 18.26% 14.82%
With Maximum Sales Charge(2) -9.90 -10.92 16.87 14.14
CLASS B (INCEPTION 9/13/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) -4.79% -6.16% 17.40% 15.52%
With CDSC(3) -9.55 -10.13 17.20 15.52
CLASS C (INCEPTION 5/1/95) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) -4.80% -6.17% 17.38% 18.05%
With CDSC(3) -5.75 -6.96 17.38 18.05
CLASS Y (INCEPTION 11/18/98) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) -4.23% -5.11% 8.23%
<TABLE>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS B CLASS C CLASS Y
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPT. INCEPT. INCEPT.
<S> <C> <C> <C> <C> <C> <C> <C>
S&P 500(4) -0.42% 7.24% 23.80% 17.80% 20.88% 24.21% 16.94%
Morningstar Large Value Average(5) -1.92 -5.21 15.16 13.36 14.02(5) 16.06 5.01
Lipper Multi-Cap Core Average(6) 2.53 11.54% 19.33% 15.67% 17.47 20.10 18.50
</TABLE>
NOTES TO CHARTS
Thesereturns represent past performance and do not guarantee future results.
Share price and return will vary and you may have a gain or loss when you sell
your shares. Recent returns may be higher or lower than those shown. Class Y
shares are available to certain institutional investors only.
1 These results include reinvestment of any dividends and capital gains, but
do not include a sales charge.
2 These results include reinvestment of any dividends and capital gains, and
the maximum sales charge of 5.75%.
3 These results include reinvestment of any dividends and capital gains.
Performance for Class B shares assumes a maximum 5.00% contingent deferred
sales charge applied when you sell shares. Class C share performance
assumes a 1.00% CDSC when you sell shares within one year of purchase.
4 S&P 500 is an unmanaged index of U.S. common stock performance. You may not
invest directly in an index.
5 Morningstar Large 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. Class C since-inception return is calculated from 4/30/95. Class Y
since-inception return is calculated from 11/30/98.
6 Lipper Multi-Cap Core Average is the average performance without sales
charges of all 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. Class C since-inception return is calculated from
4/30/95. Class Y since-inception return is calculated from 11/30/98.
2
<PAGE>
NVEST GROWTH AND INCOME FUND
================================================================================
[PICTURE OF GERALD SCRIVER GOES HERE]
Gerald Scriver
Westpeak Investment
Advisors, L.P.
INTERVIEW WITH YOUR PORTFOLIO MANAGER
--------------------------------------------------------------------------------
Q. HOW DID NVEST GROWTH AND INCOME FUND PERFORM DURING THE FIRST HALF OF 2000?
For the six months ended June 30, 2000, the return on Class A shares of Nvest
Growth and Income Fund was -4.37%, based on net asset value. The return on the
Fund's benchmark, the Standard & Poor's 500 Index, was -0.42% for the same
period. Nvest Growth and Income Fund's performance comparison reflects its
emphasis on value rather than growth, which we believe will provide the best
results for shareholders over the long-term.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PERIOD?
As the new year unfolded, stocks of high-growth technology firms selling at
extremely high valuations led the market, as they had for some time. Stocks with
strong price momentum had soared to extremely high price/earnings ratios (p/e
ratios)--a measure of whether a company's stock is high or low relative to its
earnings. The p/e ratios of some of these "hot stocks" reached a hundred times
earnings or more, and still continued to rise in price. From early March through
May, the technology sector reversed course, as market interest rotated. Many
"old economy" stocks with solid earnings and a track record returned to market
favor, reaching valuations that more closely reflected the companies'
fundamentals. By the latter part of June, however, high-tech growth stocks began
a tentative rebound, as investors purchased shares that were off their peaks,
even though they were still overvalued, in our opinion.
Q. HOW DID YOU POSITION MY FUND IN RESPONSE TO THESE EVENTS?
Our policy in managing Nvest Growth and Income Fund is to pursue opportunities
in both growth- and value-oriented investments; we believe both sectors offer
opportunities at any given time. However, we do give your Fund's portfolio a
bias toward value or growth as the market directions shift--a flexible approach
that permits us to adapt to changing trends.
3
<PAGE>
NVEST GROWTH AND INCOME FUND
================================================================================
That said, our approach in the first half of 2000 reflected our belief that
investor enthusiasm toward overvalued technology-company shares was nearing its
end. We believe that the return to more traditional, fundamental valuations
established in March will characterize the market for some time to come.
Consequently, we've structured the portfolio to focus on stocks selling at
relatively attractive valuations, which also offer future growth potential. The
average p/e ratio of the stocks in Nvest Growth and Income Fund was 17 times
earnings at the end of June--well below that of the S&P 500, which had an
average p/e of nearly 24 times earnings.
Q. WHICH INVESTMENTS AFFECTED PERFORMANCE THE MOST, POSITIVELY OR NEGATIVELY?
Nvest Growth and Income Fund's best performers were its investments in
traditional, fundamentally sound companies. Some of these benefited from
particular trends. For example, Morgan Stanley Dean Witter and Citigroup, two of
the country's leading financial-service firms, profited from a good environment
for financial stocks. Most of your Fund's best performers shared such
characteristics as attractive prices, positive earnings surprises, and
below-average volatility. These included financial stocks like Citigroup and our
health-care holdings. Pfizer, an established pharmaceutical company, is a good
example of the traditional stocks with strong fundamentals that helped bolster
performance. Pfizer's product line includes the fast-selling drug, Viagra.
