<PAGE> 1
[EATON VANCE LOGO]
31,000,000 SHARES
EATON VANCE SENIOR INCOME TRUST
------------------------
Eaton Vance Senior Income Trust (the "Trust") is a newly organized,
non-diversified, closed-end management investment company. The Trust's
investment objective is to provide a high level of current income, consistent
with the preservation of capital, by investing primarily in senior secured
floating rate loans ("Senior Loans"). Investment in such floating rate
instruments is expected to minimize changes in the underlying principal value of
the Senior Loans, and therefore the Trust's net asset value, resulting from
changes in market interest rates. Nevertheless, the Trust's net asset value and
distribution rate will vary, and may be affected by several factors, including
changes in the credit quality of the borrowers underlying Senior Loans.
Fluctuations in net asset value may be magnified as a result of the Trust's use
of leverage. An investment in the Trust may not be appropriate for all investors
and there is no assurance that the Trust will achieve its investment objective.
See "Investment Objective, Policies and Risks."
Senior Loans are made to corporations, partnerships and other business
entities ("Borrowers") which operate in various industries and geographical
regions. Senior Loans pay interest at rates which are redetermined periodically
on the basis of a floating base lending rate plus a premium. Senior Loans hold
the most senior position in the capital structure of the Borrower, are secured
with specific collateral and will have a claim on the assets of the Borrower
that is senior to that of subordinated debt, preferred stock and common stock of
the Borrower. Although Senior Loans have the most senior position in a
Borrower's capital structure and are secured by specific collateral, they are
typically of below investment grade quality and may have below investment grade
ratings, which ratings are associated with securities having speculative
characteristics. Because of the protective features of Senior Loans, the Adviser
believes, based on its experience, that these ratings do not necessarily reflect
the true risk of loss of principal or interest on a Senior Loan. The Trust
offers investors the opportunity to receive current income through a
professionally managed portfolio of Senior Loans, which is normally accessible
only to financial institutions and large corporate and institutional investors
and is not widely available to individual investors.
The Trust's investment adviser is Eaton Vance Management (the "Adviser" or
"Eaton Vance"). The Adviser was one of the first investment advisers to manage a
portfolio of Senior Loans in a publicly offered investment company, and has done
so continuously since 1989. (continued on the following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Price to Proceeds to
Public Sales Load(1) Trust(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $10.00 None $10.00
- -----------------------------------------------------------------------------------------------------------------------
Total.................................... $310,000,000 None $310,000,000
- -----------------------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-
Allotment Option(3).................... $356,500,000 None $356,500,000
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(footnotes on the following page)
------------------------
The Shares are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York City on or about October 30, 1998.
------------------------
PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS FAHNESTOCK & CO. INC. FIRST OF MICHIGAN CORPORATION
A DIVISION OF DAIN RAUSCHER INCORPORATED
GRUNTAL & CO. INTERSTATE/JOHNSON LANE JANNEY MONTGOMERY SCOTT INC.
CORPORATION
LEGG MASON WOOD WALKER MCDONALD & COMPANY WHEAT FIRST UNION
INCORPORATED SECURITIES, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 27, 1998
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF THE
TRUST AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE NASDAQ
MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
------------------------
(continued from the cover page)
The Trust is offering shares of beneficial interest, par value $0.01 per
share ("Shares"). Prior to this offering, there has been no market for the
Shares. The Shares have been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "EVF." The shares of
closed-end investment companies, such as the Trust, have frequently traded at a
discount to their net asset values. Investors in this offering should note that
the Shares may likewise trade at a discount to net asset value. This risk may be
greater for investors who sell their Shares in a relatively short period after
completion of the public offering.
The Trust expects to utilize financial leverage through borrowings,
including the issuance of debt securities, the issuance of preferred shares or
through other transactions, such as reverse repurchase agreements. The Trust
intends to utilize financial leverage in an amount up to 33 1/3% of its total
assets (including the amount obtained through leverage). The Trust intends to
utilize leverage if it is expected to result in higher income to Shareholders
over time. Use of financial leverage creates an opportunity for increased income
but, at the same time, creates special risks. There can be no assurance that a
leveraging strategy will be successful. SEE "INVESTMENT OBJECTIVE, POLICIES AND
RISKS -- USE OF LEVERAGE AND RELATED RISKS" AND "DESCRIPTION OF CAPITAL
STRUCTURE."
This Prospectus sets forth concisely information that a prospective
investor should know before investing in the Shares of the Trust. Please read
and retain this Prospectus for future reference. A Statement of Additional
Information dated October 27, 1998, has been filed with the Securities and
Exchange Commission ("SEC") and can be obtained without charge by calling
1-800-225-6265 or by writing to the Trust. A table of contents to the Statement
of Additional Information is located at page 31 of this Prospectus. This
Prospectus incorporates by reference the entire Statement of Additional
Information. The Statement of Additional Information is available along with
other Trust-related materials at the SEC's internet web site
(http://www.sec.gov).
The Trust's address is 24 Federal Street, Boston, Massachusetts 02110 and
its telephone number is 1-800-225-6265.
The Trust's Shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
------------------------
(footnotes from the cover page)
(1) Eaton Vance Management or an affiliate (not the Trust) from its own assets
will pay a commission to the Underwriters in the amount of 4.50% of the
Price to Public per Share in connection with the sale of the Shares offered
hereby. The Trust and Eaton Vance have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting."
(2) Before deducting organizational and offering expenses payable by the Trust.
Offering expenses of $620,000 ($713,000 if the Underwriters' over-allotment
option is exercised in full) will be deducted from net proceeds and
organizational expenses of approximately $110,000 will be capitalized and
amortized. Offering expenses include $125,000 payment to the Underwriters in
partial reimbursement of their expenses. Eaton Vance or an affiliate will
pay all offering expenses that exceed $0.02 per Share. Eaton Vance
Management has also agreed to waive its investment advisory and
administration fees for the two-month period following the date of this
Prospectus.
(3) Assuming exercise in full of the 45-day option granted by the Trust to the
Underwriters to purchase up to 4,650,000 additional Shares, on the same
terms, solely to cover over-allotments. See "Underwriting."
ii
<PAGE> 3
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.
THE TRUST..................... Eaton Vance Senior Income Trust (the "Trust")
is a newly organized, non-diversified,
closed-end management investment company. The
Trust offers investors the opportunity to
receive current income through a professionally
managed portfolio of senior secured floating
rate loans ("Senior Loans"). Investments in
Senior Loans are normally accessible only to
financial institutions and large corporate and
institutional investors, and are not widely
available to individual investors. An
investment in the Trust may not be appropriate
for all investors and there is no assurance
that the Trust will achieve its investment
objective.
THE OFFERING.................. The Trust is offering 31,000,000 shares of
beneficial interest, par value $0.01 per share
(the "Shares"), through a group of underwriters
(the "Underwriters") led by PaineWebber
Incorporated, A.G. Edwards & Sons, Inc.,
Prudential Securities Incorporated, Dain
Rauscher Wessels, a division of Dain Rauscher
Incorporated, Fahnestock & Co. Inc., First of
Michigan Corporation, Gruntal & Co., L.L.C.,
Interstate/Johnson Lane Corporation, Janney
Montgomery Scott Inc., Legg Mason Wood Walker,
Incorporated, McDonald & Company Securities,
Inc., and Wheat First Union, a division of
Wheat First Securities, Inc. The Underwriters
have been granted an option to purchase up to
4,650,000 additional Shares solely to cover
over-allotments, if any. The initial public
offering price is $10.00 per share. The minimum
purchase in this offering is 100 Shares
($1,000).
NO SALES CHARGE............... The Shares will be sold in the initial public
offering without any sales load or underwriting
discounts payable by investors or the Trust.
Eaton Vance Management or an affiliate (not the
Trust) from its own assets will pay a
commission to the Underwriters in connection
with sales of the Shares in this offering. See
"Underwriting."
INVESTMENT OBJECTIVE AND
POLICIES.................... The Trust's investment objective is to provide
a high level of current income, consistent with
preservation of capital, by investing primarily
in Senior Loans. Senior Loans generally are
made to corporations, partnerships and other
business entities ("Borrowers") which operate
in various industries and geographical regions.
Senior Loans pay interest at rates which are
redetermined periodically by reference to a
base lending rate, such as the London Inter-
bank Offered Rate ("LIBOR"), plus a premium. In
normal market conditions, at least 80% of the
Trust's total assets will be invested in
interests in Senior Loans. It is anticipated
that the proceeds of the Senior Loans in which
the Trust will acquire interests primarily will
be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions and
stock repurchases and, to a lesser extent, to
finance internal growth and for other corporate
purposes of Borrowers.
- --------------------------------------------------------------------------------
1
<PAGE> 4
Although Senior Loans have the most senior
position in a Borrower's capital structure and
are secured by specific collateral, they are
typically of below investment grade quality and
may have below investment grade ratings, which
ratings are associated with securities having
speculative characteristics. Because of the
protective features of Senior Loans, the
Adviser believes, based on its experience, that
these ratings do not necessarily reflect the
true risk of loss of principal or interest on a
Senior Loan. For example, the Adviser believes
that Senior Loans tend to have more favorable
loss recovery rates as compared to most other
types of below investment grade quality debt
obligations. Accordingly, the Adviser generally
does not take ratings into account when
determining whether to invest in a Senior Loan
and, in any event, does not view ratings as a
determinative factor in its investment
decisions. Investing in Senior Loans does,
however, involve investment risk, and some
Borrowers default on their Senior Loan
payments. The Trust attempts to manage these
risks through portfolio diversification and
ongoing analysis and monitoring of Borrowers.
As a result, the Trust is highly dependent on
the Adviser's credit analysis abilities.
The Trust may invest up to 20% of its total
assets in: loan interests which are not secured
by any, or that have lower than a senior claim
on, collateral; other income producing
securities such as investment and
non-investment grade corporate debt securities
and U.S. government and U.S. dollar-denominated
foreign government or supranational debt
securities (subject to the limit that not more
than 10% of the Trust's total assets may have a
fixed rate of interest); and warrants and
equity securities acquired in connection with
its investments in Senior Loans. The Trust may
also engage in lending of its securities,
repurchase agreements, reverse repurchase
agreements and, for hedging and risk management
purposes, certain derivative transactions. See
"Investment Objective, Policies and Risks."
LISTING....................... The Shares have been approved for listing,
subject to notice of issuance, on the New York
Stock Exchange under the symbol "EVF."
LEVERAGE...................... The Trust expects to utilize financial leverage
through borrowings, including the issuance of
debt securities, or the issuance of preferred
shares or through other transactions, such as
reverse repurchase agreements, which have the
effect of financial leverage. The Trust intends
to utilize financial leverage in an amount up
to 33 1/3% of its total assets (including the
amount obtained through leverage). The Trust
generally will not utilize leverage if it
anticipates that it would result in a lower
return to Shareholders over time. Use of
financial leverage creates an opportunity for
increased income for Shareholders but, at the
same time, creates special risks (including the
likelihood of greater volatility of net asset
value and market price of the Shares), and
there can be no assurance that a leveraging
strategy will be successful during any period
in which it is employed. Because leverage
achieved through borrowings is expected to be
based on a floating rate of interest that
fluctuates similarly to the floating rate on
Senior Loans in the Trust's
2
<PAGE> 5
portfolio, the Adviser believes that market
interest rate fluctuations should not adversely
affect returns on the Senior Loans obtained
with the proceeds of such borrowings. See
"Investment Objective, Policies and
Risks -- Use of Leverage and Related Risks."
INVESTMENT ADVISER AND
ADMINISTRATOR............... Eaton Vance Management (the "Adviser" or "Eaton
Vance"), a wholly-owned subsidiary of Eaton
Vance Corp., is the Trust's investment adviser
and administrator. The Adviser was one of the
first investment advisers to manage a portfolio
of Senior Loans in a publicly offered
investment company, and has done so
continuously since 1989. Eaton Vance currently
sponsors Eaton Vance Prime Rate Reserves, a
closed-end investment company that commenced
investment operations in August, 1989, and EV
Classic Senior Floating-Rate Fund, a closed-end
fund that commenced investment operations in
February, 1995. Each of these funds, as well as
an offshore fund offered to non-U.S. investors,
invests substantially all of its respective
assets in the Senior Debt Portfolio (the
"Portfolio"), a registered investment company
that serves as the vehicle through which such
funds invest in a common portfolio of Senior
Loans. The Portfolio is co-managed by the same
portfolio managers employed by the Adviser who
will co-manage the Trust's assets. For the
three-year and five-year periods ended
September 30, 1998 with respect to Eaton Vance
Prime Rate Reserves, and for the three-year
period ended September 30, 1998 with respect to
the EV Classic Senior Floating-Rate Fund, each
such fund was awarded five stars by
Morningstar, Inc. Morningstar is an independent
evaluator of public investment companies and
publishes proprietary ratings reflecting
historical risk-adjusted performance.
Morningstar ratings are calculated from a
fund's annual returns in excess of the 90-day
U.S. Treasury bill returns, with appropriate
fee adjustments, and are further adjusted with
a risk factor that reflects fund performance
below 90-day Treasury bill returns. Eaton Vance
Prime Rate Reserves and EV Classic Senior
Floating-Rate Fund are in the Morningstar
Taxable Bond Fund category, which includes
1,491 (for such three year period) and 940 (for
such five year period) other investment
companies. A fund receives five stars if its
risk-adjusted performance is in the top 10% of
its rating category. Certain investment
policies and restrictions of Eaton Vance Prime
Rate Reserves and the EV Classic Senior
Floating-Rate Fund differ from those of the
Trust. The portfolio holdings and investment
performance of such funds are expected to
differ from those of the Trust. Past
performance of such funds is not indicative of
the Trust's performance. See "Management of the
Trust."
