ANNUAL REPORT
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[LOGO] Nvest Funds(SM)
Where The Best Minds Meet(R)
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Nvest Bullseye Fund
Where
The Best
Minds Meet(R)
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December 31, 1999
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February 2000
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[PHOTO]
John T. Hailer
President and Chief
Executive Officer
Nvest Funds
"We expect 2000 to be a year of innovation, as we work on new investment options
for you, our shareholders, and your financial advisers."
After serving as Executive Vice President for Sales and Marketing since 1998, I
became President of Nvest Funds late last year. Bruce Speca, my predecessor, has
moved on to head up a new Internet venture affiliated with the parent company of
our funds. It's especially exciting for me to be assuming my new
responsibilities as we begin a new century and introduce a new identity for our
fund family.
We expect 2000 to be a year of innovation, as we work on new investment options
for you, our shareholders, and your financial advisers. At the same time, our
commitment to bringing you funds led by some of the Best Minds in the industry
remains our core business principle.
A new name, the same Best Minds
On February 1, New England Funds became Nvest Funds. We chose this new name
primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate
parent and a major financial organization with over $133 billion in assets under
management (as of 12/31/99) through 18 affiliated companies.
The companies that comprise Nvest represent a breadth of investment resources
and experience that is difficult to match. As an Nvest affiliate, we call on an
impressive roster of Best Minds to manage our funds. The recent addition of the
Kobrick Funds to our fund family extends that tradition.
1999 in review
Last year, the market focused on technology companies and large-capitalization
growth stocks. Value-oriented equity investors are still waiting for a shift in
investor sentiment, and bond investors felt the negative price impact of rising
interest rates. The following pages discuss how your fund's managers addressed
those challenges. Short-term results notwithstanding, I believe most investors
would do well to own an array of investment types in a well thought-out asset
allocation plan.
I look forward to working with you and your financial adviser as you invest
toward your personal goals. For our part, we are committed to supporting you
with quality investment products and outstanding customer service.
/s/ John T. Hailer
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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NVEST BULLSEYE FUND
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Investment Results Through December 31, 1999
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Putting Performance in Perspective
The charts comparing your 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 CHART IN THE PRINTED MATERIAL.]
March 1998 (Inception) Through December 1999
Net Asset Maximum Sales
Value(1) Charge(2) S&P500(5)
-------- --------- ---------------
12/99 $13,832 $13,039 $13,656
9/99 9,609 8,810 11,884
6/99 10,841 9,939 12,676
3/99 9,752 8,941 11,843
12/98 10,121 9,279 11,282
11/98 9,417 8,633 10,645
10/98 9,424 8,640 10,051
9/98 8,464 7,760 9,304
8/98 7,560 6,931 8,722
7/98 9,064 8,310 10,210
6/98 9,672 8,868 10,330
5/98 9,608 8,809 9,901
4/98 10,280 9,425 10,091
3/31/98 10,000 9,425 10,000
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvestment of
distributions.
1
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NVEST BULLSEYE FUND
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Average Annual Total Returns -- 12/31/99
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Class A (Inception 3/31/98) 1 Year Since Inception
Net Asset Value(1,4) 36.68% 20.32%
With Maximum Sales Charge(2,4) 28.84 16.34
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Class B (Inception 3/31/98) 1 Year Since Inception
Net Asset Value(1,4) 35.71% 19.57%
With CDSC(3,4) 30.71 17.56
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Class C (Inception 3/31/98) 1 Year Since Inception
Net Asset Value(1,4) 35.74% 19.53%
With CDSC(3,4) 34.74 19.53
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Comparative Performance 1 Year Since Inception
S&P 500 Index(5) 21.04% 19.50%
Morningstar Mid Cap Value Average(6) 6.72 -0.96
Lipper Multi-Cap Core Funds Average(7) 22.50 14.08
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Notes to Charts
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at time of purchase.
Returns would have been lower had sales charges been reflected.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes
reinvestment of all distributions and, for Class B shares, assumes that a
maximum 5.00% sales charge is applied to redemptions. The sales charge will
decrease over time, declining to zero six years after the purchase of
shares. With CDSC performance for Class C shares assumes a maximum 1.00%
sales charge on redemptions within the first year of purchase.
(4) This 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) The Standard & Poor's Composite Index of 500 Stocks (S&P 500(R)) is a
market value-weighted unmanaged index of common stock prices. It is a
common measure of stock total return performance. The performance of the
S&P 500 has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund investments.
It is not possible to invest directly in an index.
(6) Morningstar Mid Cap Value Average is an average (calculated on the basis of
net asset value) of funds with similar investment objectives as calculated
by Morningstar, Inc., an independent mutual fund ranking service.
(7) Lipper Multi-Cap Core Funds Average is an average (calculated on the basis
of net asset value) of funds with similar investment objectives as
calculated by Lipper Inc., an independent mutual fund ranking service.
2
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NVEST BULLSEYE FUND
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Interview with Your Portfolio Managers
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[PHOTO]
[PHOTO]
William K. Jurika,
Guy Elliffe
Jurika & Voyles, L.P.
Q. How did Bullseye Fund perform during its fiscal year ending December 31,
1999?
For the year ended December 31, 1999, the return on Class A shares of Bullseye
Fund was 36.68% based on net asset value. The return on the Fund's benchmark,
Standard & Poor's 500 Index, was 21.04%. It is important to remember that, while
the S&P 500 is made up of 500 of the largest-capitalization stocks in the U.S.
market, the Fund invests in a highly concentrated portfolio across all
capitalizations.
Q. What was the investment environment like during the year?
The market started off the year enamored of a select group of large-company
growth stocks. That changed for a short time in the second quarter, as signs of
a recovery in world growth boosted cyclical companies and helped spark a surge
among value stocks -- those selling at cheap prices relative to the market. When
interest rates rose in the summer, the market shifted toward those companies
whose earnings rose faster than the market anticipated, while stocks whose
earnings fell short of expectations started to suffer. Since the summer, price
momentum has taken over the market. Cheap stocks became cheaper -- sometimes
even when the business was performing relatively well -- and the rich got
richer. While we thought this market action was imprudent from a longer-term
perspective, that's the way the market went through the latter part of the year.
Q. How would you describe the investment approach you've followed most
recently?
We recognized that the market was rewarding a very narrow set of companies that
had positive near- and intermediate-term prospects. At the same time, we were
prudent with our choices in a very expensive market, looking for the companies
that offered a combination of quality, predictability, and what we considered to
be reasonable valuations. Over time, the market has rewarded investments in
companies that are building value, or those that have been priced too low for
some reason. That's where we've focused our purchases.
3
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NVEST BULLSEYE FUND
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Within the parameters set by the Fund's prospectus, we've looked for stocks of
companies offering particular characteristics. First, we looked for
predictability by choosing companies that are leaders in their industries.
Second, we were attracted to companies that offered a high return on equity,
without carrying debt to prop up those returns. Finally, we needed to feel that
the industry or the company offered a solid financial model.
Q. Which stocks helped the Fund's performance?
Most, if not all, of the Fund's strong performance came in the fourth quarter.