Most of our disappointments during the first half of 2000 were in the high-tech
area. These included Microsoft, which was hurt by the U.S. government's ongoing
antitrust actions, as well as National Semiconductor and KLA-Tenecor--two
high-growth stocks that had enjoyed strong price momentum, which were swept
along in the downdraft that beset the high-tech sector. National Semiconductor
is an established leader in the manufacture of analog and mixed-signal
semiconductors that drive PCs and electronic communications equipment.
KLA-Tenecor produces control and inspection systems that search for and describe
defects in integrated circuits during manufacturing.
4
<PAGE>
NVEST GROWTH AND INCOME FUND
================================================================================
TOP 10 PORTFOLIO HOLDINGS - 6/30/00
% OF
COMPANY NET ASSETS
------------------------------------------------
1. General Electric Co. 4.8
2. Pfizer, Inc. 3.6
3. Citigroup, Inc. 3.5
4. PepsiCo, Inc. 2.8
5. Johnson & Johnson, Inc. 2.8
6. International Business Machines Corp. 2.8
7. Intel Corp. 2.7
8. Exxon Mobil Corp. 2.6
9. Colgate-Palmolive 2.6
10. Hewlett-Packard Co. 2.6
Portfolio holdings and asset allocation will vary.
Q. WHAT IS YOUR CURRENT OUTLOOK?
Overall, we look for a continued trend away from growth and toward value. If
interest rates stay at current levels, we believe that the market will turn away
from a speculative bias and move toward the more traditional stocks with
positive fundamentals and less inflated valuations.
Nvest Growth and Income Fund is designed to seek long-term growth of capital and
income; our goal is also to manage risk. We believe a portfolio of high-priced
stocks--even though the companies may have attractive growth prospects--is
likely to be highly volatile and unable to provide consistently high returns
over time. Therefore, for the foreseeable future we will favor stocks that
appear to be modestly valued, seeking companies with reasonably attractive
growth rates and the potential for positive earnings surprises.
The portfolio manager's commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes.
Nvest Growth and Income Fund invests in growth stocks, which are generally more
sensitive to market movements because their stock prices are based on future
expectations. It also invests in value stocks, which can fall out of favor with
investors and may underperform growth stocks during certain market conditions.
It may also invest in foreign and emerging market securities, which have special
risks. These risks affect your investment's value. See a prospectus for details.
Frequent portfolio turnover may increase your risk of greater tax liability,
which could lower your return from this Fund.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of June 30, 2000
(unaudited)
COMMON STOCK -- 99.2% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (A)
-------------------------------------------------------------------------
AEROSPACE & DEFENSE-- 1.5%
62,200 Boeing Co. ...................... $2,600,737
79,200 Northrop Grumman Corp. .......... 5,247,000
-----------
7,847,737
-----------
AIRLINES-- 2.5%
88,200 AMR Corp. (c) ................... 2,331,788
102,500 Delta Air Lines, Inc. ........... 5,182,656
98,700 UAL Corp. (c) ................... 5,743,106
-----------
13,257,550
-----------
AUTOMOTIVE-- 0.1%
25,637 Visteon Corp. ................... 310,845
-----------
AUTO & RELATED-- 3.6%
195,800 Ford Motor Co. .................. 8,419,400
187,100 General Motors Corp. ............ 10,863,494
-----------
19,282,894
-----------
BANKS-- 6.2%
229,350 Chase Manhattan Corp. ........... 10,564,434
314,700 Citigroup, Inc. ................. 18,960,675
12,400 J.P. Morgan & Co., Inc. ......... 1,365,550
131,800 UnionBanCal Corp. ............... 2,446,538
-----------
33,337,197
-----------
CHEMICALS-- 0.9%
58,600 Minnesota Mining & Manufacturing Co. 4,834,500
-----------
CHEMICALS-MAJOR-- 1.6%
192,000 Dow Chemical Co. ................ 5,796,000
58,700 E.l. du Pont de Nemours & Co. ... 2,568,125
-----------
8,364,125
-----------
COMPUTER HARDWARE-- 5.0%
87,000 Apple Computer, Inc. ............ 4,556,625
54,200 Cabletron Systems, Inc. (c) ..... 1,368,550
110,000 Hewlett-Packard Co. ............. 13,736,250
16,600 SanDisk Corp. ................... 1,015,713
67,400 Sun Microsystems, Inc. (c) ...... 6,129,187
-----------
26,806,325
-----------
COMPUTER NETWORKING-- 1.8%
151,300 Cisco Systems, Inc. (c) ......... 9,617,006
-----------
COMPUTER SOFTWARE-- 5.3%
135,400 International Business Machines Corp.14,834,763
61,700 Microsoft Corp. (c) ............. 4,936,000
101,700 Oracle Corp. (c) ................ 8,549,156
----------
28,319,919
-----------
See accompanying notes to financial statements.