SHAREHOLDER SERVICING AGENT... PaineWebber Incorporated has been retained by
the Administrator to act as the Shareholder
Servicing Agent of the Trust. See "Shareholder
Servicing Agent, Custodian and Transfer Agent."
DISTRIBUTIONS................. The Trust's policy will be to make monthly
distributions to Shareholders of substantially
all net investment income of the Trust.
Distributions to Shareholders cannot be
assured, and the amount of each monthly
distribution will vary. The initial
distribution to
3
<PAGE> 6
Shareholders is expected to be paid
approximately 60 days after the completion of
this offering. See "Distributions and Taxes,"
"Dividend Reinvestment Plan" and "Use of
Proceeds."
DIVIDEND REINVESTMENT PLAN.... The Trust has established a Dividend
Reinvestment Plan (the "Plan"). Under the Plan,
all dividend and capital gain distributions
will be automatically reinvested in additional
Shares either purchased in the open market, or
newly issued by the Trust if the Shares are
trading at or above their net asset value, in
either case unless a Shareholder elects to
receive cash. Shareholders who intend to hold
their Shares through a broker or nominee should
contact such broker or nominee to determine
whether or how they may participate in the
Plan. See "Dividend Reinvestment Plan."
CLOSED-END STRUCTURE.......... Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that closed-
end funds generally list their shares for
trading on a securities exchange and do not
redeem their shares at the option of the
shareholder. By comparison, mutual funds issue
securities redeemable at net asset value at the
option of the shareholder and typically engage
in a continuous offering of their shares.
Mutual funds are subject to continuous asset
in-flows and out-flows that can complicate
portfolio management, whereas closed-end funds
generally can stay more fully invested in
securities consistent with the closed-end
fund's investment objective and policies. In
addition, in comparison to open-end funds,
closed-end funds have greater flexibility in
the employment of financial leverage and in the
ability to make certain types of investments,
including investments in illiquid securities
such as Senior Loans. However, shares of
closed-end funds frequently trade at a discount
from their net asset value. In recognition of
the possibility that the Shares might trade at
a discount to net asset value and that any such
discount may not be in the interest of
Shareholders, the Trust's Board of Trustees
(the "Board"), in consultation with Eaton
Vance, from time to time may review possible
actions to reduce any such discount. The Board
might consider open market repurchases or
tender offers for Shares at net asset value.
There can be no assurance that the Board will
decide to undertake any of these actions or
that, if undertaken, such actions would result
in the Shares trading at a price equal to or
close to net asset value per Share. The Board
might also consider the conversion of the Trust
to an open-end mutual fund. The Board of
Trustees believes, however, that the closed-end
structure is desirable, given the Trust's
investment objective and policies. Investors
should assume, therefore, that it is highly
unlikely that the Board would vote to convert
the Trust to an open-end investment company.
See "Description of Capital Structure."
SPECIAL RISK CONSIDERATIONS... No Operating History. The Trust is a
closed-end investment company with no history
of operations and is designed for long-term
investors and not as a trading vehicle.
Senior Loan Market. Senior Loans in which the
Trust will invest may not be rated by a
nationally recognized statistical rating
organization, will not be registered with the
SEC or any state securities commission and
generally will not be listed on any
4
<PAGE> 7
national securities exchange. Therefore, the
amount of public information available about
Senior Loans will be limited, and the
performance of the Trust is more dependent on
the analytical abilities of the Adviser than
would be the case for an investment company
that invests primarily in more widely rated,
registered or exchange-listed securities. In
evaluating the creditworthiness of Borrowers,
the Adviser will consider, and may rely in
part, on analyses performed by others.
Moreover, because Senior Loans are subject to
contractual restrictions on resale they are
illiquid, which may impair the Trust's ability
to realize the full value of its assets in the
event of a voluntary or involuntary liquidation
of such assets.
Credit Risk. Senior Loans, like other debt
obligations, are subject to the risk of
non-payment of scheduled interest or principal.
Such non-payment would result in a reduction of
income to the Trust, a reduction in the value
of the Senior Loan experiencing non-payment and
a potential decrease in the net asset value of
the Trust. Although Senior Loans in which the
Trust will invest will be secured by specific
collateral, there can be no assurance that
liquidation of such collateral would satisfy
the Borrower's obligation in the event of
default or that such collateral could be
readily liquidated. Senior Loans and the other
debt securities in which the Trust may invest
typically will be below investment grade
quality. Such investments generally have
speculative characteristics, and companies
obligated by such debt are generally more
vulnerable in an economic downturn. In the
event of bankruptcy of a Borrower, the Trust
could experience delays or limitations in its
ability to realize the benefits of any
collateral securing a Senior Loan. In addition,
the Trust may purchase interests in Senior
Loans from financial intermediaries whereby the
Trust depends on the intermediary for payment
of principal and interest on the Senior Loan. A
decline in the financial soundness of such
intermediaries may, therefore, adversely affect
the Trust. See "Investment Objective, Policies
and Risks."
Interest Rate Fluctuations. When interest
rates decline, the value of a portfolio
invested in fixed-rate obligations can be
expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested
in fixed-rate obligations can be expected to
decline. Although the Trust's net asset value
will vary, the Trust's management expects the
Trust's policy of acquiring primarily interests
in floating rate Senior Loans to minimize
fluctuations in net asset value resulting from
changes in market interest rates. However,
because floating or variable rates on Senior
Loans only reset periodically, changes in
prevailing interest rates can be expected to
cause some fluctuation in the Trust's net asset
value. Similarly, a sudden and significant
increase in market interest rates, may cause a
decline in the Trust's net asset value.
Moreover, as much as 10% of the total assets of
the Trust may be invested in income securities
with fixed rates of interest, which may lose
value in direct response to market interest
rate increases.
Effects of Leverage. The use of leverage by
the Trust creates an opportunity for increased
net income, but, at the same time,
5
<PAGE> 8
creates special risks. There can be no
assurance that a leveraging strategy will be
successful during any period in which it is
employed. The Trust intends to utilize leverage
to provide the holders of Shares with a
potentially higher return. Leverage creates
risks for holders of Shares, including the
likelihood of greater volatility of net asset
value and market price of the Shares and the
risk that fluctuations in interest rates on
borrowings and debt or in the dividend rates on
any preferred shares may affect the return to
Shareholders. To the extent the income derived
from securities purchased with funds received
from leverage exceeds the cost of leverage, the
Trust's return will be greater than if leverage
had not been used. Conversely, if the income
from the securities purchased with such funds
is not sufficient to cover the cost of
leverage, the return to the Trust will be less
than if leverage had not been used, and
therefore the amount available for distribution
to Shareholders as dividends and other
distributions will be reduced. In the latter
case, Eaton Vance in its best judgment may
nevertheless determine to maintain the Trust's
leveraged position if it deems such action to
be appropriate in the circumstances. As
discussed under "Management of the Trust," the
fee paid to Eaton Vance will be calculated on
the basis of the Trust's total assets,
including proceeds from borrowings for leverage
and the issuance of preferred shares, so the
fees will be higher when leverage is utilized.
Certain types of borrowings by the Trust may
result in the Trust being subject to covenants
in credit agreements, including those relating
to asset coverage and portfolio composition
requirements. The Trust may be subject to
certain restrictions on investments imposed by
guidelines of one or more rating agencies,
which may issue ratings for the debt securities
or preferred shares issued by the Trust. These
guidelines may impose asset coverage or
portfolio composition requirements that are
more stringent than those imposed on the Trust
by the Investment Company Act of 1940, as
amended (the "Investment Company Act" or "1940
Act"). It is not anticipated that these
covenants or guidelines will impede Eaton Vance
in managing the Trust's portfolio in accordance
with its investment objective and policies. See
"Investment Objective, Policies and
Risks -- Use of Leverage and Related Risks."
Special Investment Practices. The Trust may
use various investment practices that involve
special considerations including lending its
portfolio securities and entering into
repurchase and reverse repurchase agreements.
In addition, the Trust has the authority to
engage in interest rate and other hedging and
risk management transactions. For a discussion
of these practices, see "Investment Objective,
Policies and Risks -- Special Investment
Practices."
Investment in Non-U.S. Issuers. The Trust may
invest in Senior Loans and other income
producing securities of issuers that are
organized or located in countries other than
the United States, provided that such
investments are denominated in U.S. dollars and
provide for the payment of interest and
repayment of principal in U.S. dollars. An
investment in non-U.S. issuers involves special
risks, including that non-U.S. issuers may be
subject to less rigorous accounting and
reporting requirements than U.S. issuers,
6
<PAGE> 9
less rigorous regulatory requirements,
differing legal systems and laws relating to
creditors' rights, the potential inability to
enforce legal judgments and the potential for
political, social and economic adversity.
Market Price of Shares. The shares of
closed-end investment companies often trade at
a discount from their net asset value, and the
Trust's Shares may likewise trade at a discount
from net asset value. The trading price of the
Trust's Shares may be less than the public
offering price. This risk may be greater for
investors who sell their Shares in a relatively
short period after completion of the public
offering.
Non-Diversification. The Trust has registered
as a "non-diversified" investment company under
the 1940 Act. Under federal income tax rules
applicable to the Trust, with respect to 50% of
its assets, it will be able to invest more than
5% of the value of its assets in the
obligations of any single issuer, although it
has no current intention to do so. The Trust
will not invest more than 10% of its assets in
securities (including interests in Senior
Loans) of any single Borrower. To the extent
the Trust invests a relatively high percentage
of its assets in obligations of a limited
number of issuers, the Trust may be more
susceptible than a more widely diversified
investment company to any single corporate,
economic, political or regulatory occurrence.
Anti-Takeover Provisions. The Trust's
Declaration of Trust includes provisions that
could have the effect of limiting the ability
of other persons or entities to acquire control
of the Trust or to change the composition of
its Board of Trustees. See "Description of
Capital Structure -- Anti-Takeover Provisions
in the Declaration of Trust."
7
<PAGE> 10
TRUST EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Trust will bear, directly or
indirectly.
<TABLE>
<CAPTION>
NET ASSETS
PLUS
LEVERAGE(1)
-----------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load................................................ None
Dividend Reinvestment Plan Fees........................... None
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO SHARES)(1)
Investment Advisory Fee(2)................................ 1.28%
Interest Payments on Borrowed Funds....................... 2.80%
Other Expenses (including administration fee of
.38%)(2)(3)............................................ .58%
----
Total Annual Operating Expenses........................... 4.66%
====
</TABLE>
- ---------------
(1) The Trust intends to utilize leverage only if the Adviser believes that it
would result in higher income to Shareholders over time. See "Investment
Objective, Policies and Risks -- Use of Leverage and Related Risks." Assumes
borrowings of 33 1/3% of total assets (including amount borrowed) at an
interest rate of 5.60%, which is based upon the Trust's estimation of
current market conditions. At times when the Trust does not utilize
leverage, the estimated annual operating expenses would be:
<TABLE>
<S> <C>
Investment Advisory Fee(2)................................ .85%
Interest Payments on Borrowed Funds....................... None
Other Expenses (including administration fee of
.25%)(2)(3)............................................. .53%
----
Total Annual Operating Expenses........................... 1.38%
====
</TABLE>
(2) Although not reflected in the table, Eaton Vance has agreed to waive its
investment advisory and administration fees for the two-month period
following the date of this Prospectus. See "Management of the Trust."
(3) Reflects estimated amounts for the Trust's first year of operations.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the
Trust, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR(*) THREE YEARS FIVE YEARS TEN YEARS
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming No Leverage.......................... $14 $ 44 $ 76 $166
Assuming 33 1/3% Leverage..................... $47 $141 $235 $474
</TABLE>
- ---------------
* Does not give effect to the waiver by Eaton Vance of its investment advisory
and administration fees for the two-month period following the date of this
Prospectus. This Example assumes that all dividends and other distributions
are reinvested at net asset value and that the percentage amounts listed under
Total Annual Operating Expenses remain the same in the years shown, except for
amounts for the Three Years, Five Years and Ten Years periods which are after
completion of organization expense amortization. The above tables and the
assumption in the Example of a 5% annual return and reinvestment at net asset
value are required by regulation of the SEC; the assumed 5% annual return is
not a prediction of, and does not represent, the projected or actual
performance of the Trust's Shares. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES, AS THE TRUST'S ACTUAL EXPENSES MAY BE MORE
OR LESS THAN THOSE SHOWN.
8
<PAGE> 11
THE TRUST
Eaton Vance Senior Income Trust (the "Trust") is a newly organized,
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on September 23, 1998 and has no operating
history. The Trust's principal office is located at 24 Federal Street, Boston,
MA 02110 and its telephone number is 1-800-225-6265.
This Prospectus relates to the initial public offering of the Trust's
shares of beneficial interest, $.01 par value (the "Shares"). The Shares will be
sold during the initial public offering without any sales load or underwriting
discounts payable by investors or the Trust. Eaton Vance Management (the
"Adviser" or "Eaton Vance") or an affiliate (not the Trust) from its own assets
will pay a commission to the Underwriters in connection with sales of the Shares
in this offering. See "Underwriting."