During that time, the Fund benefited from stock selection, particularly among
its technology holdings. This is a sector made up of businesses with very large
market shares and worldwide operations, factors that can limit earnings
volatility. They also don't require a large amount of capital investment to
generate very high profits. Among the stocks that drove performance were i2
Technologies, a software company that helps optimize the supply chain for
technology-dependent companies like Dell Computer; STMicroelectronics, a
European semiconductor firm that supplies microchips for digital television and
wireless handsets; and Corning, which is involved in the build-up of
telecommunications infrastructure. As grateful as we are that the market has
overpaid for these
Your Fund's Investments -- 12/31/99
% of
Security Net Assets
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1. Corning Inc. 6.3
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2. i2 Technologies, Inc. 5.2
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3. Southwest Airlines 4.5
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4. KLA-Tencor Corporation 4.5
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5. International Paper Co. 4.4
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6. Duke Power Co. 4.4
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7. Cognex Corporation 4.3
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8. Blockbuster, Inc. 4.0
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9. United Parcel Service, Inc. 4.0
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10. STMicroelectronics 4.0
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11. Enron Corp. 4.0
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12. Kimberly-Clark Corp. 4.0
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13. Scientific Atlanta, Inc. 3.9
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14. First Data Corp. 3.9
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15. Circuit City Stores 3.8
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16. OM Group, Inc. 3.8
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17. Parker-Hannifin Corp. 3.8
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18. Baxter International, Inc. 3.8
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19. Vastar Resources, Inc. 3.3
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20. Seagate Technology 3.1
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21. ReliaStar Financial Corp. 2.6
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22. Expedia, Inc. 1.5
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Portfolio holdings and asset allocations will vary.
4
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NVEST BULLSEYE FUND
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and other technology stocks, we moved to reduce or sell off a significant
portion of the Fund's technology holdings at the end of the calendar year.
Beyond technology, we'd like to highlight UPS and Southwest Airlines as stocks
that helped the Fund's performance. Both companies offered attractive business
models and are market leaders in the transportation sector, an industry whose
overall financial model is generally not attractive.
Q. What's your outlook?
We believe the U.S. economy will experience some price inflation going forward.
As a result, we'll look to invest in companies that should be able to pass along
to their customers any increase in company costs. In addition, rising interest
rates will probably cause us to focus more on higher-quality, larger-company
stocks that are more easily traded. We'd emphasize that this would be a somewhat
conservative stance, not a defensive one. Overall, we'll look for stocks that we
can buy and hold, focusing on purchasing companies that are building value or on
those we feel are selling at very cheap prices for no fundamentally sound
reason.
The portfolio managers' commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in the
managers' opinion may result in strategic and other portfolio changes.
Compared with other funds, this Fund may invest a greater percentage of its
assets in a particular company. Therefore, the Fund's assets could be
significantly affected by the performance of any one of the small number of
stocks in its portfolio.
The Fund may invest in REITs, which are subject to changes in underlying real
estate values, rising interest rates, limited diversification of holdings,
higher costs and prepayment risk associated with related mortgages. The Fund may
hold foreign securities, which are affected by currency fluctuations, higher
volatility and limited liability. Political, economic and information risks are
also associated with foreign securities. Smaller-company investments carry
special risks, including narrower markets, limited financial and management
resources, less liquidity and greater volatility than large-company stocks. See
the Fund's prospectus for details.
5
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1999
Common Stock -- 87.1% of Total Net Assets
Shares Description Value (a)
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Air Travel--4.5%
62,100 Southwest Airlines............................... 1,005,244
------------
Business Services--4.0%
13,200 United Parcel Service, Inc....................... 910,800
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Chemicals--3.8%
25,000 OM Group, Inc.................................... 860,938
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Communication Services--3.9%
15,800 Scientific Atlanta, Inc.......................... 878,875
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Computer Software--5.2%
6,000 i2 Technologies, Inc. (c)........................ 1,170,000
------------
Computers & Business Equipment--3.1%
15,000 Seagate Technology (c)........................... 698,438
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Drugs & Health Care--3.8%
13,500 Baxter International, Inc........................ 847,969
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Electric Utilities--4.4%
19,600 Duke Power Co.................................... 982,450
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Electronics--12.8%
25,000 Cognex Corp. (c)................................. 975,000
9,000 KLA-Tencor Corp. (c)............................. 1,002,375
6,000 STMicroelectronics NV............................ 908,625
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2,886,000
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Gas & Pipeline Utilities--4.0%
20,200 Enron Corp....................................... 896,375
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Household Appliances & Home Furnishings--6.3%
11,000 Corning, Inc..................................... 1,418,312
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Insurance--2.6%
15,175 ReliaStar Financial Corp......................... 594,670
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Leisure--4.0%
68,100 Blockbuster, Inc................................. 910,837
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Manufacturing--Diversified - 3.8%
16,700 Parker-Hannifin Corp............................. 856,919
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Oil & Gas--3.3%
12,500 Vastar Resources, Inc............................ 737,500
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Paper & Forest Products--8.4%
17,700 International Paper Co........................... 998,944
13,600 Kimberly-Clark Corp.............................. 887,400
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1,886,344
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Retail--3.8%
19,300 Circuit City Stores.............................. 869,706
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See accompanying notes to financial statements.
6
<PAGE>
PORTFOLIO COMPOSITION -- continued
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Investments as of December 31, 1999
Common Stock -- continued
Shares Description Value (a)
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Retail--Specialty - 1.5%
10,000 Expedia, Inc. (c)................................ $ 350,000
------------
Services--3.9%
17,800 First Data Corp.................................. 877,762
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Total Common Stock (Identified Cost $15,900,717). 19,639,139
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Short Term Investments -- 9.8%
Principal
Amount
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$1,924,000 Repurchase Agreement with State
Street Bank & Trust Co. dated 12/31/1999 at
2.50% to be repurchased at $1,924,401 on
1/03/2000, collateralized by $1,940,000
U.S. Treasury Note 6.75% due 4/30/2000 with
a value of $1,966,675 ........................... 1,924,000
280,000 Repurchase Agreement with State Street
Bank & Trust Co. dated 12/31/1999 at
2.50% to be repurchased at $280,058 on
1/03/2000, collateralized $240,000 U.S.
Treasury Bond 8.50% due 2/15/2020
with a value of $291,600 ...................... 280,000
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Total Short Term Investments
(Identified Cost $2,204,000)..................... 2,204,000
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Total Investments--96.9%
(Identified Cost $18,104,717) (b)................ 21,843,139
Other assets less liabilities.................... 696,925
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Total Net Assets--100%.......................... $ 22,540,064
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1999 the
net unrealized appreciation on investments based
on cost of $18,107,278 for federal income tax
purposes was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost ...................... $ 4,117,223
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value. ..................... (381,362)
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Net unrealized appreciation ......................... $ 3,735,861
============
(c) Non-income producing security.
See accompanying notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
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December 31, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $18,104,717) ................................. $ 21,843,139
Cash ............................................................................... 780
Receivable for:
Fund shares sold ............................................................. 26,456
Securities sold .............................................................. 1,409,052
Due from investment advisor .................................................. 13,113
Dividends and interest ....................................................... 12,530
Unamortized organization expense ................................................... 13,579
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23,318,649
LIABILITIES
Payable for:
Securities purchased ......................................................... $ 703,403
Fund shares redeemed ......................................................... 17,592
Accrued expenses:
Deferred trustees' fees ...................................................... 1,626
Accounting and administrative ................................................ 4,828
Other ........................................................................ 51,136
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778,585
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NET ASSETS ............................................................................ $ 22,540,064
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Net Assets consist of:
Capital paid in .............................................................. $ 15,776,359
Undistributed net investment income (loss) ................................... (1,626)
Accumulated net realized gain (loss) ......................................... 3,026,909
Unrealized appreciation on investments ....................................... 3,738,422
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NET ASSETS ............................................................................ $ 22,540,064
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($10,548,887/609,972 shares of beneficial interest) ................................ $ 17.29
=======
Offering price per share (100/94.25 of $17.29) ..................................... $ 18.34*
=======
Net asset value and offering price of Class B shares
($9,773,658/571,667 shares of beneficial interest) ................................. $ 17.10**
=======
Net asset value and offering price of Class C shares
($2,217,519/129,719 shares of beneficial interest) ................................. $ 17.09**
=======
</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.