6
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
COMMON STOCK -- CONTINUED
SHARES DESCRIPTION VALUE (A)
-------------------------------------------------------------------------
CONSTRUCTION-- 0.9%
51,900 Lafarge Corp. ................... $1,089,900
40,000 Southdown, Inc. ................. 2,310,000
42,400 USG Corp. ....................... 1,287,900
----------
4,687,800
-----------
CONSUMER DURABLES-- 0.1%
17,700 Whirlpool Corp. ................. 825,263
-----------
DRUGS-- 8.5%
42,600 Allergan, Inc. .................. 3,173,700
155,000 Bristol-Myers Squibb Co. ........ 9,028,750
115,800 Merck & Co. ..................... 8,873,175
402,200 Pfizer, Inc. .................... 19,305,600
109,900 Schering-Plough Corp. ........... 5,549,950
-----------
45,931,175
-----------
ELECTRIC UTILITIES -- 1.4%
37,700 Public Service Enterprise Group . 1,305,362
209,500 TXU Corp. ....................... 6,180,250
-----------
7,485,612
-----------
ELECTRICAL EQUIPMENT -- 0.4%
63,600 Rockwell International Corp. .... 2,003,400
-----------
ELECTRONICS-- 5.2%
41,954 Agilent Technologies, Inc. ...... 3,094,108
13,300 Corning, Inc. ................... 3,589,338
115,400 Dover Corp. ..................... 4,680,912
38,800 Eaton Corp. ..................... 2,599,600
9,700 Globespan Semiconductor, Inc. ... 1,184,158
25,300 KLA-Tencor Corp. (c) ............ 1,481,631
155,600 Nortel Networks Corp. ........... 10,619,700
12,900 Teradyne, Inc. .................. 948,150
-----------
28,197,597
-----------
ENERGY RESERVES-- 4.4%
26,800 Chevron Corp. ................... 2,272,975
180,100 Exxon Mobil Corp. ............... 14,137,850
120,900 Royal Dutch Petroleum Co. 7,442,906
----------
23,853,731
-----------
FINANCIAL SERVICES-- 0.8%
87,800 Fannie Mae ...................... 4,582,062
-----------
See accompanying notes to financial statements.
7
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
COMMON STOCK -- CONTINUED
SHARES DESCRIPTION VALUE (A)
-------------------------------------------------------------------------
FOOD & BEVERAGES-- 3.9%
340,400 PepsiCo, Inc. ................... $15,126,525
39,700 Quaker Oats Co. ................. 2,982,462
84,400 SUPERVALU, Inc. ................. 1,608,875
34,500 Sysco Corp. ..................... 1,453,313
----------
21,171,175
-----------
HEALTH CARE-PRODUCTS-- 3.4%
35,700 Abbott Laboratories ............. 1,590,881
18,900 Bausch & Lomb, Inc. ............. 1,462,388
148,000 Johnson & Johnson, Inc. ......... 15,077,500
-----------
18,130,769
-----------
HEALTH CARE-SERVICES-- 1.6%
76,300 HCA-The Healthcare Co. .......... 2,317,612
21,700 Pacificare Health Systems (c) ... 1,306,069
60,300 UnitedHealth Group, Inc. ........ 5,170,725
----------
8,794,406
-----------
HOUSEHOLD PRODUCTS-- 2.8%
230,500 Colgate-Palmolive ............... 13,801,188
63,500 Ralston-Purina Group ............ 1,266,031
-----------
15,067,219
-----------
INDUSTRIAL PARTS-- 2.1%
287,000 Caterpillar, Inc. ............... 9,722,125
47,300 Parker-Hannifin Corp. ........... 1,620,025
-----------
11,342,150
-----------
INDUSTRIAL SERVICES-- 0.2%
31,000 Hertz Corp. ..................... 869,938
-----------
INFORMATION SERVICES-- 2.5%
33,500 First Data Corp. ................ 1,662,438
133,400 Omnicom Group, Inc. ............. 11,880,937
-----------
13,543,375
-----------
INTERNET CONTENT-- 1.3%
12,400 Ariba, Inc. ..................... 1,215,781
21,700 BroadVision, Inc. ............... 1,102,631
175,200 E*TRADE Group, Inc. ............. 2,890,800
11,000 Juniper Networks, Inc. .......... 1,601,188
-----------
6,810,400
-----------
LIFE INSURANCE-- 1.0%
24,700 CIGNA Corp. ..................... 2,309,450
92,700 Lincoln National Corp., Inc. .... 3,348,787
-----------
5,658,237
-----------
MANUFACTURING-DIVERSIFIED-- 4.8%
486,000 General Electric Co. ............ 25,758,000
-----------
See accompanying notes to financial statements.