USE OF PROCEEDS
The proceeds of this offering, before deduction of offering expenses,
estimated to be $310,000,000 (or $356,500,000 assuming exercise of the
Underwriters' over-allotment option in full), will be invested in accordance
with the Trust's investment objective and policies as soon as practicable, but
in no event, under normal market conditions, later than three months after the
receipt thereof. Pending such investment, the proceeds may be invested in
high-quality, short-term debt securities. Eaton Vance has agreed to pay all
offering expenses of the Trust that exceed $0.02 per Share.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide Shareholders with a high
level of current income, consistent with preservation of capital, by investing
primarily in senior secured floating rate loans ("Senior Loans"). Investment in
such floating rate instruments is expected to minimize changes in the underlying
principal value of the Senior Loans, and therefore the Trust's net asset value,
resulting from changes in market interest rates. The borrowers of such loans
will be corporations, partnerships and other business entities ("Borrowers")
which operate in a variety of industries and geographical regions. The Trust
provides individual investors with access to a market normally accessible only
to financial institutions and larger corporate or institutional investors.
INVESTMENT POLICIES -- GENERAL COMPOSITION OF THE TRUST
In normal market conditions, at least 80% of the Trust's total assets will
be invested in interests in Senior Loans (either as an original Lender or as a
purchaser of an Assignment or Participation, each as defined below) of domestic
or foreign Borrowers (so long as foreign loans are U.S. dollar-denominated and
payments of interest and repayments of principal are required to be made in U.S.
dollars). The Trust may invest up to 20% of its total assets in (i) loan
interests which are not secured by any, or that have a lower than senior claim
on, collateral, (ii) other income producing securities such as investment and
non-investment grade corporate debt securities and U.S. government and U.S.
dollar-denominated foreign government or supranational debt securities (subject
to the limit that no more than 10% of the Trust's total assets may be invested
in securities with a fixed rate of interest), and (iii) warrants and equity
securities issued by a Borrower or its affiliates as part of a package of
investments in the Borrower or its affiliates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Trust
may invest up to 100% of its assets in cash and high quality, short-term debt
securities.
Based upon available market data, the Adviser believes that the overall
market for U.S. debt securities, including U.S. government securities,
investment and non-investment grade corporate bonds, mortgage-related securities
and commercial paper, totaled an outstanding principal amount of approximately
$8.4 trillion at the end of 1997, and that Senior Loans represented
approximately $375 billion (or 4.5%) of that total amount. Senior Loans in which
the Trust will invest generally pay interest at rates which are redetermined
periodically by reference to a base lending rate, plus a premium. These base
lending rates generally are the prime rate offered by one or more major United
States banks (the "Prime Rate"), the London Inter-bank
9
<PAGE> 12
Offered Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base
lending rates used by commercial lenders. The following table is intended to
provide investors with a comparison of short-term money market rates, a
representative base commercial lending rate, and a representative indicator of
the premium over such base lending rate for Senior Loans. The representative
indicator shown below is derived from the DLJ Leveraged Loan Index, which was
designed in January 1992 to mirror the investible universe of the market for
Senior Loans. The DLJ Leveraged Loan Index includes approximately $58 billion of
Senior Loans and new Senior Loan issues are added when they meet certain
criteria. The DLJ Leveraged Loan Index is an unmanaged index and, although the
Adviser believes that the spreads over LIBOR reported in connection with the
determination of the Index (which are an average of the contractual spreads set
forth in the loan agreements relating to the Senior Loans included in the Index)
are representative of the historical average spreads in the overall market for
Senior Loans, the Trust will have no direct investment in, nor will its
performance be indicative of, this Index. The following comparison should not be
considered a representation of future money market rates, spreads of Senior
Loans over base reference rates nor what an investment in the Trust may earn or
what an investor's yield or total return may be in the future.
COMPARISON OF MONEY MARKET RATE,
LIBOR AND SENIOR LOANS
<TABLE>
<CAPTION>
JAN. JULY JAN. JULY JAN. JULY JAN. JULY JAN. JULY JAN. JULY JAN. JULY
1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3 Month Treasury Bill(1)....... 3.91% 3.28% 3.07% 3.11% 3.04% 4.46% 5.90% 5.59% 5.15% 5.30% 5.18% 5.19% 5.18% 5.09%
3 Month LIBOR(2)............... 4.19 3.44 3.25 3.31 3.25 4.88 6.31 5.88 5.38 5.69 5.56 5.75 5.65 5.69
Average Senior Loan Spreads
Plus 3 Month LIBOR(3)........ 6.34 5.68 5.72 5.77 5.69 7.19 8.65 8.15 7.69 8.07 8.03 8.10 8.02 8.04
</TABLE>
- ---------------
(1) U.S. Treasury bills offer a government guarantee as to the timely payment of
interest and repayment of principal at maturity. Source: Bloomberg.
(2) The London Inter-bank Offered Rate, which is used worldwide as a base for
loans to large commercial and industrial companies and may not generally be
invested in directly. Source: Bloomberg.
(3) Derived from reported average Senior Loan spreads in the DLJ Leveraged Loan
Index. The data do not reflect fluctuations in the principal value of Senior
Loans included in the Index. Source: Donaldson, Lufkin & Jenrette.
It is anticipated that the proceeds of the Senior Loans in which the Trust
will acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower. The capital structure of a Borrower may
include Senior Loans, senior and junior subordinated debt, preferred stock and
common stock issued by the Borrower, typically in descending order of seniority
with respect to claims on the Borrower's assets (described below). Senior Loans
are secured by specific collateral.
In order to borrow money pursuant to a Senior Loan, a Borrower will
frequently, for the term of the Senior Loan, pledge collateral, including but
not limited to, (i) working capital assets, such as accounts receivable and
inventory; (ii) tangible fixed assets, such as real property, buildings and
equipment; (iii) intangible assets, such as trademarks and patent rights (but
excluding goodwill); and (iv) security interests in shares of stock of
subsidiaries or affiliates. In the case of Senior Loans made to non-public
companies, the company's shareholders or owners may provide collateral in the
form of secured guarantees and/or security interests in assets that they own. In
certain instances, a Senior Loan may be secured only by stock in the Borrower or
its subsidiaries. Collateral may consist of assets that may not be readily
liquidated, and there is no assurance that the liquidation of such assets would
satisfy fully a Borrower's obligations under a Senior Loan. The Trust will not
invest in a Senior Loan unless, at the time of investment, the Adviser
determines that the value of the collateral equals or exceeds the aggregate
outstanding principal amount of the Senior Loan.
10
<PAGE> 13
The Trust is not subject to any restrictions with respect to the maturity
of Senior Loans held in its portfolio. Senior Loans typically have a stated term
of between five and nine years, and have rates of interest which typically are
redetermined either daily, monthly, quarterly or semi-annually. Longer interest
rate reset periods generally increase fluctuations in the Trust's net asset
value as a result of changes in market interest rates. The Senior Loans in the
Trust's portfolio will have a dollar-weighted average period until the next
interest rate adjustment of approximately 90 days or less. As a result, as
short-term interest rates increase, interest payable to the Trust from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Trust from its investments in Senior Loans
should decrease. The Trust may utilize certain investment practices to, among
other things, shorten the effective interest rate redetermination period of
Senior Loans in its portfolio. In the experience of the Adviser over the last
decade, because of prepayments the average life of Senior Loans has been two to
three years.
A lender may have certain obligations pursuant to a loan agreement relating
to Senior Loans, which may include the obligation to make additional loans in
certain circumstances. The Trust generally will reserve against such contingent
obligations by segregating a sufficient amount of cash, liquid securities and
liquid Senior Loans, subject to the Trust's borrowing limitations. The Trust
will not purchase interests in Senior Loans that would require the Trust to make
any such additional loans if such additional loan commitments in the aggregate
would exceed 20% of the Trust's total assets or would cause the Trust to fail to
meet its tax diversification requirements.
The Trust may purchase and retain in its portfolio a Senior Loan where the
Borrower has experienced, or may be perceived to be likely to experience, credit
problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Trust may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan.
The Trust also may invest up to 5% of its total assets in structured notes
with rates of return determined by reference to the total rate of return on one
or more Senior Loans referenced in such notes. The rate of return on the
structured note may be determined by applying a multiplier to the rate of total
return on the referenced Senior Loan or Loans. Application of a multiplier is
comparable to the use of financial leverage, a speculative technique. Leverage
magnifies the potential for gain and the risk of loss; as a result, a relatively
small decline in the value of a referenced Loan could result in a relatively
large loss in the value of a structured note. See "Use of Leverage and Related
Risks" below. Structured notes will be treated as Senior Loans for purposes of
the Trust's policy of normally investing at least 80% of its assets in Senior
Loans, and may be subject to the Trust's leverage limitations.
The Trust has adopted certain fundamental investment restrictions set forth
in the Statement of Additional Information which may not be changed without a
Shareholder vote. Except for such restrictions, the investment objective and
policies of the Trust may be changed by the Board of Trustees without
Shareholder action.
CERTAIN CHARACTERISTICS OF SENIOR LOANS
A Senior Loan is typically originated, negotiated and structured by a U.S.
or foreign commercial bank, insurance company, finance company or other
financial institution (the "Agent") for a lending syndicate of financial
institutions ("Lenders"). The Agent typically administers and enforces the
Senior Loan on behalf of the other Lenders in the syndicate. In addition, an
institution, typically but not always the Agent, holds any collateral on behalf
of the Lenders.
Senior Loans include senior secured floating rate loans and institutionally
traded senior secured floating rate debt obligations issued by an asset-backed
pool, and interests therein. Loan interests generally take the form of direct
interests acquired during a primary distribution and may also take the form of
participation interests in, assignments of, or novations of a Senior Loan
acquired in secondary markets. Such loan interests may be acquired from U.S. or
foreign commercial banks, insurance companies, finance companies or other
11
<PAGE> 14
financial institutions who have made loans or are members of a lending syndicate
or from other holders of loan interests.
The Trust may purchase "Assignments" from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments may,
however, be arranged through private negotiations between potential assignees
and potential assignors, and the rights and obligations acquired by the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
The Trust also may invest without limit in "Participations." Participations
by the Trust in a Lender's portion of a Senior Loan typically will result in the
Trust having a contractual relationship only with such Lender, not with the
Borrower. As a result, the Trust may have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by such Lender of such payments
from the Borrower. In connection with purchasing Participations, the Trust
generally will have no right to enforce compliance by the Borrower with the
terms of the loan agreement, nor any rights with respect to any funds acquired
by other Lenders through set-off against the Borrower and the Trust may not
directly benefit from the collateral supporting the Senior Loan in which it has
purchased the Participation. As a result, the Trust may assume the credit risk
of both the Borrower and the Lender selling the Participation. In the event of
the insolvency of the Lender selling a Participation, the Trust may be treated
as a general creditor of such Lender. The selling Lenders and other persons
interpositioned between such Lenders and the Trust with respect to such
Participations will likely conduct their principal business activities in the
banking, finance and financial services industries. Persons engaged in such
industries may be more susceptible to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary policy,
governmental regulations concerning such industries and concerning capital
raising activities generally and fluctuations in the financial markets
generally.
The Trust will only acquire Participations if the Lender selling the
Participation, and any other persons interpositioned between the Trust and the
Lender, at the time of investment has outstanding debt or deposit obligations
rated investment grade (BBB or A-3 or higher by Standard & Poor's Ratings Group
("S&P") or Baa or P-3 or higher by Moody's Investors Service, Inc. ("Moody's")
or comparably rated by another nationally recognized rating agency (each a
"Rating Agency")) or determined by the Adviser to be of comparable quality.
Similarly, the Trust will purchase an Assignment or Participation or act as a
Lender with respect to a syndicated Senior Loan only where the Agent with
respect to such Senior Loan at the time of investment has outstanding debt or
deposit obligations rated investment grade or determined by the Adviser to be of
comparable quality. Long-term debt rated BBB by S&P is regarded by S&P as having
adequate capacity to pay interest and repay principal and debt rated Baa by
Moody's is regarded by Moody's as a medium grade obligation, i.e., it is neither
highly protected nor poorly secured. Commercial paper rated A-3 by S&P indicates
that S&P believes such obligations exhibit adequate protection parameters but
that adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment on
the obligation and issues of commercial paper rated P-3 by Moody's are
considered by Moody's to have an acceptable ability for repayment of short-term
debt obligations but the effect of industry characteristics and market
conditions may be more pronounced. A description of the corporate bond ratings
of Moody's and S&P is included as Appendix A to the Statement of Additional
Information.
12
<PAGE> 15
OTHER INCOME PRODUCING SECURITIES
The Trust, with respect to 20% of its total assets, may purchase a variety
of U.S. and foreign corporate and government debt obligations that are U.S.
dollar-denominated. The Adviser may consider capital appreciation potential when
investing in such income producing debt securities, which may have fixed,
variable or floating rates of interest. These securities may include (i)
interests in loans from Borrowers that are not secured by any, or that have
lower than senior claim on, collateral, (ii) other income producing securities
such as investment and non-investment grade corporate debt securities and U.S.
government and U.S. dollar-denominated foreign government or supranational debt
securities (subject to the limit that no more than 10% of the Trust's total
assets may be invested in securities with a fixed rate of interest), and (iii)
warrants and equity securities issued by a Borrower or its affiliates as part of
a package of investments in the Borrower or its affiliates.