8
<PAGE>
STATEMENT OF OPERATIONS
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Year Ended December 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................................................. $ 174,670
Interest .............................................................. 27,009
-----------
201,679
Expenses:
Management fees ................................................... $ 183,892
Service fees - Class A ............................................ 22,304
Service and distribution fees - Class B ........................... 81,204
Service and distribution fees - Class C ........................... 23,148
Trustees' fees and expenses ....................................... 6,292
Accounting and administrative ..................................... 18,707
Custodian ......................................................... 56,773
Transfer agent .................................................... 121,182
Audit and tax services ............................................ 26,500
Legal ............................................................. 1,416
Printing .......................................................... 17,091
Registration ...................................................... 35,813
Amortization of organization expenses ............................. 4,176
Insurance ......................................................... 4,239
Miscellaneous ..................................................... 10,617
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Total expenses .......................................................... 613,354
Less expense waived/reimbursed by the investment adviser and subadviser.. (196,882) 416,472
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Net investment loss ..................................................... (214,793)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on investments -- net ............................ 3,877,349
Unrealized appreciation on investments -- net ......................... 2,400,768
-----------
Net gain (loss) on investment transactions ............................ 6,278,117
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NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ...................... $ 6,063,324
===========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
For the Period
March 31,1998(a) Year Ended
through December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment loss ...................... $ (81,543) $ (214,793)
Net realized gain (loss) on investments .. (656,441) 3,877,349
Net unrealized appreciation on investments 1,337,654 2,400,768
------------ ------------
Increase in net assets from operations ... 599,670 6,063,324
------------ ------------
Increase (decrease) in net assets
derived from capital share transactions .. 20,658,273 (4,781,203)
------------ ------------
Total increase (decrease) in net assets ....... 21,257,943 1,282,121
NET ASSETS
Beginning of the period .................. 0 21,257,943
------------ ------------
End of the period ........................ $ 21,257,943 $ 22,540,064
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
End of the period ........................ $ (397) $ (1,626)
============ ============
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
Class A Class B Class C
-------------------------- -------------------------- -------------------------
March 31, March 31, March 31,
1998(a) 1998(a) 1998(a)
through Year Ended through Year Ended through Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1998 1999 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 12.50 $ 12.65 $ 12.50 $ 12.60 $ 12.50 $ 12.59
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) from
investment operations
Net investment
income (loss) ................. (0.02)(b) (0.09)(b) (0.08)(b) (0.19)(b) (0.08)(b) (0.18)(b)
Net realized and
unrealized gain
(loss) on Investments ......... 0.17 4.73 0.18 4.69 0.17 4.68
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .................... 0.15 4.64 0.10 4.50 0.09 4.50
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ................. $ 12.65 $ 17.29 $ 12.60 $ 17.10 $ 12.59 $ 17.09
========== ========== ========== ========== ========== ==========
Total return (%) (c) .............. 1.2 36.7 0.8 35.7 0.7 35.7
Ratio of operating
expenses to average
net assets (%) (d) ............ 1.75(e) 1.75 2.50(e) 2.50 2.50(e) 2.50
Ratio of net investment
income (loss) to
average net
assets (%) .................... (0.28)(e) (0.71) (1.03)(e) (1.45) (1.03)(e) (1.45)
Portfolio turnover
rate (%) ..................... 68 138 68 138 68 138
Net assets,
end of period (000) ........... $ 9,653 $ 10,549 $ 8,618 $ 9,774 $ 2,987 $ 2,218
(a) Commencement of operations.
(b) Per share net investment loss has been calculated using the average shares
outstanding during the period.
(c) A sales charge in the case of Class A Shares and a contingent deferred
sales charge in the case of Class B and Class C Shares is not reflected in
total return calculations. Periods less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the expense limitation described in Note 4 to the Financial Statements,
would have been (%): 3.14(e) 2.77 3.89(e) 3.52 3.89(e) 3.52
(e) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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For the Year Ended December 31, 1999
1. Significant Accounting Policies. The Fund is a Series of Nvest Funds Trust
III (formerly known as New England Funds Trust III), a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company. The
Fund seeks long-term capital growth. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of the Trust in multiple series
(each such series is a "Fund").
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase. Class C shares do not pay front end
sales charges 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. 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. 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
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1999
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.
These differences are primarily due to differing treatments for non-deductible
expenses, net operating losses and distributions from real estate investment
trusts for book and tax purposes. Permanent book and tax basis differences
relating to shareholder distributions will result in reclassification to the
capital accounts.
e. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. The Fund's subadviser is responsible
for determining that the value of the collateral is at all times at least equal
to the repurchase price. 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.
f. Organization Expense. Costs incurred in fiscal 1998 in connection with the
Fund's organization, amounting to $21,223 in the aggregate, were paid by the
Fund and are being amortized by the Fund over 60 months.
2. Purchases and Sales of Securities. For the year ended December 31, 1999
purchases and sales of securities (excluding short-term investments) were
$25,869,025 and $32,943,112, 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 0.95% of the first $200 million of the Fund's
average daily net assets, 0.90% of the next $300 million and 0.85% of such
assets in excess of $500 million reduced by payments to the Fund's investment
subadviser, Jurika & Voyles L.P. ("Jurika & Voyles"), at the rate of 0.57% of
the first $200 million of the average daily net assets of the Fund, 0.50% of the
next $300 million of such assets and 0.43% 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 Jurika & Voyles are wholly owned
subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of
Metropolitan Life Insurance Company ("MetLife").
Fees earned by Nvest Management and Jurika & Voyles under the management and
subadvisory agreements in effect during the year ended December 31, 1999 are as
follows:
Fees Earned (a)
---------------
Nvest Management $ 110,335
Jurika & Voyles 73,557
(a) Before reduction pursuant to expense limitations. See note 4.
The effective management fee for the year ended December 31, 1999 was 0.95%.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1999
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 reimburses NSC for all or part of
NSC's expenses of providing these services which include the following: (i)
expenses for personnel performing bookkeeping, accounting, and financial
reporting functions and clerical functions relating to the Fund and (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1999 these
expenses amounted to $18,707 and are shown separately in the financial
statements as accounting and administrative.
c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services serves as the sub-transfer agent for
the Fund. For the year ended December 31, 1999, the Fund paid NSC $86,558 as
compensation for its services in that capacity.
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, 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 year ended December 31, 1999,
the Fund paid Nvest Funds $22,304 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 year ended December 31, 1999, the Fund paid Nvest
Funds $20,301 and $5,787 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 monthly
distribution fees 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
year ended December 31, 1999, the Fund paid Nvest Funds $60,903 and $17,361 in
distribution fees under the Class B and Class C plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
Nvest Funds by investors in shares of the Fund during the year ended December
31, 1999 amounted to $92,373.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1999
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.
Note 4. Expense Limitations and Contingent Expense Obligation. Nvest Management
has given a binding undertaking and Jurika & Voyles has voluntarily agreed to
waive 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 rate of 1.75% for
Class A shares, 2.50% for Class B shares and 2.50% for Class C shares. Nvest
Management's undertaking will be in effect for the life of the Fund's current
prospectus. As a result of the Fund's expenses exceeding the expense limitation
during the year ended December 31, 1999, Nvest Management and Jurika & Voyles
waived their entire management and subadvisory fees of $183,892 and Nvest
Management assumed additional expenses of $12,990.
In conjunction with the above undertaking, a fee deferral agreement was in
effect for the period ended December 31, 1998, by which Nvest Management and
Jurika & Voyles deferred fees subject to the obligation of the Fund to pay such
fees in later periods to the extent that the Fund's expenses fall below the
annual rate of 1.75% for Class A shares, 2.50% for Class B shares and 2.50% for
Class C shares, provided however, that the fund is not obligated to pay any such
deferred fees more than two years after the end of the fiscal year in which the
fee was deferred. This deferral agreement is longer in effect.