8
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
COMMON STOCK -- CONTINUED
SHARES DESCRIPTION VALUE (A)
-------------------------------------------------------------------------
MEDIA & ENTERTAINMENT-- 1.7%
72,100 Gannett Co. ..................... $4,312,481
127,800 Walt Disney Co. ................. 4,960,238
-----------
9,272,719
-----------
METALS & MINING-- 0.8%
96,900 Alcan Aluminium Ltd. ............ 3,003,900
53,400 Alcoa, Inc. ..................... 1,548,600
-----------
4,552,500
-----------
OIL-REFINING & DISTRIBUTION-- 0.3%
28,800 Texaco, Inc. .................... 1,533,600
-----------
PAPER & FOREST PRODUCTS -- 0.4%
48,500 Georgia Pacific Corp., Timber Group 1,273,125
28,700 International Paper Co. ......... 855,619
-----------
2,128,744
-----------
PROPERTY & CASUALTY INSURANCE-- 1.7%
65,500 MGIC Investment Corp. ........... 2,980,250
84,400 PMI Group, Inc. ................. 4,009,000
40,000 Radian Group, Inc. (c) .......... 2,070,000
-----------
9,059,250
-----------
PUBLISHING-- 0.4%
41,000 Knight-Ridder, Inc. ............. 2,180,687
-----------
RAILROADS & EQUIPMENT -- 0.8%
82,900 Burlington Northern Santa Fe .... 1,901,519
61,100 Union Pacific Corp. ............. 2,272,156
-----------
4,173,675
-----------
RETAIL-CLOTHING-- 0.2%
54,200 The Limited, Inc. ............... 1,172,075
-----------
RETAIL-DEPARTMENT STORE -- 1.9%
122,000 Federated Department Stores, Inc. 4,117,500
94,900 Sears, Roebuck & Co. ............ 3,096,112
37,200 Target Corp. .................... 2,157,600
18,100 Wal-Mart Stores, Inc. ........... 1,043,013
-----------
10,414,225
-----------
RETAIL-SPECIALTY-- 2.2%
42,000 BJ's Wholesale Club (c) ......... 1,386,000
191,250 Home Depot, Inc. ................ 9,550,547
22,500 Lowe's Company., Inc. ........... 923,906
-----------
11,860,453
-----------
SECURITIES & ASSET MANAGEMENT-- 3.9%
38,200 AXA Financial, Inc. ............. 1,298,800
75,710 Bear Stearns Companies, Inc. .... 3,151,429
See accompanying notes to financial statements.
9
<PAGE>
PORTFOLIO COMPOSITION-CONTINUED
================================================================================
Investments as of June 30, 2000
(unaudited)
COMMON STOCK -- CONTINUED
SHARES DESCRIPTION VALUE (A)
-------------------------------------------------------------------------
55,000 Lehman Brothers Holdings, Inc. .. $5,200,937
37,100 Merrill Lynch & Co., Inc. ....... 4,266,500
82,900 Morgan Stanley Dean Witter & Co. 6,901,425
-----------
20,819,091
-----------
SEMICONDUCTORS-- 5.9%
20,700 Advanced Micro Devices, Inc. (c) 1,599,075
27,800 Analog Devices, Inc. ............ 2,112,800
33,900 Applied Materials, Inc. (c) ..... 3,072,188
31,200 Cypress Semiconductor Corp. ..... 1,318,200
109,300 Intel Corp. ..................... 14,612,044
16,600 LSI Logic Corp. (c) ............. 898,475
15,300 National Semiconductor Corp. (c) 868,275
107,800 Texas Instruments, Inc. ......... 7,404,512
-----------
31,885,569
-----------
SEMICONDUCTOR-ELECTRONICS-- 0.6%
39,500 Xilinx, Inc. (c) ................ 3,261,219
-----------
TELECOMMUNICATIONS-- 4.3%
163,300 AT&T Corp. ...................... 5,164,362
84,300 Bell Atlantic Corp. ............. 4,283,494
315,000 BellSouth Corp. ................. 13,426,875
-----------
22,874,731
-----------
THRIFT-- 0.3%
84,600 Golden State Bancorp, Inc. (c) .. 1,522,800
-----------
Total Common Stock
(Identified Cost $531,360,059) .. 533,401,745
-----------
SHORT TERM INVESTMENT--0.6%
PRINCIPAL
AMOUNT
--------------------------------------------------------------------------------
$ 3,106,000 Repurchase Agreement with State Street Bank
and Trust Co. dated 6/30/2000 at 5.25% to
be repurchased at $3,107,359 on 7/03/2000,
collateralized by $2,785,000 U.S. Treasury Bond
7.125% due 2/15/2023 with a value of $3,171,419 3,106,000
---------
Total Short Term Investment
(Identified Cost $3,106,000) .................. 3,106,000
---------
Total Investments--99.8%
(Identified Cost $534,466,059) (b) ............. 536,507,745
Other assets less liabilities ................. 872,590
---------
Total Net Assets-- 100% ....................... $ 537,380,335
==============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 2000 the net
unrealized appreciation on investments based on cost of
$534,466,059 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 $ 43,008,473
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ (40,966,787)
------------------
Net unrealized appreciation ........................... $ 2,041,686
==================
(c) Non-income producing security.
See accompanying notes to financial statements.