USE OF LEVERAGE AND RELATED RISKS
The Trust expects to utilize leverage through borrowings, including the
issuance of debt securities, or the issuance of preferred shares or through
other transactions, such as reverse repurchase agreements, which have the effect
of financial leverage. The Trust intends to utilize leverage in an amount up to
approximately 33 1/3% of its total assets (including the amount obtained from
leverage). The Trust generally will not utilize leverage if the Adviser
anticipates that it would result in a lower return to Shareholders for any
significant amount of time. The Trust also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of Trust securities.
Leverage creates risks for holders of the Shares, including the likelihood
of greater volatility of net asset value and market price of the Shares.
Although there is a risk that fluctuations in interest rates on borrowings and
short-term debt or in the dividend rates on any preferred shares may adversely
affect the return to the holders of the Shares, the Adviser believes that this
should be mitigated when the Trust uses leverage with floating rate costs,
because the Trust's costs of leverage and its portfolio of Senior Loans will
ordinarily have similar floating rates of interest. If the income from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return on the Trust will be less than if leverage had not been
used, and therefore the amount available for distribution to Shareholders as
dividends and other distributions will be reduced. The Adviser in its best
judgment nevertheless may determine to maintain the Trust's leveraged position
if it deems such action to be appropriate in the circumstances. As discussed
under "Management of the Trust," during periods in which the Trust is utilizing
leverage the fees paid to Eaton Vance for investment advisory and administrative
services will be higher than if the Trust did not utilize leverage because the
fees paid will be calculated on the basis of the Trust's total assets, including
proceeds from borrowings for leverage and the issuance of preferred shares.
Capital raised through leverage will be subject to interest costs or
dividend payments which may exceed the income and appreciation on the assets
purchased. The Trust also may be required to maintain, among other things,
minimum average balances in connection with borrowings or to pay a commitment or
other fee to maintain a line of credit; any such requirements will increase the
cost of borrowing over the stated interest rate. The issuance of preferred
shares involves offering expenses and other costs and may limit the Trust's
freedom to pay dividends on Shares or to engage in other activities. Borrowings
and the issuance of a class of preferred shares having priority over the Trust's
Shares create an opportunity for greater return per Share, but at the same time
such leveraging is a speculative technique in that it will increase the Trust's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with borrowed funds or offering proceeds exceed the cost of borrowing
or issuing additional classes of securities (and other Trust expenses), the use
of leverage will diminish the investment performance of the Trust's Shares
compared with what it would have been without leverage.
Certain types of borrowings may result in the Trust being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements. The Trust may be subject to certain
restrictions on investments imposed by guidelines of one or more Rating Agencies
which may issue
13
<PAGE> 16
ratings for any corporate debt securities or preferred shares issued by the
Trust. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed on the Trust by the
Investment Company Act. It is not anticipated that these covenants or guidelines
will impede the Adviser from managing the Trust's portfolio in accordance with
the Trust's investment objective and policies. The Trust currently is in
preliminary negotiations with commercial banks to arrange a credit facility. The
terms of any agreements relating to the credit facility, including commitment
and facility fees and the rate of interest charged on such borrowings, have not
been determined and are subject to a definitive agreement and other conditions.
Under the Investment Company Act, the Trust is not permitted to incur
indebtedness unless immediately after such incurrence the Trust has an asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Trust's
total assets). Additionally, under the Investment Company Act, the Trust may not
declare any dividend or other distribution upon any class of its capital shares
(including the Shares), or purchase any such capital shares, unless the
aggregate indebtedness of the Trust has, at the time of the declaration of any
such dividend or distribution or at the time of any such purchase, an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. Under the Investment
Company Act, the Trust is not permitted to issue preferred shares unless
immediately after such issuance the net asset value of the Trust's portfolio is
at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the Trust's total assets).
In addition, the Trust is not permitted to declare any cash dividend or other
distribution on its Shares unless, at the time of such declaration, the net
asset value of the Trust's portfolio (determined after deducting the amount of
such dividend or other distribution) is at least 200% of such liquidation value.
If preferred shares are issued, the Trust intends, to the extent possible, to
purchase or redeem preferred shares from time to time to maintain coverage of
any preferred shares of at least 200%.
The Trust's willingness to borrow money and issue new securities for
investment purposes, and the amount the Trust will borrow or issue, will depend
on many factors, the most important of which are market conditions and interest
rates. Successful use of a leveraging strategy depends on the Adviser's ability
to predict correctly interest rates and market movements, and there is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.
Assuming the utilization of leverage in the amount of approximately 33 1/3%
of the Trust's total assets and an annual interest rate on borrowings of 5.60%
payable on such leverage based on market rates as of the date of this
Prospectus, the annual return that the total assets in the Trust's portfolio
must experience (net of expenses) in order to cover such interest payments would
be 1.87%. The Trust's actual cost of leverage will be based on market rates at
the time the Trust undertakes a leveraging strategy, and such actual cost of
leverage may be higher or lower than that assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Trust's Shares of leverage in the amount of approximately 33 1/3%
of the Trust's total assets, assuming hypothetical annual returns of the Trust's
portfolio of minus 10% to plus 10%. As the table shows, leverage generally
increases the return to Shareholders when portfolio return is positive and
greater than the cost of leverage and decreases the return when the portfolio
return is negative or less than the cost of leverage. The figures appearing in
the table are hypothetical and actual returns may be greater or less than those
appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assuming Portfolio Return (net of expenses)....... (10)% (5)% 0% 5% 10%
Corresponding Share Return Assuming 33 1/3%
Leverage........................................ (17.80)% (10.30)% (2.80)% 4.70% 12.20%
</TABLE>
Until the Trust borrows or issues preferred shares, the Shares will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Shares
cannot be achieved until the proceeds resulting from the use of leverage have
been invested in accordance with the Trust's investment objective and policies.
14
<PAGE> 17
ADDITIONAL RISK CONSIDERATIONS
Interest Rate Risk. When interest rates decline, the value of a portfolio
invested in fixed-rate obligations can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed-rate obligations
can be expected to decline. Although the Trust's net asset value will vary, the
Trust's management expects the Trust's policy of acquiring primarily interests
in floating rate Senior Loans to minimize fluctuations in net asset value as a
result of changes in market interest rates. However, because floating rates on
Senior Loans only reset periodically, changes in prevailing interest rates can
be expected to cause some fluctuation in the Trust's net asset value. Similarly,
a sudden and significant increase in market interest rates may cause a decline
in the Trust's net asset value. Moreover, as much as 10% of the total assets of
the Trust may be invested in income securities with fixed rates of interest,
which may lose value in direct response to market interest rate increases.
Credit Risk. Senior Loans, like other corporate debt obligations, are
subject to the risk of non-payment of scheduled interest or principal. Such
non-payment would result in a reduction of income to the Trust, a reduction in
the value of the Senior Loan experiencing non-payment and a potential decrease
in the net asset value of the Trust. Although, with respect to Senior Loans, the
Trust generally will invest only in Senior Loans that the Adviser believes are
secured by specific collateral the value of which equals or exceeds the
principal amount of the Senior Loan at the time of initial investment, there can
be no assurance that the liquidation of any such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Trust could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. Some Senior Loans in which the Trust may invest are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such Senior Loans to presently existing or future indebtedness
of the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Trust, including, in certain circumstances, invalidating such Senior
Loans.
Senior Loans in which the Trust will invest often are not rated by a Rating
Agency, will not be registered with the SEC or any state securities commission
and will not be listed on any national securities exchange. Although the Trust
will have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered or exchange listed securities. Borrowers
may have outstanding debt obligations that are rated below investment grade by a
Rating Agency. More recently, such Rating Agencies have begun rating Senior
Loans and many Senior Loans have been assigned a rating below investment grade.
The Trust will invest in such Senior Loans. Debt securities which are unsecured
and rated below investment grade are viewed by the Rating Agencies as having
speculative characteristics and are commonly known as "junk bonds." A
description of the ratings of corporate bonds by Moody's and S&P is included as
Appendix A to the Statement of Additional Information. Because of the protective
features of Senior Loans (being senior and secured by specific collateral), the
Adviser believes, based on its experience, that these ratings do not necessarily
reflect the true risk of loss of principal or interest on a Senior Loan. For
example, the Adviser believes that Senior Loans tend to have more favorable loss
recovery rates as compared to most other types of below investment grade debt
obligations. Accordingly, the Adviser generally does not take ratings into
account when determining whether to invest in a Senior Loan and, in any event,
does not view ratings as a determinative factor in its investment decisions.
Investing in Senior Loans does, however, involve investment risk, and some
Borrowers default on their Senior Loan payments. The Trust attempts to manage
these risks through portfolio diversification and ongoing analysis and
monitoring of Borrowers. As a result, the Trust is more dependent on the
Adviser's credit analysis abilities than a fund that invests in other types of
debt securities.
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The Trust may invest up to 20% of its total assets in: Loans from Borrowers
that are not secured by any, or that have lower than a senior claim on,
collateral; in warrants and equity securities acquired in connection with the
Trust's ownership of Senior Loans; and in other income producing securities such
as investment grade and below investment grade corporate debt securities and
U.S. government and U.S. dollar-denominated foreign government or supranational
debt securities (subject to the limit that no more than 10% of the Trust's total
assets may be invested in securities with a fixed rate of interest). Securities
rated below investment grade are commonly referred to as "junk bonds."
Securities rated below investment grade or unrated securities of comparable
quality ("lower quality securities") are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). The prices of lower quality
securities are also more likely to react to real or perceived developments
affecting market and credit risk than are prices of investment grade quality
securities ("higher quality securities"), which react primarily to movements in
the general level of interest rates. A substantial portion of the Trust's
portfolio of Senior Loans and other debt securities may be lower quality
securities issued in connection with mergers, acquisitions, leveraged buy-outs,
recapitalizations and other highly leveraged transactions, which pose a higher
risk of default or bankruptcy of the issuer than other higher quality
securities, particularly during periods of deteriorating economic conditions and
contraction in the credit markets. The investments in the Trust's portfolio will
have speculative characteristics.
Foreign Securities. Although the Trust will only invest in U.S.
dollar-denominated income securities, the Trust may invest in Senior Loans and
other debt securities of non-U.S. issuers. Investment in securities of non-U.S.
issuers involves special risks, including that non-U.S. issuers may be subject
to less rigorous accounting and reporting requirements than U.S. issuers, less
rigorous regulatory requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal judgments and the
potential for political, social and economic adversity. The willingness and
ability of sovereign issuers to pay principal and interest on government
securities depends on various economic factors, including among others the
issuer's balance of payments, overall debt level, and cash flow considerations
related to the availability of tax or other revenues to satisfy the issuer's
obligations. Supranational organizations do not have taxing powers, so they are
dependent upon their members' continued support in order to meet interest and
principal payments. The securities of some foreign issuers are less liquid and
at times more volatile than securities of comparable U.S. issuers. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in the payment or delivery of securities and interest or in the recovery
of assets held abroad) and expenses not present in the settlement of domestic
investments. Investments may include securities issued by the governments of
lesser-developed countries, which are sometimes referred to as "emerging
markets." There may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, armed conflict and diplomatic developments
which could affect the value of the Trust's investments in certain foreign
countries.
Liquidity Risk. Senior Loans, at present, are generally not readily
marketable and are subject to restrictions on resale. Interests in Senior Loans
generally are not listed on any national securities exchange or automated
quotation system and no active trading market may exist for many of the Senior
Loans in which the Trust will invest. Where a secondary market exists, such
market may be subject to irregular trading activity, wide bid/ask spreads and
extended trade settlement periods. Senior Loans are thus relatively illiquid,
which illiquidity may impair the Trust's ability to realize the full value of
its assets in the event of a voluntary or involuntary liquidation of such
assets. The Trust has no limitation on the amount of its assets which may be
invested in securities which are not readily marketable or are subject to
restrictions on resale. The substantial portion of the Trust's assets invested
in Senior Loan interests may restrict the ability of the Trust to dispose of its
investments in a timely fashion and at a fair price, and could result in capital
losses to the Trust and holders of Shares. The risks associated with illiquidity
are particularly acute in situations where the Trust's operations require cash,
such as if the Trust tenders for its Shares, and may result in the Trust
borrowing to meet short-term cash requirements.
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Regulatory Changes. To the extent that legislation or state or federal
regulators that regulate certain financial institutions impose additional
requirements or restrictions with respect to the ability of such institutions to
make loans, particularly in connection with highly leveraged transactions, the
availability of Senior Loans for investment by the Trust may be adversely
affected. Further, such legislation or regulation could depress the market value
of Senior Loans held by the Trust.
Closed-End Funds. The Trust is a closed-end investment company with no
history of operations and is designed primarily for long-term investors and not
as a trading vehicle. The shares of closed-end investment companies often trade
at a discount from their net asset value, and the Trust's Shares may likewise
trade at a discount from net asset value. The trading price of the Trust's
Shares may be less than the initial public offering price, creating a risk of
loss for investors purchasing in the initial public offering of the Shares. This
market price risk may be greater for investors who sell their Shares within a
relatively short period after completion of this offering.