Fees deferred in 1998 (subject to repayment until December 31, 2000): Nvest
Management and Jurika & Voyles deferred their entire management and subadvisory
fees of $115,268.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1999
5. Capital Shares. At December 31, 1999 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>
For the Period
March 31, 1998(a)
through Year Ended
December 31, 1998 December 31, 1999
---------------------------- ----------------------------
Class A Shares Amount Shares Amount
- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 977,480 $ 11,869,164 156,650 $ 2,072,162
Shares repurchased .................................. (214,356) (2,450,111) (309,802) (4,026,800)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 763,124 $ 9,419,053 (153,152) $ (1,954,638)
------------ ------------ ------------ ------------
<CAPTION>
For the Period
March 31, 1998(a)
through Year Ended
December 31, 1998 December 31, 1999
---------------------------- ----------------------------
Class B Shares Amount Shares Amount
- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 777,580 $ 9,366,653 152,642 $ 1,933,280
Shares repurchased .................................. (93,769) (1,075,313) (264,786) (3,376,826)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 683,811 $ 8,291,340 (112,144) $ (1,443,546)
------------ ------------ ------------ ------------
<CAPTION>
For the Period
March 31, 1998(a)
through Year Ended
December 31, 1998 December 31, 1999
---------------------------- ----------------------------
Class C Shares Amount Shares Amount
- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 277,249 $ 3,391,994 17,629 $ 226,404
Shares repurchased .................................. (40,069) (444,114) (125,090) (1,609,423)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 237,180 2,947,880 (107,461) (1,383,019)
------------ ------------ ------------ ------------
Increase (decrease) derived from
capital shares transactions ...................... 1,684,115 $ 20,658,273 (372,757) $ (4,781,203)
============ ============ ============ ============
</TABLE>
(a) Commencement of operations.
6. Non-diversified Status. Compared with other mutual funds, the Fund may invest
a greater percentage of its assets in a particular company. Therefore, the
Fund's return could be significantly affected by the performance of any one of
the small number of stocks in its portfolio.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To the Trustees of Nvest Funds Trust III
and the Shareholders of the Nvest Bullseye Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Nvest Bullseye Fund (formerly
the New England Bullseye Fund) (the "Fund"), a series of Nvest Funds Trust III,
at December 31, 1999, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2000
17
<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.
Market Capitalization - The value of a company's issued and outstanding common
stock, as priced by the market:
Number of outstanding shares X current market price of a share = market
capitalization.
Price/Earnings Ratio - Current market price of a stock divided by its earnings
per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different stocks.
Growth Investing - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more aggressive than
"value" investing.
Value Investing - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks tend to have a lower
price/earnings ratio than that of growth stocks.
Standard & Poor's 500(R) (S&P 500) - Market value-weighted index showing the
change in aggregate market value of 500 stocks relative to the base period of
1941-1943. It is composed mostly of companies listed on the New York Stock
Exchange. It is not possible to invest directly in an index.
18
<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 FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
The Power of Monthly Investing
$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.
19
<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.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Two Hypothetical Investments
Investor A $214,295
Investor B $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.
<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
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
*An investment in the Fund is not insured
or guaranteed by the FDIC
or any other 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)
- ---------------------
399 Boylston Street
Boston, Massachusetts
02116
- ---------------------
BE56-1299
[LOGO] Printed on Recycled Paper
<PAGE>
================================================================================
[LOGO] Nvest Funds (SM)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
Nvest Equity Income Fund
Where
The Best
Minds Meet(R)
- -----------------
December 31, 1999
- -----------------
<PAGE>
================================================================================
February 2000
- --------------------------------------------------------------------------------
[PHOTO]
John T. Hailer
President and Chief
Executive Officer
Nvest Funds
"We expect 2000 to be a year of innovation, as we work on new
investment options for you, our shareholders, and your financial advisers."
After serving as Executive Vice President for Sales and Marketing since 1998, I
became President of Nvest Funds late last year. Bruce Speca, my predecessor, has
moved on to head up a new Internet venture affiliated with the parent company of
our funds. It's especially exciting for me to be assuming my new
responsibilities as we begin a new century and introduce a new identity for our
fund family.
We expect 2000 to be a year of innovation, as we work on new investment options
for you, our shareholders, and your financial advisers. At the same time, our
commitment to bringing you funds led by some of the Best Minds in the industry
remains our core business principle.
A new name, the same Best Minds
On February 1, New England Funds became Nvest Funds. We chose this new name
primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate
parent and a major financial organization with over $133 billion in assets under
management (as of 12/31/99) through 18 affiliated companies.
The companies that comprise Nvest represent a breadth of investment resources
and experience that is difficult to match. As an Nvest affiliate, we call on an
impressive roster of Best Minds to manage our funds. The recent addition of the
Kobrick Funds to our fund family extends that tradition.
1999 in review
Last year, the market focused on technology companies and large-capitalization
growth stocks. Value-oriented equity investors are still waiting for a shift in
investor sentiment, and bond investors felt the negative price impact of rising
interest rates. The following pages discuss how your fund's managers addressed
those challenges. Short-term results notwithstanding, I believe most investors
would do well to own an array of investment types in a well thought-out asset
allocation plan.
I look forward to working with you and your financial adviser as you invest
toward your personal goals. For our part, we are committed to supporting you
with quality investment products and outstanding customer service.
/s/John T. Hailer
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
NVEST EQUITY INCOME FUND
================================================================================
Investment Results Through December 31, 1999
- --------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing your 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.
Your Fund's benchmark has changed from the Standard & Poor's Composite Index of
500 Stocks ("S&P 500")(5) to the Russell 1000 Value Index(4) to better reflect
its investment goal, strategy and the type of stocks normally included in the
portfolio.
Growth of a $10,000 Investment in Class A Shares
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
November 1995 (Inception) through December 1999
Net Asset Maximum Sales Russell 1000
Value(1) Charge(2) Value Index(4) S&P 500(5)
-------- --------- -------------- ----------
12/99 $16,135 $15,207 $20,413 $26,037
6/99 17,366 16,368 21,463 24,177
12/98 16,455 15,509 19,016 21,510
6/98 17,002 16,025 18,444 19,694
12/97 16,026 15,105 16,444 16,737
6/97 14,629 13,788 14,315 15,140
12/96 13,068 12,316 12,164 12,555
6/96 11,356 10,703 10,748 11,245
12/95 10,321 9,728 10,374 10,215
11/28/95 10,000 9,425 10,000 10,000
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvestment of
distributions.
1
<PAGE>
NVEST EQUITY INCOME FUND
================================================================================
Average Annual Total Returns -- 12/31/99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A (Inception 11/28/95) 1 Year Since Inception
Net Asset Value(1) -1.94% 12.41%
With Maximum Sales Charge(2) -7.61 10.79
- --------------------------------------------------------------------------------
Class B (Inception 9/15/97) 1 Year Since Inception
Net Asset Value(1) -2.66% 1.27%
With CDSC(3) -7.51 -0.03
- --------------------------------------------------------------------------------
Class C (Inception 9/15/97) 1 Year Since Inception
Net Asset Value(1) -2.66% 1.29%
With CDSC(3) -3.63 1.29
- --------------------------------------------------------------------------------
Since Since
Fund's Fund's
Class A Class B and C
Comparative Performance 1 Year Inception Inception
Russell 1000 Value(4) 7.35% 19.84% 12.24%
S&P 500(5) 21.04 26.04 23.27
Morningstar Large Value Average(6) 6.59 16.55 8.74
Lipper Equity Income Average(7) 3.31 14.41 7.06
- --------------------------------------------------------------------------------
Notes to Charts
Fund performance for the period through May 31, 1999 reflects that of the prior
subadviser, Loomis, Sayles & Company, L.P. Vaughan, Nelson, Scarborough &
McCullough, L.P. (VNSM) became the subadviser beginning June 1, 1999.