10
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
================================================================================
June 30, 2000
(unaudited)
<TABLE>
ASSETS
<S> <C> <C>
Investments at value (Identified cost $534,466,059) .. $ 536,507,745
Cash ................................................. 3,117
Receivable for:
Fund shares sold ................................ 391,919
Securities sold ................................. 5,965,713
Dividends and interest .......................... 427,821
Tax reclaims .................................... 168
---
543,296,483
LIABILITIES
Payable for:
Securities purchased ............................ $ 4,696,322
Fund shares redeemed ............................ 961,603
Accrued expenses:
Transfer agent .................................. 109,025
Management fees ................................. 29,219
Deferred trustees' fees ......................... 36,164
Accounting and administrative ................... 16,062
Other ........................................... 67,753
------
5,916,148
---------
NET ASSETS $ 537,380,335
===================
Net Assets consist of:
Paid in capital ................................. $ 519,647,400
Undistributed net investment income (loss) ...... (694,815)
Accumulated net realized gain (loss) ............ 16,386,064
Unrealized appreciation (depreciation) on investments 2,041,686
---------
NET ASSETS ................................................... $ 537,380,335
====================
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($321,980,501 / 21,969,450 shares of beneficial interest) ...... $ 14.66
===============
Offering price per share (100/94.25 of $14.66) ......................... $ 15.55*
===============
Net asset value and offering price of Class B shares
($182,563,544 / 12,758,191 shares of beneficial interest) ...... $ 14.31**
===============
Net asset value and offering price of Class C shares
($22,113,426 / 1,547,345 shares of beneficial interest) ........ $ 14.29**
===============
Net asset value, offering and redemption price of Class Y shares
($10,722,864 / 729,131 shares of beneficial interest) .......... $ 14.71
===============
</TABLE>
* 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.
11
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Six Months Ended June 30, 2000
(unaudited)
<TABLE>
INVESTMENT INCOME
<S> <C> <C>
Dividends (net of foreign taxes of $20,177) $ 3,513,275
Interest 87,472
------
3,600,747
Expenses
Management fees $ 1,865,430
Service fees - Class A 420,942
Service and distribution fees - Class B 980,467
Service and distribution fees - Class C 96,235
Trustees' fees and expenses 14,969
Accounting and administrative 94,310
Custodian 69,971
Transfer agent - Class A, Class B, Class C 705,095
Transfer agent - Class Y 5,862
Audit and tax services 19,425
Legal 13,805
Printing 24,238
Registration 37,001
Miscellaneous 18,572
------
Total expenses before reductions 4,366,322
Less reductions (92,176) 4,274,146
------- ---------
Net investment income (loss) (673,399)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on Investments - net 870,429
Unrealized appreciation (depreciation) on investments - net (29,381,071)
-----------
Net gain (loss) on investment transactions (28,510,642)
-----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (29,184,041)
===================
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
(unaudited)
<TABLE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
----------------------------
FROM OPERATIONS
<S> <C> <C> <C>
Net investment income (loss) ........................................... $ 998,681 $ (673,399)
Net realized gain (loss) on investments ................................ 100,407,049 870,429
Unrealized appreciation (depreciation) on investments .................. (52,996,051) (29,381,071)
----------- -----------
Increase (decrease) in net assets from operations ...................... 48,409,679 (29,184,041)
---------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ........................................................... (1,056,821) 0
Class Y ........................................................... (55,735) 0
In excess of net investment income
Class A ........................................................... (49,021) 0
Class Y ........................................................... (2,585) 0
Net realized gain on investments
Class A ........................................................... (57,051,170) 0
Class B ........................................................... (33,147,376) 0
Class C ........................................................... (4,191,359) 0
Class Y ........................................................... (2,192,903) 0
---------- -
(97,746,970) 0
----------- -
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................ 207,032,451 (66,928,135)
----------- -----------
Total increase (decrease) in net assets ........................................ 157,695,160 (96,112,176)
NET ASSETS
Beginning of the period ........................................... 475,797,351 633,492,511
----------- -----------
End of the period ................................................. $ 633,492,511 $ 537,380,335
=============== ===============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS)
End of the period ................................................. $ (21,416) $ (694,815)
=============== ===============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period.
(unaudited)
<TABLE>
CLASS A
--------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
-------------------------------------------------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period ..................... $ 12.41 $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ............. 0.18 0.13 0.07(b) 0.04 0.08 0.00(c)
Net Realized and Unrealized Gain
(Loss) on Investments ............. 4.01 2.07 4.40 3.29 1.40 (0.67)
------- ------- ------- ------- ------- -------
Total From Investment Operations .. 4.19 2.20 4.47 3.33 1.48 (0.67)
------- ------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.18) (0.13) (0.06) (0.01) (0.06) 0.00
Distributions From Net
Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00
Distributions in Excess
of Net Investment Income .......... 0.00 0.00 0.00 0.00 0.00(c) 0.00
------- ------- ------- ------- ------- -------
Total Distributions ............... (2.21) (2.72) (2.99) (2.11) (2.72) 0.00
------- ------- ------- ------- ------- -------
Net Asset Value,
End of the Period ................. $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33 $ 14.66
======= ======= ======= ======= ======= =======
Total Return (%)(a) ............... 35.1 17.2 33.4 23.9 9.5 (4.4)
Ratio of Operating Expenses to
Average Net Assets (%) ............ 1.38 1.30 1.25 1.23 1.21 1.27(d)
Ratio of Operating Expenses to Average
Net Assets After
Expense Reductions (%) ............ 1.38 1.30 1.25 1.23 1.21 1.24(d)(e)
Ratio of Net Investment Income to
Average Net Assets (%) ............ 1.31 0.92 0.46 0.33 0.48 0.04(d)
Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82
Net Assets, End of the Period (000) $150,693 $166,963 $220,912 $304,139 $375,676 $321,981
</TABLE>
(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) Amount is less than $0.01 per share.