Non-Diversification. The Trust has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and in connection with federal income tax rules applicable to the
Trust, with respect to 50% of its total assets, it will be able to invest more
than 5% of the value of its assets in the obligations of any single issuer,
including Senior Loans of a single Borrower or single Lender, although it has no
current intention to do so. The Trust will not invest more than 10% of the value
of its assets in securities (including interests in Senior Loans) of any single
Borrower. Moreover, the Trust may invest more than 10% (but not more than 25%)
of its total assets in Senior Loan interests for which the same intermediate
participant is interposed between the Trust and the Borrower. To the extent the
Trust invests a relatively high percentage of its assets in obligations of a
limited number of issuers, the Trust will be more susceptible than a more widely
diversified investment company to any single corporate, economic, political or
regulatory occurrence.
Year 2000 Compliance. The Trust could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." Eaton Vance is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Trust's other major
service providers. At this time, there can be no assurance that these steps will
be sufficient to avoid any adverse impact to the Trust.
In addition, it is possible that the markets for Senior Loans and other
securities in which the Trust invests may be detrimentally affected by computer
failures throughout the financial services industry beginning on or before
January 1, 2000. Improperly functioning trading systems may result in settlement
problems and liquidity issues. In addition, corporate and governmental data
processing errors may result in production problems for individual companies and
overall economic uncertainties. Earnings of individual issuers will be affected
by remediation costs, which may be substantial and may be reported
inconsistently in U.S. and foreign financial statements. Accordingly, the
Trust's investments may be adversely affected.
SPECIAL INVESTMENT PRACTICES
The Trust may engage in the following investment practices to seek to
enhance income or reduce investment risk, but has no current intention to do so.
Interest Rate and Other Hedging Transactions. The Trust may purchase or
sell derivative instruments (which are instruments that derive their value from
another instrument, security or index) to seek to hedge against fluctuations in
securities prices or interest rates. The Trust's transactions in derivative
instruments may include the purchase or sale of futures contracts on securities,
securities indices or other indices, other financial instruments; options on
futures contracts; exchange-traded and over-the-counter options on securities or
indices; index-linked securities; and interest rate swaps. The Trust's
transactions in derivative instruments involve a risk of loss or depreciation
due to: unanticipated adverse changes in securities prices, interest rates, the
other financial instruments' prices; the inability to close out a position;
default by the counterparty; imperfect correlation between a position and the
desired hedge; tax constraints on closing out positions; and
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portfolio management constraints on securities subject to such transactions. The
loss on derivative instruments (other than purchased options) may substantially
exceed the Trust's initial investment in these instruments. In addition, the
Trust may lose the entire premium paid for purchased options that expire before
they can be profitably exercised by the Trust. Transaction costs will be
incurred in opening and closing positions in derivative instruments. There can
be no assurance that the Adviser's use of derivative instruments will be
advantageous to the Trust.
The Trust may use interest rate swaps for risk management purposes and not
as a speculative investment and would typically use interest rate swaps to
shorten the average time to interest rate reset of the Trust. Interest rate
swaps involve the exchange by the Trust with another party of their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
Adviser has had limited experience in the use of interest rate swaps but has
utilized other types of hedging and risk management techniques. If the Adviser
is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Trust would be less
favorable than what it would have been if this investment technique were never
used.
Securities Lending. The Trust may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers. During
the existence of a loan, the Trust will continue to receive the equivalent of
the interest paid by the issuer on the securities loaned and will also receive a
fee, or all or a portion of the interest on investment of the collateral, if
any. However, the Trust may pay lending fees to such borrowers. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed by the
Trust's Adviser to be of good standing and when, in the judgment of the Adviser,
the consideration which can be earned from securities loans of this type, net of
administrative expenses and any finders or other fees, justifies the attendant
risk. The financial condition of the borrower will be monitored by the Adviser
on an ongoing basis. The value of the securities loaned will not exceed 30% of
the Trust's total assets.
Repurchase Agreements. The Trust may enter into repurchase agreements with
member banks of the Federal Reserve System or primary dealers in U.S. Government
securities. Under a repurchase agreement, the Trust buys securities at one price
and simultaneously promises to sell back those securities at a higher price. The
Trust's repurchase agreements will provide that the value of the collateral
underlying the repurchase agreement will always be at least equal to the
repurchase price, including any accrued interest earned on the repurchase
agreement, and will be marked to market daily. The repurchase date is usually
within seven days of the original purchase date. In all cases, the Adviser must
be satisfied with the creditworthiness of the other party to the agreement
before entering into a repurchase agreement. In the event of the bankruptcy of
the other party to a repurchase agreement, the Trust might experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities the Trust purchased may have declined, the Trust could experience a
loss.
Reverse Repurchase Agreements. The Trust may also enter into "reverse"
repurchase agreements which involve the sale of securities held and an agreement
to repurchase the securities at an agreed-upon price, date, and interest
payment. Reverse repurchase agreements involve risks similar to those described
above under "-- Use of Leverage" and expose the Trust to the credit risk of the
counterparty.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The management of the Trust, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Trust's Board of Trustees under the laws of The Commonwealth of
Massachusetts.
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THE ADVISER
Eaton Vance Management acts as the Trust's investment adviser under an
Investment Advisory Agreement ("Advisory Agreement"). The Adviser's principal
office is located at 24 Federal Street, Boston, MA 02110. Eaton Vance, its
affiliates and predecessor companies have been managing assets of individuals
and institutions since 1924 and of investment companies since 1931. Eaton Vance
(or its affiliates) currently serves as the investment adviser to investment
companies and various individual and institutional clients with combined assets
under management of over $27 billion, of which approximately $25 billion is in
investment companies. Eaton Vance is a wholly-owned subsidiary of Eaton Vance
Corp., a publicly held holding company which through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities.
Eaton Vance was one of the first investment advisers to manage a portfolio
of Senior Loans in a publicly offered investment company and has done so
continuously since 1989. Eaton Vance currently offers Eaton Vance Prime Rate
Reserves, a closed-end investment company that commenced investment operations
in August, 1989, and EV Classic Senior Floating-Rate Fund, a closed-end fund
that commenced investment operations in February, 1995. Each of these funds, as
well as an offshore fund offered to non-U.S. investors, invests substantially
all of its respective assets in the Senior Debt Portfolio, a registered
investment company that serves as the vehicle through which such funds invest in
a common portfolio of Senior Loans. For the three-year and five-year periods
ended September 30, 1998 with respect to Eaton Vance Prime Rate Reserves, and
for the three-year period ended September 30, 1998 with respect to the EV
Classic Senior Floating-Rate Fund, each such fund was awarded five stars by
Morningstar, Inc. Morningstar is an independent evaluator of public investment
companies and publishes proprietary ratings reflecting historical risk-adjusted
performance. Morningstar ratings are calculated from a fund's annual returns in
excess of the 90-day U.S. Treasury bill returns, with appropriate fee
adjustments and are further adjusted with a risk factor that reflects fund
performance below 90-day Treasury bill returns. Eaton Vance Prime Rate Reserves
and the EV Classic Senior Floating-Rate Fund are in the Morningstar Taxable Bond
Fund category, which includes 1,491 (for such three year period) and 940 (for
such five year period) other investment companies. A fund receives five stars if
its risk-adjusted performance is in the top 10% of its rating category. Although
these funds have substantially similar investment objectives and policies as the
Trust, certain investment policies and restrictions of Eaton Vance Prime Rate
Reserves and the EV Classic Senior Floating Rate Fund differ from those of the
Trust. For example, such funds have not employed financial leverage for
investment purposes and such funds have not invested in lower quality bonds with
fixed rates of interest. Moreover, such funds are continuously offered and
conduct quarterly tender offers so they have not been fully invested at all
times. The portfolio holdings and investment performance of such funds will
differ from those of the Trust. Past performance of such funds is not indicative
of the Trust's performance.
Under the general supervision of the Trust's Board of Trustees, the Adviser
will carry out the investment and reinvestment of the assets of the Trust, will
furnish continuously an investment program with respect to the Trust, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to the Trust investment
advice and office facilities, equipment and personnel for servicing the
investments of the Trust. The Adviser will compensate all Trustees and officers
of the Trust who are members of the Adviser's organization and who render
investment services to the Trust, and will also compensate all other Adviser
personnel who provide research and investment services to the Trust. In return
for these services, facilities and payments, the Trust has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of .85%
of the average weekly gross assets of the Trust. Gross assets of the Trust shall
be calculated by deducting accrued liabilities of the Trust not including the
principal amount of any indebtedness constituting financial leverage. The
Adviser has agreed to waive its investment advisory fee for the two-month period
following the date of this Prospectus.
Scott H. Page and Payson F. Swaffield are co-portfolio managers of the
Trust and are responsible for day-to-day management of the Trust's investments.
Mr. Page has been an employee of Eaton Vance since 1989 and Mr. Swaffield has
been an employee of Eaton Vance since 1990. Each has been a Vice President of
Eaton Vance since 1992 and has been involved in the management of Senior Loans
throughout his tenure at Eaton Vance. They currently co-manage Senior Debt
Portfolio (described above) with assets of approximately $5.8 billion.
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The Trust and the Adviser have adopted Codes of Ethics relating to personal
securities transactions. The Codes permit Adviser personnel to invest in
securities (including securities that may be purchased or held by the Trust) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
The Trust has engaged Eaton Vance to act as its administrator under an
Administration Agreement (the "Administration Agreement"). Under the
Administration Agreement, Eaton Vance is responsible for managing the business
affairs of the Trust, subject to the supervision of the Trust's Board of
Trustees. Eaton Vance will furnish to the Trust all office facilities, equipment
and personnel for administering the affairs of the Trust. Eaton Vance's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Trust's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing service
in connection with any repurchase offers and other administrative services
necessary to conduct the Trust's business. In return for these services,
facilities and payments, the Trust is authorized to pay Eaton Vance as
compensation under the Administration Agreement a fee in the amount of .25% of
the average weekly gross assets of the Trust. Eaton Vance has agreed to waive
its administration fee for the two-month period following the date of this
Prospectus.
DISTRIBUTIONS AND TAXES
The Trust intends to make monthly distributions of net investment income,
after payment of interest on any outstanding borrowings or dividends on any
outstanding preferred shares. The Trust will distribute annually any net
short-term capital gain and any net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss). Distributions to
Shareholders cannot be assured, and the amount of each monthly distribution is
likely to vary. Initial distributions to Shareholders are expected to be paid
approximately 60 days after the completion of this offering. While there are any
borrowings or preferred shares outstanding, the Trust may not be permitted to
declare any cash dividend or other distribution on its Shares in certain
circumstances. See "Description of Capital Structure."
Distributions of the Trust's investment company taxable income (consisting
generally of net investment income and net short-term capital gain) are taxable
to Shareholders as ordinary income, whether paid in cash or reinvested in
additional Shares. Distributions of the Trust's net capital gain ("capital gain
dividends"), if any, are taxable to Shareholders at the rates applicable to
long-term capital gains, regardless of the length of time Shares have been held
by Shareholders. Distributions, if any, in excess of the Trust's earnings and
profits will first reduce the adjusted tax basis of a holder's Shares and, after
such adjusted tax basis has been reduced to zero, will constitute capital gains
to such holder (assuming such Shares are held as a capital asset). See below for
a summary of the maximum tax rates applicable to capital gains (including
capital gain dividends).
The Trust will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The Trust's
distributions will not qualify for the dividends-received deduction for
corporations.
Selling Shareholders will generally recognize gain or loss in an amount
equal to the difference between their adjusted tax basis in the Shares and the
amount received. If such Shares are held as a capital asset, the gain or loss
will be a capital gain or loss. The maximum tax rate applicable to net capital
gains recognized by individuals and other non-corporate taxpayers is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. Any
loss recognized upon a taxable disposition of Shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such Shares. For purposes of determining
whether Shares have been held for six months or less, the holding period is
suspended for any periods during which the Shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any loss
realized on a sale or exchange of Shares will be disallowed to the extent those
Shares are replaced by other Shares within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the
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Shares (which could occur, for example, if the Shareholder is a participant in
the Plan (as defined below)). In that event, the basis of the replacement Shares
will be adjusted to reflect the disallowed loss.
An investor should be aware that if Shares are purchased in the open market
shortly before the record date for any dividend (including a capital gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce the
trading value of such Shares, in effect resulting in a taxable return of some of
the purchase price. Shareholders that are not liable for tax on their income and
whose Shares are not debt-financed are not required to pay tax on dividends they
receive from the Trust. Taxable distributions to individuals and certain other
non-corporate Shareholders, including those who have not provided their correct
taxpayer identification number and other required certifications, may be subject
to "backup" federal income tax withholding of 31%.
The foregoing briefly summarizes some of the important federal income tax
consequences to Shareholders of investing in Shares and does not address special
tax rules applicable to certain types of investors, such as corporate and
foreign investors, individual retirement accounts and other retirement plans.
There may be other federal, state, local or foreign tax considerations
applicable to a particular investor. Investors should consult their tax
advisers.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Trust's Dividend Reinvestment Plan (the "Plan"), unless a
Shareholder otherwise elects, all distributions of dividends (including all
capital gain dividends) will be automatically reinvested in Shares.