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
Returns would have been lower had sales charges been reflected.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes
reinvestment of all distributions and, for Class B shares, assumes that a
maximum 5.00% sales charge is applied to redemptions. The sales charge will
decrease over time, declining to zero six years after the purchase of
shares. With CDSC performance for Class C shares assumes a maximum 1.00%
sales charge on redemptions within the first year of purchase.
(4) Russell 1000 Value Index is an unmanaged index measuring the performance of
those Russell 1000 companies with lower price-to-book ratios and lower
forecasted growth values. The performance of the index has not been
adjusted for ongoing management, distribution and operating expenses and
sales charges applicable to mutual fund investments. It is not possible to
invest directly in an index. Class B and C share since inception return is
calculated from 9/30/97.
(5) The S&P 500(R) is a market value-weighted unmanaged index of common stock
prices for 500 selected stocks, most of which are listed on the New York
Stock Exchange. It is a common measure of stock total return performance.
The performance of the index has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to mutual
fund investments. It is not possible to invest directly in an index.
(6) Morningstar Large Value Average is an average (calculated on the basis of
net asset value) of funds with similar investment objectives as calculated
by Morningstar, Inc., an independent mutual fund ranking service. Class A
share since inception return is calculated from 11/30/95. Class B and C
share since inception performance is calculated from 9/30/97.
(7) Lipper Equity Income Average is an average (calculated on the basis of net
asset value) of funds with similar investment objectives as calculated by
Lipper Inc., an independent mutual fund ranking service. Class A share
since inception return is calculated from 11/30/95. Class B and C share
since inception performance is calculated from 9/30/97.
2
<PAGE>
NVEST EQUITY INCOME FUND
================================================================================
Interview with Your Portfolio Managers
- --------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
Margaret Buescher,
Jean Malo
Vaughan, Nelson,
Scarborough &
McCullough, L.P.*
Q. Please tell us about Equity Income Fund's performance in 1999.
For the year ended December 31, 1999, the Fund's Class A shares returned -1.94%
at net asset value. This return includes a $0.46 per share loss in net asset
value and reinvested distributions of $0.12. The Fund lagged the 7.35% return of
the Russell 1000 Value Index, a common measure of large-cap value stock
performance and the Fund's benchmark index.
Q. What was the market environment during the period?
Large-cap value stocks, like the kind your fund invests in, underperformed
growth stocks again in 1999, despite staging a vigorous but short-lived rally
during the second quarter. Investor dollars continued to support growth stocks
this year, to say nothing of the explosion in high-technology and
Internet-related issues. This behavior extends the pattern of the last few
years, as persistent economic strength and benign interest rates inspired
investor confidence that large, established growth companies would go on
increasing their profits, and benefit from upward price momentum.
The focus narrowed further in the second half of the year, when investors
concentrated on Internet and technology issues, including initial public
offerings.
The U.S. economy simmered last year, reaching a near boil in the third quarter
when it expanded at an annualized 5.5% rate. This impressive strength, on top
of OPEC-inspired hikes in the price of oil, provided ample cause for the
Federal Reserve Board to raise short-term interest rates three times during the
year. The Fed thus undid its three rate cuts of a year earlier, when slumping
overseas economies threatened to close off markets -- and profits -- for many
U.S. corporations. Many foreign markets had stabilized in 1999, allowing the Fed
to raise rates without fear of choking off domestic expansion.
Q. Given that environment, what strategies did you pursue for the Fund?
Our investment team began managing the Fund on June 1, 1999. Consistent with our
long-standing discipline, we choose stocks based on established criteria
3
<PAGE>
NVEST EQUITY INCOME FUND
================================================================================
- --------------------------------------------------------------------------------
regardless of the general market outlook. Our goal is high returns, but only in
the context of careful risk assessment -- a calculation that has been missing
recently from many investors' checklists.
The approach we employ emphasizes value rather than growth -- we favor companies
whose stock prices fail to reflect the underlying value our research indicates
they may possess. Key criteria are sound management, a positive earnings
outlook, low price relative to potential value and above-average dividend yield.
In strategic terms, we emphasized sectors, including consumer staples and
pharmaceutical manufacturers, that can prosper in an economy in which growth is
moderating, an eventuality that we believe is not far off.
To take advantage of the less restrictive interest rate scenario that a
moderating economy implies, we expanded holdings in the financial sector. Now
that Congress has lifted the restrictive 1930's legislation known as
Glass-Steagall, we anticipate new competitive opportunities for a range of
financial companies. More recent additions in this sector include Chubb,
Citigroup and J.P. Morgan, while the Fund's largest financial holdings remain
American General and Chase Manhattan.
Q. What factors or investments affected performance the most, positively or
negatively?
On the broadest level, the Fund's underperformance reflects the market's
indifference to value and to yield, essential components of our conservative
discipline. Instead, earnings expansion and price momentum (the notion that a
rising stock will go on rising) have dominated investor sentiment for some time.
The nature of many of the stocks that have been performance leaders in the
Russell 1000 Value Index excludes them from consideration in the Fund --
cellular and wireless companies and others, where yield is nil and valuations
unacceptably high, by our criteria.
Your Fund's 10 Largest Investments -- 12/31/99
% of
Company Net Assets
- --------------------------------------------------------------------------------
1. Chase Manhattan Corp. 5.0
- --------------------------------------------------------------------------------
2. American General Corp. 4.8
- --------------------------------------------------------------------------------
3. Bank of New York Company, Inc. 4.4
- --------------------------------------------------------------------------------
4. Federal National Mortgage Association 3.7
- --------------------------------------------------------------------------------
5. Shell Transport & Trading Co. 3.5
- --------------------------------------------------------------------------------
6. GTE Corp. 3.3
- --------------------------------------------------------------------------------
7. Duke Power Co. 3.2
- --------------------------------------------------------------------------------
8. Hewlett-Packard Co. 3.1
- --------------------------------------------------------------------------------
9. Merck & Co. 3.0
- --------------------------------------------------------------------------------
10. SBC Communications, Inc. 2.9
- --------------------------------------------------------------------------------
Portfolio holdings and asset allocation will vary.
4
<PAGE>
NVEST EQUITY INCOME FUND
================================================================================
- --------------------------------------------------------------------------------
The Fund benefited in 1999 from its energy holdings, as rising oil prices pushed
stocks higher. We took some profits as energy prices seemed to be peaking and
shifted the proceeds to the financial sector. But we did establish a position in
Exxon Mobil; significant efficiencies should result from the merger of two of
the world's most well-managed oil companies. Stocks that disappointed include
three that failed to meet earnings expectations: we continue to hold Bank One
and Philip Morris but have eliminated Xerox, whose poor performance primarily in
overseas markets hurt results.
Our technology commitment was conservative and generally successful. The Fund
benefited from its holding in IBM, which is being favorably revalued as a
service company rather than as a manufacturer. The Fund also owns a Morgan
Stanley security convertible into the common stock of Oracle Corporation, a
leading manufacturer of database management software for corporations. From this
holding the Fund derives a generous yield while capturing some of Oracle's
upside potential.
Q. What is your outlook for next year and beyond?
Our investment style emphasizes the search for unrecognized value and
above-market yield. Recently, the market has had no taste for either.
Nevertheless, we will continue to hone our long-standing discipline in
preparation for the time when investors turn once again to traditional
approaches and some balance returns to the marketplace.
In the meantime, we continue to position the Fund for the economy we envision --
slower growth, no recession, and more stable interest rates. The Fund remains an
attractive investment for investors seeking a more conservative, higher yielding
alternative in the equity market.
The 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.
The Fund invests in foreign securities. Investing in foreign securities involves
special risks. These risks may increase share price volatility. See the Fund's
prospectus for details.