(d) Computed on an annualized basis.
(e) The Fund has entered into agreements with brokers whereby the brokers will
rebate a portion of brokerage commissions. The rebates are used to reduce
operating expenses of the Fund.
See accompanying notes to financial statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period.
(unaudited)
<TABLE>
CLASS B
--------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
-------------------------------------------------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period ..................... $ 12.42 $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income (Loss) ...... 0.10 0.03 (0.05)(b) (0.05) (0.04) 0.00(c)
Net Realized and Unrealized Gain
(Loss) on Investments ............. 4.01 2.07 4.40 3.24 1.36 (0.72)
------- ------- ------- ------- ------- -------
Total From Investment Operations .. 4.11 2.10 4.35 3.19 1.32 (0.72)
------- ------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.10) (0.04) (0.01) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00
Distributions in Excess of
Net Investment Income ............. 0.00 0.00 0.00 0.00 0.00(c) 0.00
------- ------- ------- ------- ------- -------
Total Distributions ............... (2.13) (2.63) (2.94) (2.10) (2.66) 0.00
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03 $14.31
======= ======= ======= ======= ======= ======
Total Return (%)(a) ............... 34.3 16.3 32.4 23.1 8.6 (4.8)
Ratio of Operating Expenses to
Average Net Assets (%) ............ 2.11 2.05 2.00 1.98 1.96 2.02(d)
Ratio of Operating Expenses to
Average Net Assets After
Expense Reductions (%) ............ 2.11 2.05 2.00 1.98 1.96 1.99(d)(e)
Ratio of Net Investment Income to
Average Net Assets (%) ............ 0.56 0.17 (0.29) (0.42) (0.27) (0.71)(d)
Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82
Net Assets, End of the Period (000) $29,026 $46,856 $81,066 $153,369 $216,457 $182,564
</TABLE>
(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) Amount is less than $0.01 per share.
(d) Computed on an annualized basis.
(e) The Fund has entered into agreements with brokers whereby the brokers will
rebate a portion of brokerage commissions. The rebates are used to reduce
operating expenses of the Fund.
See accompanying notes to financial statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period.
(unaudited)
<TABLE>
CLASS C
--------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
-------------------------------------------------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period ........................ $ 13.84 $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income (Loss) ...... 0.06 0.04 (0.05)(d (0.04) (0.04) 0.00
Net Realized and Unrealized
Gain (Loss) on Investments ........ 2.58 2.05 4.42 3.21 1.36 (0.72)
------- ------- ------- ------- ------- -------
Total From Investment Operations .. 2.64 2.09 4.37 3.17 1.32 (0.72)
------- ------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.06) (0.04) (0.01) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00
Distributions in Excess
of Net Investment Income .......... 0.00 0.00 0.00 0.00 0.00(e) 0.00
------- ------- ------- ------- ------- -------
Total Distributions ............... (2.09) (2.63) (2.94) (2.10) (2.66) 0.00
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01 $ 14.29
======= ======= ======= ======= ======= =======
Total Return (%)(c) ............... 20.2 16.3 32.6 22.9 8.6 (4.8)
Ratio of Operating Expenses
to Average Net Assets (%) ......... 2.11(b) 2.05 2.00 1.98 1.96 2.02(b)
Ratio of Operating Expenses to
Average Net Assets After
Expense Reductions (%) ............ 2.11(b) 2.05 2.00 1.98 1.96 1.99(b)(f)
Ratio of Net Investment Income
to Average Net Assets (%) ......... 0.56(b) 0.17 (0.29) (0.42) (0.27) (0.71)(b)
Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82
Net Assets, End of the Period (000) $ 4,707 $ 3,912 $ 6,735 $18,288 $26,983 $22,113
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
(d) Per share net investment income (loss) has been calculated using the
average shares outstanding during the period.
(e) Amount is less than $0.01 per share.
(f) The Fund has entered into agreements with brokers whereby the brokers will
rebate a portion of brokerage commissions. The rebates are used to reduce
operating expenses of the Fund.
See accompanying notes to financial statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
For a share outstanding throughout each period.
(unaudited)
<TABLE>
CLASS Y
-------------------------------------
NOVEMBER
18,(A) YEAR SIX MONTHS
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
-------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period $15.42 $16.57 $15.36
------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) 0.02 0.02 0.00
Net Realized and Unrealized
Gain (Loss) on Investments 1.22 1.51 (0.65)
---- ---- -----
Total From Investment Operations 1.24 1.53 (0.65)
---- ---- -----
Less Distributions Dividends From Net
Investment Income (0.02) (0.08) 0.00
Distributions From Net Realized Capital Gains (0.07) (2.66) 0.00
Distributions in Excess of
Net Investment Income 0.00 0.00(d) 0.00
---- ---- ----
Total Distributions (0.09) (2.74) 0.00
----- ----- ----
Net Asset Value, End of the Period $16.57 $15.36 $14.71
====== ====== ======
Total Return (%)(c) 8.1 9.8 (4.2)
Ratio of Operating Expenses
to Average Net Assets (%) 0.98(b) 0.96 1.55(b)(e)
Ratio of Operating Expenses to
Average Net Assets After Expense Reductions (%) 0.98(b) 0.96 1.52(b)
Ratio of Net Investment Income
to Average Net Assets (%) 0.58(b) (0.73) (0.24)(b)
Portfolio Turnover Rate (%) 114 133 82
Net Assets, End of the Period (000) $ 1 $14,377 $10,723
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
(d) Amount is less than $0.01 per share.