First Data Investor Services Group (the "Plan Agent") serves as agent for
the Shareholders in administering the Plan. Shareholders who elect not to
participate in the Plan will receive all distributions of dividends in cash paid
by check mailed directly to the Shareholder of record (or if the Shares are held
in street or other nominee name, then to the nominee) by First Data Investor
Services Group as disbursing agent. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without penalty by
written notice if received by the Plan Agent not less than ten days prior to any
dividend record date.
Shares will be acquired by the Plan Agent or an independent broker-dealer
for the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional previously authorized but
unissued Shares from the Trust ("newly issued shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per Share is equal to or less than the market price per Share plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued Shares on behalf of the participants. The number of newly issued Shares
to be credited to each participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per Share on the date the
Shares are issued, provided that the maximum discount from the then current
market price per Share on the date of issuance may not exceed 5%. If on the
dividend payment date the net asset value per Share is greater than the market
value plus estimated brokerage commissions (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent will have up to 30 days after the dividend payment date to invest the
dividend amount in Shares acquired in open-market purchases. If, before the Plan
Agent has completed its open-market purchases, the market price of a Share
exceeds the net asset value per Share, the average per Share purchase price paid
by the Plan Agent may exceed the net asset value of the Trust's Shares,
resulting in the acquisition of fewer Shares than if the dividend had been paid
in newly issued Shares on the dividend payment date. Therefore, the Plan
provides that if the Plan Agent is unable to invest the full dividend amount in
open-market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase period, the Plan Agent will cease
making open-market purchases and will invest the uninvested portion of the
dividend amount in newly issued Shares.
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The Plan Agent maintains all Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each Shareholder proxy will include those Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held pursuant
to the Plan in accordance with the instructions of the participants.
In the case of Shareholders such as banks, brokers or nominees that hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholder's name and held for the account of beneficial owners who
participate in the Plan.
There will be no brokerage charges with respect to Shares issued directly
by the Trust as a result of dividends payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in connection
with the reinvestment of dividends.
Shareholders participating in the Plan may receive benefits not available
to Shareholders not participating in the Plan. If the market price (plus
commissions) of the Trust's Shares is above their net asset value, participants
in the Plan will receive Shares of the Trust at less than they could otherwise
purchase them and will have Shares with a cash value greater than the value of
any cash distribution they would have received on their Shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the per Share value
of any cash distribution they would have received on their Shares. However,
there may be insufficient Shares available in the market to make distributions
in Shares at prices below the net asset value. Also, since the Trust does not
redeem its Shares, the price on resale may be more or less than the net asset
value.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Trust
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at P. O. Box 8030, Boston, MA 02266-8030. Please call 1-800-331-1710 between the
hours of 9:00 a.m. and 5:00 p.m. Eastern Standard Time if you have questions
regarding the Plan.
DESCRIPTION OF CAPITAL STRUCTURE
The Trust is an unincorporated business trust established under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
September 23, 1998 (the "Declaration of Trust"). The Declaration of Trust
provides that the Trustees of the Trust may authorize separate classes of shares
of beneficial interest. The Trustees have authorized an unlimited number of
Shares. The Declaration of Trust also authorizes the Trust to borrow money or
otherwise obtain credit and in this connection issue notes or other evidence of
indebtedness. The Trust intends to hold annual meetings of the holders of Shares
in compliance with the requirements of the New York Stock Exchange.
Shares. The Declaration of Trust permits the Trust to issue an unlimited
number of full and fractional Shares of beneficial interest, $0.01 par value per
Share. Each Share represents an equal proportionate interest in the assets of
the Trust with each other Share in the Trust. Holders of Shares will be entitled
to the payment of dividends when, as and if declared by the Board of Trustees.
The 1940 Act or the terms of any borrowings or preferred shares may limit the
payment of dividends to the holders of Shares. Each whole Share shall be
entitled to one vote as to matters on which it is entitled to vote pursuant to
the terms of the Declaration of Trust on file with the SEC. Upon liquidation of
the Trust, after paying or adequately providing for the payment of all
liabilities of the Trust and the liquidation preference with respect to any
outstanding preferred shares, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the Trustees
may distribute the remaining assets of the Trust among the holders of the
Shares. The Declaration of Trust provides that Shareholders are not liable for
any liabilities of the Trust,
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requires inclusion of a clause to that effect in every agreement entered into by
the Trust and indemnifies shareholders against any such liability. Although
shareholders of an unincorporated business trust established under Massachusetts
law, in certain limited circumstances, may be held personally liable for the
obligations of the trust as though they were general partners, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.
While there are any borrowings or preferred shares outstanding, the Trust
may not be permitted to declare any cash dividend or other distribution on its
Shares, unless at the time of such declaration, (i) all accrued dividends on
preferred shares or accrued interest on borrowings has been paid and (2) the
value of the Trust's total assets (determined after deducting the amount of such
dividend or other distribution), less all liabilities and indebtedness of the
Trust not represented by senior securities, is at least 300% of the aggregate
amount of such securities representing indebtedness and at least 200% of the
aggregate amount of securities representing indebtedness plus the aggregate
liquidation value of the outstanding preferred shares (expected to equal the
aggregate original purchase price of the outstanding preferred shares plus
redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, the Trust may be required to
comply with other asset coverage requirements as a condition of the Trust
obtaining a rating of the preferred shares from a Rating Agency or as a
condition to borrowing money. These requirements may include an asset coverage
test more stringent than under the 1940 Act. This limitation on the Trust's
ability to make distributions on its Shares could in certain circumstances
impair the ability of the Trust to maintain its qualification for taxation as a
regulated investment company. The Trust intends, however, to the extent possible
to purchase or redeem preferred shares or to repay borrowings from time to time
to maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the preferred shares in certain circumstances in
connection with any such impairment of the Trust's status as a regulated
investment company. See "Investment Objective, Policies and Risks" and
"Distributions and Taxes." Depending on the timing of any such redemption or
repayment, the Trust may be required to pay a premium in addition to the
liquidation preference of the preferred shares or the principal amount of the
borrowings to the holders thereof. See "--Borrowings" below.
The Trust has no present intention of offering additional Shares, except as
described herein. Other offerings of its Shares, if made, will require approval
of the Board of Trustees. Any additional offering will not be sold at a price
per Share below the then current net asset value (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
Shareholders or with the consent of a majority of the Trust's outstanding
Shares. The Shares have no preemptive rights.
The Trust generally will not issue Share certificates. However, upon
written request to the Trust's transfer agent, a share certificate will be
issued for any or all of the full Shares credited to an investor's account.
Share certificates which have been issued to an investor may be returned at any
time.
Repurchase Of Shares and Other Discount Corrective Measures. Because
shares of closed-end management investment companies frequently trade at a
discount to their net asset values, the Board of Trustees has determined that
from time to time it may be in the interest of Shareholders for the Trust to
take corrective actions. The Board of Trustees, in consultation with Eaton
Vance, will review at least annually the possibility of open market repurchases
and/or tender offers for the Shares and will consider such factors as the market
price of the Shares, the net asset value of the Shares, the liquidity of the
assets of the Trust, effect on the Trust's expenses, whether such transactions
would impair the Trust's status as a regulated investment company or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions which may have a material effect
on the Trust's ability to consummate such transactions. There are no assurances
that the Board of Trustees will, in fact, decide to undertake either of these
actions or if undertaken, that such actions will result in the Trust's Shares
trading at a price which is equal to or approximates their net asset value. In
recognition of the possibility that the Shares might trade at a discount to net
asset value and that any such discount may not be in the interest of
Shareholders, the Board of Trustees, in consultation with Eaton Vance, from time
to time may review possible actions to reduce any such discount.
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<PAGE> 26
Borrowings. The Declaration of Trust authorizes the Trust, without prior
approval of the Shareholders, to borrow money in an amount up to 33 1/3% of the
Trust's total assets (including the amount borrowed). In this regard, the Trust
may issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) and may secure any such borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust's assets. In connection with such
borrowing, the Trust may be required to maintain minimum average balances with
the lender or to pay a commitment or other fee to maintain a line of credit. Any
such requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Trust, immediately after any
such borrowings, must have an "asset coverage" of at least 300%. With respect to
any such borrowing, asset coverage means the ratio which the value of the total
assets of the Trust, less all liabilities and indebtedness not represented by
senior securities (as defined in the 1940 Act), bears to the aggregate amount of
such borrowing represented by senior securities by the Trust. Certain types of
borrowing may result in the Trust being subject to covenants in credit
agreements relating to asset coverages or portfolio composition or otherwise.
Such restrictions may be more stringent than those imposed by the 1940 Act. The
rights of lenders to the Trust to receive interest on and repayment of principal
of any such borrowings will be senior to those of the Shareholders, and the
terms of any such borrowings may contain provisions which limit certain
activities of the Trust, including the payment of dividends to Shareholders in
certain circumstances. Further, the terms of any such borrowing may and the 1940
Act does (in certain circumstances) grant to the lenders to the Trust certain
voting rights in the event of default in the payment of interest on or repayment
of principal. In the event that such provisions would impair the Trust's status
as a regulated investment company, the Trust, subject to its ability to
liquidate its relatively illiquid portfolio, intends to repay the borrowings.
Any borrowing will likely rank senior to or pari passu (on the same level as)
with all other existing and future borrowings of the Trust. See "Investment
Objective, Policies and Risks -- Use of Leverage and Related Risks." The Trust
may also borrow up to an additional 5% of its total assets for temporary
purposes, as permitted by the 1940 Act.
The Trust currently expects that it may enter into definitive agreements
with respect to a credit facility shortly after the closing of the offer and
sale of the Shares offered hereby. The Trust is currently in negotiations with a
limited number of large commercial banks to arrange a credit facility pursuant
to which the Trust expects to be entitled to borrow an amount equal to
approximately 33 1/3 of the Trust's total assets (inclusive of the amount
borrowed) as of the closing of the offer and sale of the Shares offered hereby.
Any such borrowings would constitute financial leverage. The terms of any
agreements relating to such a credit facility have not been determined and are
subject to definitive agreement and other conditions but the Trust anticipates
that such a credit facility would have terms substantially similar to the
following: (i) a final maturity not expected to exceed three years, subject to
possible extension by the Trust; (ii) with respect to each draw under the
facility, an interest rate equal to the lesser of LIBOR plus a stated premium or
an alternate rate on the outstanding amount of each such draw, reset over
periods ranging from one to six months; and (iii) payment by the Trust of
certain fees and expenses including an underwriting fee, a commitment fee on the
average undrawn amount of the facility, an ongoing administration fee and the
expenses of the lenders under the facility incurred in connection therewith. The
facility is not expected to be convertible into any other securities of the
Trust, outstanding amounts are expected to be prepayable by the Trust prior to
final maturity without significant penalty and there are not expected to be any
sinking fund or mandatory retirement provisions. Outstanding amounts would be
payable at maturity or such earlier times as required by the agreement. The
Trust may be required to prepay outstanding amounts under the facility or incur
a penalty rate of interest in the event of the occurrence of certain events of
default. The Trust expects to indemnify the lenders under the facility against
liabilities they may incur in connection with the facility. In addition the
Trust expects that such a credit facility would contain covenants which, among
other things, likely will limit the Trust's ability to pay dividends in certain
circumstances, incur additional debt, change its fundamental investment policies
and engage in certain transactions including mergers and consolidations, and may
require asset coverage ratios in addition to those required by the 1940 Act. The
Trust may be required to pledge its assets and to maintain a portion of its
assets in cash or high-grade securities as a reserve against interest or
principal payments and expenses. The Trust expects that any credit facility
would have customary covenant, negative covenant and default provisions. There
can be no assurance that the Trust will enter into an agreement for a credit
facility on terms and conditions representative of the foregoing, or that
additional
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<PAGE> 27
material terms will not apply. In addition, if entered into, any such credit
facility may in the future be replaced or refinanced by one or more credit
facilities having substantially different terms or by the issuance of preferred
shares or debt securities.
Preferred Shares. The Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest with preference rights,
including preferred shares (the "Preferred Shares"), having a par value of $0.01
per share, in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the
Shareholders.
Under the requirements of the 1940 Act, the Trust must, immediately after
the issuance of any Preferred Shares, have an "asset coverage" of at least 200%.
Asset coverage means the ratio which the value of the total assets of the Trust,
less all liability and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Trust, if any, plus the aggregate liquidation
preference of the Preferred Shares. If the Trust seeks a rating of the Preferred
Shares, asset coverage requirements, in addition to those set forth in the 1940
Act, may be imposed. The liquidation value of the Preferred Shares is expected
to equal their aggregate original purchase price plus redemption premium, if
any, together with any accrued and unpaid dividends thereon (on a cumulative
basis), whether or not earned or declared. The terms of the Preferred Shares,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board of Trustees (subject to
applicable law and the Trust's Declaration of Trust) if and when it authorizes
the Preferred Shares. The Trust may issue Preferred Shares that provide for the
periodic redetermination of the dividend rate at relatively short intervals
through an auction or remarketing procedure, although the terms of the Preferred
Shares may also enable the Trust to lengthen such intervals. At times, the
dividend rate as redetermined on the Trust's Preferred Shares may approach or
exceed the Trust's return after expenses on the investment of proceeds from the
Preferred Shares and the Trust's leverage structure would result in a lower rate
of return to Shareholders than if the Trust were not so structured. However, the
Trust believes that the floating rate nature of Senior Loans in which the Trust
invests helps mitigate against the risks of increased dividend costs as a result
of redetermined market rates adversely impacting the return to Shareholders.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Trust, the terms of any Preferred Shares may entitle the
holders of Preferred Shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative basis) before any distribution of assets
is made to holders of Shares. After payment of the full amount of the
liquidating distribution to which they are entitled, the Preferred Shareholders
would not be entitled to any further participation in any distribution of assets
by the Trust.