*On May 14, 1999, The Fund's Board of Trustees authorized Vaughan, Nelson,
Scarborough & McCullough, L.P. (VNSM) to act as interim subadviser to Nvest
Equity Income Fund beginning June 1, 1999. VNSM succeeded Loomis, Sayles & Co.,
L.P., the Fund's previous adviser. Shareholders approved VNSM as the Fund's
subadviser in July 1999.
5
<PAGE>
PORTFOLIO COMPOSITION
================================================================================
Investments as of December 31, 1999
Common Stock -- 96.6% of Total Net Assets
Shares Description Value (a)
- --------------------------------------------------------------------------------
Aerospace--6.4%
8,900 General Dynamics Corp. ......................... $ 469,475
8,500 Honeywell International, Inc. .................. 490,344
8,600 Northrop Grumman Corp. ......................... 464,937
----------
1,424,756
----------
Automotive--2.0%
6,100 General Motors Corp. ........................... 443,394
----------
Banks--17.3%
8,200 Bank America Corp. ............................. 411,538
24,500 Bank of New York Company, Inc. ................. 980,000
13,900 Bank One Corp. ................................. 445,669
14,200 Chase Manhattan Corp. .......................... 1,103,162
6,000 Citigroup, Inc. ................................ 333,375
4,500 J.P. Morgan Corp. .............................. 569,812
----------
3,843,556
----------
Business Services--2.6%
8,100 Dun & Bradstreet Corp. ......................... 238,950
5,100 Electronic Data Systems Corp. .................. 341,381
----------
580,331
----------
Chemicals--2.5%
8,600 E.l. du Pont de Nemours & Co. .................. 566,525
----------
Computers & Business Equipment--6.6%
12,200 Compaq Computer Corp. .......................... 330,162
6,100 Hewlett-Packard Co. ............................ 695,019
4,200 International Business Machines Corp. .......... 453,600
----------
1,478,781
----------
Domestic Oil--2.7%
7,400 Exxon Mobil Corp. .............................. 596,163
----------
Drugs & Health Care--9.5%
11,400 Abbott Laboratories ............................ 413,963
9,400 Baxter International, Inc. ..................... 590,437
9,800 Merck & Co. .................................... 657,212
10,100 Pharmacia & Upjohn, Inc. ....................... 454,500
----------
2,116,112
----------
Electric Utilities--3.2%
14,300 Duke Power Co. ................................. 716,788
----------
Electrical Equipment--1.7%
2,500 General Electric Co. ........................... 386,875
----------
See accompanying notes to financial statements.
6
<PAGE>
PORTFOLIO COMPOSITION -- continued
================================================================================
Investments as of December 31, 1999
Common Stock -- continued
Shares Description Value (a)
- --------------------------------------------------------------------------------
Financial Services--6.2%
13,100 Federal National Mortgage Association .......... $ 817,931
7,500 GATX Corp. ..................................... 253,125
1,000 Hvide Capital Trust 144A ....................... 1,500
3,700 Merrill Lynch & Company, Inc. .................. 308,950
----------
1,381,506
----------
Food & Beverages--7.6%
7,400 H.J. Heinz Co. ................................. 294,613
17,900 PepsiCo, Inc. .................................. 630,975
9,500 Philip Morris Companies, Inc. .................. 220,281
8,400 Quaker Oats Co. ................................ 551,250
----------
1,697,119
----------
Forest Products--1.4%
4,300 Weyerhaeuser Co. ............................... 308,794
----------
Insurance--7.9%
14,200 American General Corp. ......................... 1,077,425
7,800 Chubb Corp. .................................... 439,238
6,900 HSB Group, Inc. ................................ 233,306
----------
1,749,969
----------
International Oil--5.8%
8,700 BP Amoco PLC (ADR) ............................. 516,019
15,700 Shell Transport & Trading Co. (ADR) ............ 773,225
----------
1,289,244
----------
Office Furnishings & Supplies--2.4%
7,400 Avery Dennison Corp. ........................... 539,275
----------
Photography--1.3%
4,400 Eastman Kodak Co. .............................. 291,500
----------
Real Estate--1.1%
6,300 Weingarten Realty Investors (REIT) ............. 245,306
----------
Telecommunication--8.4%
10,000 AT&T Corp. ..................................... 507,500
10,300 GTE Corp. ...................................... 726,794
13,028 SBC Communications, Inc. ....................... 635,115
----------
1,869,409
----------
Total Common Stock (Identified Cost
$21,570,411)............................... 21,525,403
----------
Convertible Security -- 2.7%
Units
- --------------------------------------------------------------------------------
Financial Services--2.7%
21,000 Morgan Stanley Dean Witter & Company
6% Reset PERQS Exchangeable for shares
of Oracle Corp. Common Stock..................... 598,500
----------
Total Convertible Security (Identified Cost $491,928) 598,500
----------
See accompanying notes to financial statements.
7
<PAGE>
PORTFOLIO COMPOSITION -- continued
================================================================================
Investments as of December 31, 1999
Short Term Investments -- 0.9%
<TABLE>
<CAPTION>
Principal
Amount Description Value (a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 201,000 Repurchase Agreement with State Street Bank & Trust Co. dated 12/31/1999
at 2.500% to be repurchased at $201,042 on 01/03/2000, collateralized by
$200,000 U.S. Treasury Bond at 6.750% due 08/15/2026
valued at $206,250............................................................. $ 201,000
-----------
Total Short Term Investment (Identified Cost $201,000)......................... 201,000
-----------
Total Investments--100.2% (Identified Cost $22,263,339)(b)..................... 22,324,903
Other assets less liabilities................................................. (55,149)
-----------
Total Net Assets--100%........................................................ $22,269,754
-----------
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1999 the net unrealized appreciation on investments based
on cost of $22,263,339 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........................................................ $ 1,861,816
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value........................................................ (1,800,252)
-----------
Net unrealized appreciation $ 61,564
===========
At December 31, 1999 the Fund had a capital loss carryover of
approximately $238,648 which expires on December 31, 2007. This may be
available to offset future realized capital gains, if any, to the
extent provided by regulations.
PERQS Performance Equity-Linked Redemption Quarterly-Pay Securities
ADR An American Depositary Receipt (ADR) is a certificate issued by a
Custodian Bank representing the right to receive securities of the
foreign issuer described. The values of ADRs are significantly
influenced by trading on exchanges not located in the United States.
REIT Real Estate Investment Trust
144A Securities exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At the
year end, the value of these amounted to $1,500 or 0.01% of net
assets.
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
================================================================================
December 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS
Investments at value (Identified cost $22,263,339) .................... $ 22,324,903
Cash .................................................................. 16,194
Receivable for:
Fund shares sold .................................................. 12,669
Dividends and interest ............................................ 49,804
Unamortized organization expenses ..................................... 3,699
------------
22,407,269
------------
LIABILITIES
Payable for:
Fund shares redeemed .............................................. $ 80,162
Accrued expenses:
Management fees ................................................... 8,046
Deferred trustees' fees ........................................... 2,422
Accounting and administrative ..................................... 6,087
Other expenses .................................................... 40,798
------------
137,515
------------
NET ASSETS .............................................................................. $ 22,269,754
============
Net Assets consist of:
Capital paid in ................................................... $ 22,426,834
Undistributed net investment income ............................... 20,001
Accumulated net realized gains (losses) ........................... (238,645)
Unrealized appreciation (depreciation) on investments ............. 61,564
------------
NET ASSETS .............................................................................. $ 22,269,754
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($11,291,399/658,185 shares of beneficial interest) ................... $ 17.16
=========
Offering price per share (100/94.25 of $17.16) ........................ $ 18.21*
=========
Net asset value and offering price of Class B shares
($9,642,592/564,038 shares of beneficial interest) .................... $ 17.10**
=========
Net asset value and offering price of Class C shares
($1,335,763/78,090 shares of beneficial interest) ..................... $ 17.11**
=========
</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.