(e) The Fund has entered into agreements with brokers whereby the brokers will
rebate a portion of brokerage commissions. The rebates are used to reduce
operating expenses of the Fund.
See accompanying notes to financial statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust II
(the "Trust"), a Massachusetts business trust, registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. The Fund seeks opportunities for long-term growth of capital
and income. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series is a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased prior to
May 1, 1997). Class C shares do not pay a front end sales charge and do not
convert to any other class of shares, but they do pay a higher ongoing
distribution fee than Class A shares and may be subject to a contingent deferred
sales charge if those shares are redeemed within one year. 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 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 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 subadviser,
under the supervision of the Fund's Trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Interest
income is increased by the accretion of discount. In determining net gain or
loss on securities sold, the cost of securities has been determined on the
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 all of its income and any net realized capital
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
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 the 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.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to capital accounts.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price, including interest. The Fund's subadviser is
responsible for determining that the value of the collateral is at all times at
least equal to the repurchase price. Repurchase agreements could involve certain
risks in the event of default or insolvency of the other party including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 2000
purchases and sales of securities (excluding short-term investments) were
$465,432,797 and $530,798,402, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser Nvest Funds Management, L.P. ("Nvest
Management") at the annual rate of 0.70% of the first $200 million of the Fund's
average daily net assets, 0.65% of the next $300 million and 0.60% of such
assets in excess of $500 million, reduced by the payment to the Fund's
investment subadviser, Westpeak Investment Advisors, L.P. ("Westpeak") at the
rate of 0.50% of the first $25 million of the Fund's average daily net assets,
0.40% of the next $75 million, 0.35% of the next $100 million and 0.30% of such
assets in excess of $200 million. Certain officers and directors of Nvest
Management are also officers or Trustees of the Fund. Nvest Management and
Westpeak are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which
is a subsidiary of Metropolitan Life Insurance Company (Note 7). Fees earned by
Nvest Management and Westpeak under the management and subadvisory agreements in
effect during the six months ended June 30, 2000 are as follows:
Fees Earned
-----------
Nest Management $ 932,715
Westpeak 932,715
-------
$ 1,865,430
=============
The effective annualized management fee for the six months ended June 30, 2000
was 0.66%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund pays NSC a group fee for these
services equal to the annual rate of 0.035% of the first $5 billion of Nvest
Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest
Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net
assets in excess of $10 billion. For the six months ended June 30, 2000, these
expenses amounted to $94,310 and are shown separately in the financial
statements as accounting and administrative. The effective annu-
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
alized accounting and administrative expense for the six months ended June 30,
2000 was 0.034%.
c. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent to
the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer
agent for the Fund. NSC receives account fees for Class A, Class B and Class C
shareholder accounts. NSC and BFDS are also reimbursed by the Fund for
out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of
average daily net assets. For the six months ended June 30, 2000, the Fund paid
NSC $527,174 as compensation for its services as transfer agent.
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"), 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
(including certain payments to securities dealers, who may be affiliated with
Nvest Funds) incurred by the Nvest Funds in providing personal services to
investors in Class A shares and/or the maintenance of shareholder accounts. For
the six months ended June 30, 2000, the Fund paid Nvest Funds $ 420,942 in fees
under the Class A Plan.
Under the Class B and Class C Plans, the Fund pays Nvest Funds 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 (including certain payments to securities dealers, who may be
affiliated with Nvest Funds) incurred by Nvest Funds in providing personal
services to investors in Class B and Class C shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 2000, the Fund paid
Nvest Funds $245,117 and $24,059 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 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 in
connection with the marketing or sale of Class B and Class C shares. For the six
months ended June 30, 2000, the Fund paid Nvest Funds $735,350 and $72,176 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 six months ended June
30, 2000 amounted to $732,160.
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
Manaagement, Nvest Funds, 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
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
$4,000. These fees are allocated to the various Nvest Funds based on a formula
that takes into account, among other factors, the relative net assets of each
Fund.
A deferred compensation plan is available to the Trustees on a voluntary basis.
Each participating Trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund or
certain other Nvest Funds on the normal payment date. Deferred amounts remain in
the Funds until distributed in accordance with the Plan.