Anti-Takeover Provisions in the Declaration of Trust. The Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Trust or to change the
composition of its Board of Trustees, and could have the effect of depriving
Shareholders of an opportunity to sell their Shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Trust. These provisions may have the effect of discouraging attempts to
acquire control of the Trust, which attempts could have the effect of increasing
the expenses of the Trust and interfering with the normal operation of the
Trust. The Board of Trustees is divided into three classes, with the term of one
class expiring at each annual meeting of Shareholders. At each annual meeting,
one class of Trustees is elected to a three-year term. This provision could
delay for up to two years the replacement of a majority of the Board of
Trustees. A Trustee may be removed from office only for cause by a written
instrument signed by the remaining Trustees or by a vote of the holders of at
least two-thirds of the class of Shares of the Trust that elected such Trustee
and is entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the Trust,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly
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<PAGE> 28
and whether alone or together with its affiliates and associates, beneficially
owns 5% or more of the outstanding shares of any class of beneficial interest of
the Trust. The transactions subject to these special approval requirements are:
(i) the merger or consolidation of the Trust or any subsidiary of the Trust with
or into any Principal Shareholder; (ii) the issuance of any securities of the
Trust to any Principal Shareholder for cash; (iii) the sale, lease or exchange
of all or any substantial part of the assets of the Trust to any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); or (iv) the sale, lease or exchange to the Trust or any subsidiary
thereof, in exchange for securities of the Trust, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period).
The Board of Trustees has determined that provisions with respect to the
Board and the 75% voting requirements described above, which voting requirements
are greater than the minimum requirements under Massachusetts law or the 1940
Act, are in the best interest of Shareholders generally. Reference should be
made to the Declaration of Trust on file with the SEC for the full text of these
provisions.
Conversion to Open-End Fund. The Trust may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Trust's then outstanding Shares and preferred shares (if any), each voting
separately as a class, or (ii) more than 50% of the then outstanding Shares and
preferred shares (if any), voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Trust could not occur until 90 days after
the Shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all Shareholders. The composition of
the Trust's portfolio likely would prohibit the Trust from complying with
regulations of the SEC applicable to open-end investment companies. Accordingly,
conversion likely would require significant changes in the Trust's investment
policies and liquidation of a substantial portion of its relatively illiquid
portfolio. Conversion of the Trust to an open-end investment company also would
require the redemption of any outstanding Preferred Shares and could require the
repayment of borrowings, which would eliminate the leveraged capital structure
of the Trust with respect to the Shares. In the event of conversion, the Shares
would cease to be listed on the New York Stock Exchange or other national
securities exchange or market system. The Board of Trustees believes, however,
that the closed-end structure is desirable, given the Trust's investment
objective and policies. Investors should assume, therefore, that it is unlikely
that the Board of Trustees would vote to convert the Trust to an open-end
investment company. Shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
The Trust expects to pay all such redemption requests in cash, but intends to
reserve the right to pay redemption requests in a combination of cash or
securities. If such partial payment in securities were made, investors may incur
brokerage costs in converting such securities to cash. If the Trust were
converted to an open-end fund, it is likely that new Shares would be sold at net
asset value plus a sales load.
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<PAGE> 29
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York, A.G.
Edwards & Sons, Inc., One North Jefferson Avenue, St. Louis, Missouri,
Prudential Securities Incorporated, One New York Plaza, New York, New York, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, 60 South Sixth
Street, Minneapolis, Minnesota, Fahnestock & Co. Inc., 125 Broad Street, New
York, New York, First of Michigan Corporation, 300 River Place, Detroit,
Michigan, Gruntal & Co., L.L.C., One Liberty Plaza, New York, New York,
Interstate/Johnson Lane Corporation, 945 East Paces Ferry Road, Atlanta,
Georgia, Janney Montgomery Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania, Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland, McDonald & Company Securities, Inc., 800 Superior Avenue, Cleveland,
Ohio, and Wheat First Union, a division of Wheat First Securities, Inc., 901
East Byrd Street, Richmond, Virginia as their representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement with the Trust and Eaton Vance (the "Underwriting
Agreement"), to purchase from the Trust the number of Shares set forth opposite
their respective names. The Underwriters are committed to purchase all of such
Shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
PaineWebber Incorporated.................................... 1,782,500
A.G. Edwards & Sons, Inc. .................................. 1,782,500
Prudential Securities Incorporated.......................... 1,782,500
Dain Rauscher Wessels....................................... 1,782,500
Fahnestock & Co. Inc. ...................................... 1,782,500
First of Michigan Corporation............................... 1,782,500
Gruntal & Co., L.L.C. ...................................... 1,782,500
Interstate/Johnson Lane Corporation......................... 1,782,500
Janney Montgomery Scott Inc. ............................... 1,782,500
Legg Mason Wood Walker, Incorporated........................ 1,782,500
McDonald & Company Securities, Inc. ........................ 1,782,500
Wheat First Securities, Inc. ............................... 1,782,500
ABN AMRO Chicago Corporation................................ 350,000
Bear, Stearns & Co. Inc. ................................... 350,000
BT Alex. Brown Incorporated................................. 350,000
Chase Securities Inc. ...................................... 350,000
CIBC Oppenheimer Corp. ..................................... 350,000
Schroder & Co. Inc. ........................................ 350,000
SG Cowen Securities Corporation............................. 350,000
Advest, Inc. ............................................... 240,000
Robert W. Baird & Co. Incorporated.......................... 240,000
J.C. Bradford & Co. ........................................ 240,000
Crowell, Weedon & Co. ...................................... 240,000
Everen Securities, Inc. .................................... 240,000
Fifth Third/The Ohio Company................................ 240,000
First Albany Corporation.................................... 240,000
Fleet Securities, Inc. ..................................... 240,000
Gibraltar Securities Co. ................................... 240,000
Josephthal & Co. Inc. ...................................... 240,000
Morgan Keegan & Company, Inc. .............................. 240,000
Parker/Hunter Incorporated.................................. 240,000
Pennsylvania Merchant Group................................. 240,000
Piper Jaffray Inc. ......................................... 240,000
Ragen Mackenzie Incorporated................................ 240,000
Roney Capital Markets....................................... 240,000
Scott & Stringfellow, Inc. ................................. 240,000
Stephens Inc. .............................................. 240,000
Stifel, Nicolaus & Company, Incorporated.................... 240,000
Suntrust Equitable Securities Corporation................... 240,000
Sutro & Co. Incorporated.................................... 240,000
Tucker Anthony Incorporated................................. 240,000
C.E. Unterberg, Towbin...................................... 240,000
Van Kasper & Company........................................ 240,000
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Allen & Company of Florida Inc. ............................ 100,000
Ferris, Baker Watts, Inc. .................................. 100,000
First Southwest Company..................................... 100,000
J.B. Hanauer & Co. ......................................... 100,000
Johnston, Lemon & Co. Incorporated.......................... 100,000
JW Genesis Capital Markets, LLC............................. 100,000
Moors & Cabot, Inc. ........................................ 100,000
NatCity Investments, Inc. .................................. 100,000
David A. Noyes & Company.................................... 100,000
Paulson Investment Company, Incorporated.................... 100,000
Southwest Securities, Inc. ................................. 100,000
M.L. Stern & Co., Inc. ..................................... 100,000
TD Securities (USA) Inc. ................................... 100,000
Utendahl Capital Partners, L.P. ............................ 100,000
----------
Total............................................. 31,000,000
==========
</TABLE>
The Trust has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus to purchase up to an additional 4,650,000
Shares to cover over-allotments, if any, at the initial offering price. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Shares offered hereby. To the extent
that the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase an additional number
of Shares proportionate to such Underwriter's initial commitment.
As set forth in the notes to the table on the cover page of this
Prospectus, Eaton Vance or an affiliate (not the Trust) from its own assets has
agreed to pay a commission to the Underwriters in the amount of $0.45 per Share
(4.50% of the public offering price per Share) or an aggregate amount of
$13,950,000 ($16,042,500 assuming full exercise of the over-allotment option)
for all Shares covered by this Prospectus. Such payment will be the legal
obligation of Eaton Vance or an affiliate and made out of its own assets and
will not in any way represent an obligation of the Trust or its Shareholders.
The Representatives have advised the Trust that the Underwriters may pay up to
$0.30 per Share from such payment received from Eaton Vance to selected dealers
who sell the Shares and that the Underwriters and such dealers may reallow a
concession of up to $0.10 per Share to certain other dealers who sell Shares.
Eaton Vance (or an affiliate) has agreed to pay all offering expenses of the
Trust that exceed $0.02 per share. Offering expenses include $125,000 payment to
the Underwriters in partial reimbursement of their expenses.
Prior to this offering, there has been no public market for the Shares or
any other securities of the Trust. The Shares have been approved for listing on
the New York Stock Exchange under the symbol "EVF." In order to meet the
requirements for listing the Shares on the New York Stock Exchange, the
Underwriters have undertaken to sell lots of 100 or more Shares to a minimum of
2,000 beneficial holders. The minimum investment requirement is 100 Shares
($1,000).
The Trust and Eaton Vance have each agreed to indemnify the several
Underwriters for or to contribute to the losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Trust has agreed not to offer or sell any additional Shares of the
Trust, other than as contemplated by this Prospectus, for a period of 180 days
after the date of the Underwriting Agreement without the prior written consent
of the Underwriters.
The Representatives have informed the Trust that the Underwriters do not
intend to confirm sale to any accounts over which they exercise discretionary
authority.
The Underwriters may take certain actions to discourage short-term trading
of Shares during a period of time following the initial offering date. Included
in these actions is the withholding of the concession and other payments to
dealers in connection with Shares which were sold by such dealers and which are
repurchased for the account of the Underwriters during such period. In addition,
physical delivery of certificates representing Shares is required to transfer
ownership of Shares for a certain period. Until the distribution of Shares is
completed, rules of the SEC may limit the ability of the Underwriters and
certain selling group members to
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<PAGE> 31
bid for and purchase the Shares. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Shares. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Shares. If the
Underwriters create a short position in the Shares in connection with the
offering, i.e., if they sell more Shares than are set forth on the cover page of
this Prospectus, then the Underwriters may reduce that short position by
purchasing Shares in the open market. The Underwriters may also elect to reduce
any short position by exercising all or a part of the over-allotment option
described above. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases. In
addition, the Underwriters may impose "penalty bids" under contractual
arrangements with dealers participating in the offering whereby it may reclaim
the selling concession with respect to Shares distributed in the offering but
subsequently purchased for the account of the Underwriters in the open market.
Neither the Trust nor the Underwriters make any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the price of the Shares. In addition, neither the Trust nor
the Underwriters make any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Under the terms of and subject to the conditions of the Underwriting
Agreement, the Underwriters are committed to purchase and pay for all Shares
offered hereby if any are purchased. The Underwriting Agreement provides that it
may be terminated at or prior to the closing date for the purchase of the Shares
if, in the judgement of the Representatives, payment for the delivery of the
Shares is rendered impracticable or inadvisable because (1) trading in the
equity securities of the Trust is suspended by the SEC, by an exchange that
lists the Shares, or by the National Association of Securities Dealers Automated
Quotation National Market System ("NASDAQ"), (2) trading in securities generally
on the New York Stock Exchange or NASDAQ shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such exchange
or over-the-counter market, (3) additional material governmental restrictions,
not in force on the date of the Underwriting Agreement, have been imposed upon
trading in securities generally or trading in securities generally has been
suspended on any U.S. securities exchange, (4) a general banking moratorium has
been established by Federal or New York authorities, or (5) any material adverse
change in the financial or securities markets in the United States or in
political, financial or economic conditions in the United States or any outbreak
or material escalation of hostilities or other calamity or crisis occurs, the
effect of which is such as to make it impracticable to market any or all of the
Shares. The Underwriting Agreement also may be terminated if any of the
conditions specified in the Underwriting Agreement have not been fulfilled when
and as required by such agreement.
The Trust anticipates that the Representatives and certain other
Underwriters may from time to time act as brokers or dealers in connection with
the execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers while
they are Underwriters.