9
<PAGE>
STATEMENT OF OPERATIONS
================================================================================
Year Ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of $4,599) ................... $ 667,327
Interest ..................................................... 14,239
---------
681,566
Expenses
Management fees ............................................ $ 196,897
Service fees - A ........................................... 35,201
Service and distribution fees - Class B .................... 122,010
Service and distribution fees - Class C .................... 17,052
Trustees' fees and expenses ................................ 6,448
Accounting and administrative .............................. 22,000
Custodian .................................................. 51,681
Transfer agent ............................................. 124,062
Audit and tax services ..................................... 20,860
Legal ...................................................... 3,194
Printing ................................................... 31,993
Registration ............................................... 52,337
Amortization of organization expenses ...................... 4,654
Insurance .................................................. 405
Miscellaneous .............................................. 12,007
---------
Total expenses ............................................... 700,801
Less expenses waived by the investment adviser and subadvisers (174,581) 526,220
--------- ---------
Net investment income ........................................ 155,346
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on investments -- net ................. 470,916
Foreign currency transactions - net ..................... 32
-----------
Total realized gain (loss) on investments
and foreign currency transactions ..................... 470,948
-----------
Unrealized appreciation (depreciation) on:
Investments - net ....................................... (1,477,659)
-----------
Net gain (loss) on investment transactions ................. (1,006,711)
-----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ...... $ (851,365)
===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) ............................................ $ 396,289 $ 155,346
Net realized gain (loss) on investments and foreign currency transactions (495,667) 470,948
Net unrealized appreciation (depreciation) on investments ............... 395,829 (1,477,659)
------------ -------------
Increase (decrease) in net assets from operations ....................... 296,451 (851,365)
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................................... (268,096) (97,786)
Class B ............................................................... (115,988) (35,542)
Class C ............................................................... (15,562) (4,872)
Net realized gain on investments
Class A ............................................................... (179,152) (2,457)
Class B ............................................................... (162,228) (2,078)
Class C ............................................................... (21,050) (306)
------------ -------------
(762,076) (143,041)
------------ -------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................. 11,376,636 (13,298,989)
------------ -------------
Total increase (decrease) in net assets .................................... 10,911,011 (14,293,395)
NET ASSETS
Beginning of the year ................................................... 25,652,138 36,563,149
------------ -------------
End of the year ......................................................... $ 36,563,149 $ 22,269,754
============ =============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the year ......................................................... $ 4,105 $ 20,001
============ =============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
Class A
------------------------------------------
November 28, 1995(a)
through
December 31, Year Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 12.50 $ 12.86 $ 15.15 $ 17.59 $ 17.62
---------- ---------- ----------- ---------- -----------
Income From Investment Operations
Net Investment Income ................................. 0.04 0.31 0.25 0.26(b) 0.17
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... 0.36 3.11 3.15 0.20(c) (0.51)
---------- ---------- ----------- ---------- -----------
Total From Investment Operations ...................... 0.40 3.42 3.40 0.46 (0.34)
---------- ---------- ----------- ---------- -----------
Less Distributions
Dividends From Net Investment Income .................. (0.04) (0.30) (0.26) (0.26) (0.12)
Distributions From Net Realized Capital Gains ......... 0.00 (0.83) (0.70) (0.17) (0.00)(g)
---------- ---------- ----------- ---------- -----------
Total Distributions ................................... (0.04) (1.13) (0.96) (0.43) (0.12)
---------- ---------- ----------- ---------- -----------
Net Asset Value, End of Period ........................ $ 12.86 $ 15.15 $ 17.59 $ 17.62 $ 17.16
========== ========== =========== ========== ===========
Total Return (%) (d) .................................. 3.2 26.6 22.6 2.7 (1.9)
Ratio of Operating Expenses to Average Net
Assets (%) (e) ........................................ 1.50(f) 1.50 1.50 1.50 1.50
Ratio of Net Investment Income to Average Net
Assets (%) ............................................ 3.58(f) 2.06 1.76 1.48 0.94
Portfolio Turnover Rate (%) ........................... 0 45 33 61 93
Net Assets, End of Period (000) ....................... $ 2,064 $ 2,613 $ 14,681 $ 17,839 $ 11,291
</TABLE>
The subadviser to the Fund prior to June 1, 1999 was Loomis, Sayles & Company,
L.P. Effective June 1, 1999 Vaughn, Nelson, Scarborough & McCullough, L.P.
became the subadviser.
(a) Commencement of operations.
(b) Per share net investment income has been calculated using the average
shares outstanding during the period.
(c) 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 market values of the investments of the Fund.
(d) A sales charge is not reflected in total return calculations. The period
less than one year is not annualized.
(e) The ratio of operating expenses to average net assets without giving effect
to the expense limitation described in Note 4 to the Financial Statements
would have been (%)... 5.97(f) 3.67 3.10 1.92 2.12
(f) Computed on an annualized basis.
(g) Amount is less than $0.01.
See accompanying notes to financial statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
Class B Class C
-------------------------------------- --------------------------------------
September 15, September 15,
1997(a) 1997(a)
through through
December 31, Year Ended December 31, December 31, Year Ended December 31,
----------------------- ----------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............. $ 17.06 $ 17.59 $ 17.62 $ 17.06 $ 17.59 $ 17.63
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment Income ............. 0.03 0.13(b) 0.03 0.03 0.13(b) 0.03
Net Realized and
Unrealized Gain (Loss)
on Investments .................. 0.60 0.20(c) (0.50) 0.60 0.21(c) (0.50)
-------- -------- -------- -------- -------- --------
Total From
Investment Operations ........... 0.63 0.33 (0.47) 0.63 0.34 (0.47)
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income ............... (0.04) (0.13) (0.05) (0.04) (0.13) (0.05)
Distributions From Net
Realized Capital Gains .......... (0.06) (0.17) (0.00)(g) (0.06) (0.17) (0.00)(g)
-------- -------- -------- -------- -------- --------
Total Distributions ............... (0.10) (0.30) (0.05) (0.10) (0.30) (0.05)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .... $ 17.59 $ 17.62 $ 17.10 $ 17.59 $ 17.63 $ 17.11
======== ======== ======== ======== ======== ========
Total Return (%) (d) .............. 3.7 2.0 (2.7) 3.7 2.0 (2.7)
Ratio of Operating
Expenses to Average
Net Assets (%) (e) .............. 2.25(f) 2.25 2.25 2.25(f) 2.25 2.25
Ratio of Net Investment
Income to Average
Net Assets (%) .................. 1.01(f) 0.73 0.19 1.01(f) 0.73 0.19
Portfolio Turnover Rate (%) ....... 33 61 93 33 61 93
Net Assets, End of Period (000) ... $ 9,375 $ 16,623 $ 9,643 $ 1,596 $ 2,101 $ 1,336
The subadviser to the Fund prior to June 1, 1999 was Loomis, Sayles & Company,
L.P. Effective June 1, 1999 Vaughn, Nelson, Scarborough & McCullough, L.P.
became the subadviser.
(a) Commencement of operations.
(b) Per share net investment income has been calculated using the average
shares outstanding during the period.
(c) 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 market values of the investments of the Fund.
(d) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
(e) The ratio of operating expenses to average net assets without giving effect
to the expense limitation described in Note 4 to the Financial Statements
would have been (%)
................................... 3.85(f) 2.67 2.87 3.85(f) 2.67 2.87
(f) Computed on an annualized basis.
(g) Amount is less than $0.01.
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
For the Year Ended December 31, 1999
1. Significant Accounting Policies. The Fund is a Series of Nvest Funds Trust
III, 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 current income and capital growth.
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of the Trust in multiple series (each such series is a "Fund").
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase. Class C shares do not pay front end
sales charges 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 generally accepted accounting principles 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 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. Foreign Currency Translation. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continuted
================================================================================
For the Year Ended December 31, 1999
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities resulting from changes in the exchange rate.
d. Federal Income Taxes. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
e. Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on 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.