4. CAPITAL SHARES. At June 30, 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:
<TABLE>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1999 ENDED JUNE 30, 2000
CLASS A SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 11,472,939 $197,730,741 1,685,887 $ 24,809,753
Shares issued in connection with the reinvestment of:
Dividends from net investment income 53,068 962,663 0 0
Distributions from net realized gain 3,434,246 51,752,162 0 0
--------- ---------- - -
14,960,253 250,445,566 1,685,887 24,809,753
Shares repurchased (8,811,484) (151,367,164) (4,215,529) (61,553,097)
---------- ------------ ---------- -----------
Net increase (decrease) 6,148,769 $ 99,078,402 (2,529,642) $(36,743,344)
--------- ------------ ---------- ------------
YEAR ENDED SIX MONTHS
DECEMBER 31, 1999 ENDED JUNE 30, 2000
CLASS B SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------ ------
Shares sold 5,249,461 $ 88,949,545 1,291,140 $ 18,557,301
Shares issued in connection with the reinvestment of:
Distributions from net realized gain 2,070,562 30,607,517 0 0
--------- ---------- - -
7,320,023 119,557,062 1,291,140 18,557,301
Shares repurchased (2,288,012) (38,363,095) (2,936,326) (42,086,028)
---------- ----------- ---------- -----------
Net increase (decrease) 5,032,011 $ 81,193,967 (1,645,186) $(23,528,727)
--------- ------------ ---------- ------------
YEAR ENDED SIX MONTHS
DECEMBER 31, 1999 ENDED JUNE 30, 2000
CLASS C SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------ ------
Shares sold 999,688 $ 16,915,102 253,831 $ 3,633,718
Shares issued in connection with the reinvestment of:
Distributions from net realized gain 247,673 3,657,804 0 0
------- --------- - -
1,247,361 20,572,906 253,831 3,633,718
Shares repurchased (568,351) (9,465,865) (504,210) (7,223,630)
-------- ---------- -------- ----------
Net increase (decrease) 679,010 $ 11,107,041 (250,379) $ (3,589,912)
------- ------------ -------- ------------
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
================================================================================
For the Six Months Ended June 30, 2000
(unaudited)
<TABLE>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1999 ENDED JUNE 30, 2000
CLASS Y SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 972,875 $ 16,586,441 88,872 $ 1,313,913
Shares issued in connection with the reinvestment of:
Dividends from net investment income 3,202 58,080 0 0
----- ------ - -
Distributions from net realized gain 144,486 2,180,268 0 0
1,120,563 18,824,789 88,872 1,313,913
Shares repurchased (184,433) (3,171,748) (295,917) (4,380,065)
-------- ---------- -------- ----------
Net increase (decrease) 936,130 $ 15,653,041 (207,045) $ (3,066,152)
------- ------------ -------- ------------
Increase (decrease) derived from capital shares transactions 12,795,920 $207,032,451 (4,632,252) $(66,928,135)
========== ============ ========== ============
</TABLE>
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 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 six months ended June 30,
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 six months ended June 30, 2000, the Fund's
expenses were reduced by $ 92,176 under these agreements.
7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership,
Nvest Companies, L.P., have entered into an agreement for CDC Asset Management
to acquire all of their outstanding partnership units. CDC Asset Management is
the investment management arm of France's Caisse des Depots et Consignation,
which is a major diversified financial institution. Nvest will be renamed CDC
Asset Management-North America and it will continue to use the holding company
structure. Nvest affiliates will retain their investment independence, brand
names, management and operating autonomy. The transaction will not affect daily
operations of the Nvest Funds or the investment management activities of the
Funds' investment advisers or subadvisers.
Consummation of the transaction with CDC is subject to a number of
contingencies, including regulatory approvals and approval of the unitholders of
Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the
transaction may result in a change of control for the Nvest affiliates.
Consequently, it is anticipated that the Nvest affiliates will seek approval of
new agreements from the Board of Trustees and shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 2000.
22
<PAGE>
NVEST EQUITY INCOME FUND
Supplement dated August 21, 2000 to Nvest Stock Funds Prospectus Class A, B
and C dated May 1, 2000
Effective August 1, 2000, Margaret Buescher is the sole portfolio manager for
the Fund.
23
<PAGE>
REGULAR INVESTING PAYS
================================================================================
FIVE GOOD REASONS TO INVEST REGULARLY
--------------------------------------------------------------------------------
1. It's an easy way to build assets.
2. It's convenient and effortless.
3. It requires a low minimum to get started.
4. It can help you reach important long-term goals like financing retirement
or college funding.
5. It can help you benefit from the ups and downs of the market.
With Investment Builder, 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
[A CHART THAT SHOWS INVESTMENTS OVER A 20 YEAR SPAN]
100 $200 $500
25 Years $91,236 $182,472 $456,181
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.
24
<PAGE>
NVEST FUNDS
================================================================================
LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY
Capital Growth Fund Star Worldwide Fund
Kobrick Growth Fund International Equity Fund
Growth Fund
Growth and Income Fund CORPORATE INCOME FUNDS
Balanced Fund Short Term Corporate Income Fund
Star Value Fund Bond Income Fund
High Income Fund
ALL-CAP EQUITY FUNDS Strategic Income Fund
Star Advisers Fund
Kobrick Capital Fund
Bullseye Fund GOVERNMENT INCOME FUNDS
Equity Income Fund Limited Term U.S. Government Fund
Government Securities Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund MONEY MARKET FUNDS*
Kobrick Emerging Growth Fund Cash Management Trust
Tax Exempt Money Market Trust
*Investments in the money market
funds are not insured or
gauranteed by the FDIC or any
government agency.
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
To learn more, and for a free prospectus, contact your financial representative.
VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM
Nvest Funds Distributor, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
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.
<PAGE>
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