These differences are primarily due to differing treatments for organization
costs and distributions from Real Estate Investment Trusts for book and tax
purposes. Permanent book and tax basis differences relating to shareholder
distributions will result in reclassification to the capital accounts.
f. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. 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.
g. Organization Expense. Costs incurred in fiscal 1995 in connection with the
Fund's organization and registration, amounting to approximately $19,700 in the
aggregate, were paid by the Fund and are being amortized by the Fund over 60
months.
2. Purchases and Sales of Securities. For the year year ended December 31, 1999
purchases and sales of securities (excluding short-term investments) were
$25,921,515 and $38,632,512, respectively.
3a. Management Fees and Other Transactions with Affiliates. During the year
ended December 31, 1999, the Fund operated under two subadvisory fee contracts.
Prior to June 1, 1999, Loomis Sayles & Company, L.P. ("Loomis Sayles") was the
Fund's investment subadviser. Effective June 1, 1999 Vaughn, Nelson, Scarborough
& McCullough, L.P. ("VNSM") became the investment subadviser.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continuted
================================================================================
For the Year Ended December 31, 1999
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 of subadviser fees to the Fund's investment subadviser VNSM at the rate
of 0.40% of the first $200 million of the average daily net assets of the Fund,
0.325% of the next $300 million of such assets and 0.275% of such assets in
excess of $500 million. Loomis Sayles was paid at the annual rate identical to
the rate currently being paid to VNSM. Certain officers and directors of Nvest
Management are also officers or trustees of the Fund. Nvest Management, VNSM and
Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"),
which is a subsidiary of Metropolitan Life Insurance Company ("MetLife").
Fees earned by Nvest Management, VNSM and Loomis Sayles under the management and
subadvisory agreements in effect during the year ended December 31, 1999 are as
follows:
Fees Earned (a) Period
--------------- ------
Nvest Management $ 84,385 1/1 -- 12/31/99
Loomis Sayles 51,737 1/1 -- 5/31/99
VNSM 60,775 6/1 -- 12/31/99
----------
$ 196,897
==========
(a) Before reduction pursuant to expense limitations. See note 4.
The effective management fee for the year ended December 31, 1999 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 reimburses NSC for all or part of
NSC's expenses of providing these services which include the following: (i)
expenses for personnel performing bookkeeping, accounting, and financial
reporting functions and clerical functions relating to the Fund and (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1999 these
expenses amounted to $22,000 and are shown separately in the financial
statements as accounting and administrative.
c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services serves as the sub-transfer agent for
the Fund. For the year ended December 31, 1999, the Fund paid NSC $90,311 as
compensation for its services in that capacity.
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, 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
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continuted
================================================================================
For the Year Ended December 31, 1999
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 year ended December 31,
1999, the Fund paid Nvest Funds $35,201 in fees under the Class A Plan.
Under the Class B and Class C 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 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 year ended December 31, 1999, the Fund paid Nvest
Funds $30,503 and $4,263 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 monthly
distribution fees 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
year ended December 31, 1999, the Fund paid Nvest Funds $91,507 and $12,789 in
distribution fees under the Class B and Class C plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
Nvest Funds by investors in shares of the Fund during the year ended December
31, 1999 amounted to $115,676.
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 and Contingent Expense Obligation. Nvest Management and
VNSM have given binding undertakings to waive 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 rate of 1.50% for Class A shares, 2.25% for Class B
shares and 2.25% for Class C shares. Nvest Management's undertaking will be in
effect for the life of the Fund's current prospectus. As a result of the Fund's
expenses exceeding the expense limitation during the year ended December 31,
1999, Nvest
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continuted
================================================================================
For the Year Ended December 31, 1999
Management waived $62,069 of its $84,385 management fees, Loomis
Sayles waived their entire management fee of $51,737, and VNSM waived their
entire management fee fee of $60,775.
Under a previous fee deferral agreement Nvest Management deferred fees and
expenses subject to the obligation of the Fund to pay Nvest Management such fees
and expenses in later periods to the extent that the Fund's expenses fall below
the annual rate of 1.50% for Class A shares, 2.25% for Class B shares and 2.25%
for Class C shares; provided however, that the fund is not obligated to pay any
such deferred fees or expenses more than two years after the end of the fiscal
year in which the fee or expense was deferred.
Expenses deferred in 1998 (subject to repayment until December 31, 2000): Nvest
Management deferred $29,753 of its management fees.
5. Capital Shares. At December 31, 1999, 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 December 31,
----------------------------------------------------------------
1998 1999
----------------------------- ------------------------------
Class A Shares Amount Shares Amount
- ----------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares sold .................................................... 605,911 $ 11,038,787 87,037 $ 1,513,831
Shares issued in connection with the reinvestment of:
Dividends from net investment income ....................... 14,398 255,693 5,282 92,420
Distributions from net realized gains ...................... 10,133 171,218 136 2,361
------------ ------------ ------------ ------------
630,442 11,465,698 92,455 1,608,612
Shares repurchased ............................................. (452,923) (8,091,937) (446,573) (7,693,665)
------------ ------------ ------------ ------------
Net increase (decrease) ........................................ 177,519 $ 3,373,761 (354,118) $ (6,085,053)
------------ ------------ ------------ ------------
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1998 1999
----------------------------- ------------------------------
Class B Shares Amount Shares Amount
- ----------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares sold .................................................... 547,429 $ 9,914,032 62,612 $ 1,085,853
Shares issued in connection with the reinvestment of:
Dividends from net investment income ....................... 5,903 104,500 1,802 31,246
Distributions from net realized gains ...................... 8,752 147,992 107 1,861
------------ ------------ ------------ ------------
562,084 10,166,524 64,521 1,118,960
Shares repurchased ............................................. (151,715) (2,689,057) (443,688) (7,627,426)
------------ ------------ ------------ ------------
Net increase (decrease) ........................................ 410,369 $ 7,477,467 (379,167) $ (6,508,466)
------------ ------------ ------------ ------------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continuted
================================================================================
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1998 1999
----------------------------- ------------------------------
Class C Shares Amount Shares Amount
- ----------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares sold .................................................... 64,147 $ 1,161,625 9,838 $ 173,140
Shares issued in connection with the reinvestment of:
Dividends from net investment income ....................... 776 13,773 248 4,290
Distributions from net realized gains ...................... 1,200 20,278 17 288
------------ ------------ ------------ ------------
66,123 1,195,676 10,103 177,718
Shares repurchased ............................................. (37,673) (670,268) (51,187) (883,188)
------------ ------------ ------------ ------------
Net increase (decrease) ........................................ 28,450 $ 525,408 (41,084) $ (705,470)
------------ ------------ ------------ ------------
Increase (decrease) derived from
capital shares transactions .............................. 616,338 $ 11,376,636 (774,369) $(13,298,989)
============ ============ ============ ============
</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 4, 1999. Advances under the Agreement are taken primarily for temporary or
emergency purposes. Borrowings under the Agreement bear interest at a rate tied
to one of several short-term rates that may be selected from time to time. In
addition, the Funds are charged a facility fee equal to 0.08% per annum on the
unused portion of the line of credit. The annual cost of maintaining the line of
credit and the facility fee is apportioned pro rata among the participating
Funds. There were no borrowings as of or during the year ended December 31,
1999.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To the Trustees of Nvest Funds Trust III and the Shareholders of the Nvest
Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Nvest Equity Income Fund
(formerly the New England Equity Income Fund) (the "Fund"), a series of Nvest
Funds Trust III, at December 31, 1999, the results of its operations, the
changes in its net assets and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2000
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
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
*An investment in the Fund is not insured
or guaranteed by the FDIC
or any other 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)
- ---------------------
399 Boylston Street
Boston, Massachusetts
02116
- ---------------------
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