As described below under "Shareholder Servicing Agent, Custodian and
Transfer Agent," PaineWebber Incorporated will provide shareholder services to
the Trust pursuant to a Shareholder Servicing Agreement with Eaton Vance. Eaton
Vance will pay a monthly fee on an annual basis equal to .10% of the average
weekly gross assets of the Trust for such services.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
Pursuant to a Shareholder Servicing Agreement between PaineWebber
Incorporated (the "Shareholder Servicing Agent") and Eaton Vance, the
Shareholder Servicing Agent will (i) undertake to make public information
pertaining to the Trust on an ongoing basis and to communicate to investors and
prospective investors the Trust's features and benefits (including periodic
seminars or conference calls, responses to questions from current or prospective
shareholders and specific shareholder contact where appropriate); (ii) make
available to investors and prospective investors market price, net asset value,
yield and other information regarding the Trust, if reasonably obtainable, for
the purpose of maintaining the visibility of the Trust in the investor
community; (iii) at the request of Eaton Vance, provide certain economic
research and statistical information and reports, if reasonably obtainable, on
behalf of the Trust, and consult with representatives and Trustees of the Trust
in connection therewith, which information and reports shall include:
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<PAGE> 32
(a) statistical and financial market information with respect to the Trust's
market performance and (b) comparative information regarding the Trust and other
closed-end management investment companies with respect to (1) the net asset
value of their respective shares, (2) the respective market performance of the
Trust and such other companies and (3) other relevant performance indicators;
and (iv) at the request of Eaton Vance, provide information to and consult with
the Board of Trustees with respect to applicable modifications to dividend
policies or capital structure, repositioning or restructuring of the Trust,
conversion of the Trust to an open-end investment company, liquidation or
merger; provided, however, that under the terms of the Shareholder Servicing
Agreement, the Shareholder Servicing Agent is not obligated to render any
opinions, valuations or recommendations of any kind or to perform any such
similar services. For these services, Eaton Vance will pay the Shareholder
Servicing Agent a fee equal on an annual basis to .10% of the Trust's average
weekly gross assets, payable in arrears at the end of each calendar month. Under
the terms of the Shareholder Servicing Agreement, the Shareholder Servicing
Agent is relieved from liability to Eaton Vance for any act or omission in the
course of its performances under the Shareholder Servicing Agreement in the
absence of gross negligence or willful misconduct by the Shareholder Servicing
Agent. The Shareholder Servicing Agreement will continue for an initial term of
two years and thereafter for successive one-year periods unless terminated by
either party upon 60 days written notice.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA
02116 is the custodian of the Trust and will maintain custody of the securities
and cash of the Trust. IBT maintains the Trust's general ledger and computes net
asset value per share at least weekly. IBT also attends to details in connection
with the sale, exchange, substitution, transfer and other dealings with the
Trust's investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
First Data Investor Services Group, P.O. Box 5123, Westborough, MA
01581-5123 is the transfer agent and dividend disbursing agent of the Trust.
LEGAL OPINIONS
It is expected that certain legal matters in connection with the Shares
offered hereby will be passed upon for the Trust by Kirkpatrick & Lockhart LLP,
and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and its
affiliated entities.
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<PAGE> 33
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Trust
has filed with the SEC. The complete Registration Statement may be obtained from
the SEC upon payment of the fee prescribed by its rules and regulations. The
Statement of Additional Information can be obtained without charge by calling
1-800-225-6265.
Statements contained in this Prospectus as to the contents of any contract
or other documents referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, each such statement being qualified in all respects by such reference.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Additional Investment Information and Restrictions.......... B-2
Trustees and Officers....................................... B-6
Investment Advisory and Other Services...................... B-8
Determination of Net Asset Value............................ B-9
Portfolio Trading........................................... B-10
Taxes....................................................... B-11
Other Information........................................... B-12
Auditors.................................................... B-12
Independent Auditors Report................................. B-13
Statement of Assets and Liabilities......................... B-14
Appendix A: Ratings of Corporate Bonds...................... B-15
</TABLE>
31
<PAGE> 34
===============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST OR THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE TRUST
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER
THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 1
Trust Expenses.............................. 8
The Trust................................... 9
Use of Proceeds............................. 9
Investment Objective, Policies and Risks.... 9
Management of the Trust..................... 18
Distributions and Taxes..................... 20
Dividend Reinvestment Plan.................. 21
Description of Capital Structure............ 22
Underwriting................................ 27
Shareholder Servicing Agent, Custodian and
Transfer Agent............................ 29
Legal Opinions.............................. 30
Additional Information...................... 31
Table of Contents for the Statement of
Additional Information.................... 31
</TABLE>
------------------------
UNTIL NOVEMBER 21, 1998, ALL DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================
===============================================================
31,000,000 SHARES
EATON VANCE SENIOR
INCOME TRUST
[EATON VANCE LOGO]
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
FAHNESTOCK & CO. INC.
FIRST OF MICHIGAN CORPORATION
GRUNTAL & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
JANNEY MONTGOMERY SCOTT INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
WHEAT FIRST UNION
------------------------
OCTOBER 27, 1998
===============================================================
<PAGE> 35
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 27, 1998
EATON VANCE SENIOR INCOME TRUST
24 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(800) 225-6265
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Investment Information and Restrictions.......... B-2
Trustees and Officers....................................... B-6
Investment Advisory and Other Services...................... B-8
Determination of Net Asset Value............................ B-9
Portfolio Trading........................................... B-10
Taxes....................................................... B-11
Other Information........................................... B-12
Auditors.................................................... B-12
Independent Auditors Report................................. B-13
Statement of Assets and Liabilities......................... B-14
Appendix A: Ratings of Corporate Bonds...................... B-15
</TABLE>
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE SENIOR INCOME TRUST (THE "TRUST")
DATED OCTOBER 27, 1998, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED
HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE TRUST AT
1-800-225-6265.
<PAGE> 36
Capitalized terms used in this Statement of Additional Information and not
otherwise defined have the meanings given them in the Trust's Prospectus.
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
Lending Fees. In the process of buying, selling and holding Senior Loans
the Trust may receive and/or pay certain fees. These fees are in addition to
interest payments received and may include facility fees, commitment fees,
commissions and prepayment penalty fees. When the Trust buys a Senior Loan it
may receive a facility fee and when it sells a Senior Loan it may pay a facility
fee. On an ongoing basis, the Trust may receive a commitment fee based on the
undrawn portion of the underlying line of credit portion of a Senior Loan. In
certain circumstances, the Trust may receive a prepayment penalty fee upon the
prepayment of a Senior Loan by a Borrower. Other fees received by the Trust may
include covenant waiver fees and covenant modification fees.
Borrower Covenants. A Borrower must comply with various restrictive
covenants contained in a loan agreement or note purchase agreement between the
Borrower and the Lender or lending syndicate (the "Loan Agreement"). Such
covenants, in addition to requiring the scheduled payment of interest and
principal, may include restrictions on dividend payments and other distributions
to stockholders, provisions requiring the Borrower to maintain specific minimum
financial ratios, and limits on total debt. In addition, the Loan Agreement may
contain a covenant requiring the Borrower to prepay the Senior Loan with any
free cash flow. Free cash flow is generally defined as net cash flow after
scheduled debt service payments and permitted capital expenditures, and includes
the proceeds from asset dispositions or sales of securities. A breach of a
covenant which is not waived by the Agent, or by the lenders directly, as the
case may be, is normally an event of acceleration; i.e., the Agent, or the
lenders directly, as the case may be, has the right to call the outstanding
Senior Loan. The typical practice of an Agent or a Lender in relying exclusively
or primarily on reports from the Borrower may involve a risk of fraud by the
Borrower. In the case of a Senior Loan in the form of a Participation, the
agreement between the buyer and seller may limit the rights of the holder of a
Senior Loan to vote on certain changes which may be made to the Loan Agreement,
such as waiving a breach of a covenant. However, the holder of the Participation
will, in almost all cases, have the right to vote on certain fundamental issues
such as changes in principal amount, payment dates and interest rate.
Administration of Loans. In a typical Senior Loan, the Agent administers
the terms of the Loan Agreement. In such cases, the Agent is normally
responsible for the collection of principal and interest payments from the
Borrower and the apportionment of these payments to the credit of all
institutions which are parties to the Loan Agreement. The Trust will generally
rely upon the Agent or an intermediate participant to receive and forward to the
Trust its portion of the principal and interest payments on the Senior Loan.
Furthermore, unless under the terms of a Participation Agreement the Trust has
direct recourse against the Borrower, the Trust will rely on the Agent and the
other members of the lending syndicate to use appropriate credit remedies
against the Borrower. The Agent is typically responsible for monitoring
compliance with covenants contained in the Loan Agreement based upon reports
prepared by the Borrower. The seller of the Senior Loan usually does, but is
often not obligated to, notify holders of Senior Loans of any failures of
compliance. The Agent may monitor the value of the collateral and, if the value
of the collateral declines, may accelerate the Senior Loan, may give the
Borrower an opportunity to provide additional collateral or may seek other
protection for the benefit of the participants in the Senior Loan. The Agent is
compensated by the Borrower for providing these services under a Loan Agreement,
and such compensation may include special fees paid upon structuring and funding
the Senior Loan and other fees paid on a continuing basis. With respect to
Senior Loans for which the Agent does not perform such administrative and
enforcement functions, the Trust will perform such tasks on its own behalf,
although a collateral bank will typically hold any collateral on behalf of the
Trust and the other lenders pursuant to the applicable Loan Agreement.
A financial institution's appointment as Agent may usually be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan
B-2
<PAGE> 37
Agreement should remain available to holders of Senior Loans. However, if assets
held by the Agent for the benefit of the Trust were determined to be subject to
the claims of the Agent's general creditors, the Trust might incur certain costs
and delays in realizing payment on a Senior Loan, or suffer a loss of principal
and/or interest. In situations involving other intermediate participants similar
risks may arise.
Prepayments. Senior Loans usually require, in addition to scheduled
payments of interest and principal, the prepayment of the Senior Loan from free
cash flow, as defined above. The degree to which Borrowers prepay Senior Loans,
whether as a contractual requirement or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among lenders, among others. As such, prepayments cannot
be predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Trust derives interest income will be
reduced. However, the Trust may receive both a prepayment penalty fee from the
prepaying Borrower and a facility fee upon the purchase of a new Senior Loan
with the proceeds from the prepayment of the former. Prepayments generally will
not materially affect the Trust's performance because the Trust should be able
to reinvest prepayments in other Senior Loans that have similar or identical
yields and because receipt of such fees may mitigate any adverse impact on the
Trust's yield.
Other Information Regarding Senior Loans. From time to time, the Adviser
and its affiliates may borrow money from various banks in connection with their
business activities. Such banks may also sell Senior Loans to or acquire them
from the Trust or may be intermediate participants with respect to Senior Loans
in which the Trust owns interests. Such banks may also act as Agents for Senior
Loans held by the Trust.
The Trust may acquire interests in Senior Loans which are designed to
provide temporary or "bridge" financing to a Borrower pending the sale of
identified assets or the arrangement of longer-term loans or the issuance and
sale of debt obligations. The Trust may also invest in Senior Loans of Borrowers
who have obtained bridge loans from other parties. A Borrower's use of bridge
loans involves a risk that the Borrower may be unable to locate permanent
financing to replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Trust will be subject to the risk that
this stock will decline in value. Such a decline, whether as a result of
bankruptcy proceedings or otherwise, could cause the Senior Loan to be
undercollateralized or unsecured. In most credit agreements there is no formal
requirement to pledge additional collateral. In addition, the Trust may invest
in Senior Loans guaranteed by, or fully secured by assets of, shareholders or
owners, even if the Senior Loans are not otherwise collateralized by assets of
the Borrower; provided, however, that such guarantees are fully secured. There
may be temporary periods when the principal asset held by a Borrower is the
stock of a related company, which may not legally be pledged to secure a Senior
Loan. On occasions when such stock cannot be pledged, the Senior Loan will be
temporarily unsecured until the stock can be pledged or is exchanged for or
replaced by other assets, which will be pledged as security for the Senior Loan.
However, the Borrower's ability to dispose of such securities, other than in
connection with such pledge or replacement, will be strictly limited for the
protection of the holders of Senior Loans. During any such period in which the
Senior Loan is temporarily unsecured, such Senior Loans will not be treated as
secured Senior Loans for purposes of the Trust's policy of investing in normal
market conditions at least 80% of its total assets in such secured Senior Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Trust's security interest in the loan collateral or subordinate
the Trust's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Trust. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Borrower, but were instead paid to other persons (such as shareholders of the
Borrower) in an amount which left the Borrower insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Trust's security interest in
B-3
<PAGE> 38
loan collateral. If the Trust's security interest in loan collateral is
invalidated or the Senior Loan is subordinated to other debt of a Borrower in
bankruptcy or other proceedings, it is unlikely that the Trust would be able to
recover the full amount of the principal and interest due on the Loan.
Interest Rate Swaps. The Trust may enter into interest rate swaps on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities. For example, if the Trust holds a Senior
Loan with an interest rate that is reset only once each year, it may swap the
right to receive interest at this fixed rate for the right to receive interest
at a rate that is reset daily. Such a swap position would offset changes in the
value of the Senior Loan because of subsequent changes in interest rates. This
would protect the Trust from a decline in the value of the Senior Loan due to
rising interest rates, but would also limit its ability to benefit from falling
interest rates.
The Trust will enter into interest rate swaps only on a net basis, i.e.,
the two payment streams are netted out, with the Trust receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
transactions are entered into for good faith hedging and risk management
purposes and because a segregated account will be used, the Trust will not treat
them as being subject to the Trust's borrowing restrictions. The net amount of
the excess, if any, of the Trust's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Trust's custodian. The Trust will not enter into any interest rate swap unless
the credit quality of the unsecured senior debt or the claims-paying ability of
the other party thereto is considered to be investment grade by the Adviser. If
there is a default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Trust is contractually obligated to make or receive. Since interest rate swaps
are individually negotiated, the Trust expects to achieve an acceptable degree
of correlation between its rights to receive interest on Senior Loans and its
rights and obligations to receive and pay interest pursuant to interest rate
swaps.
Credit Derivatives. The Trust may engage in credit derivative
transactions. Default price risk derivatives are linked to the price of
reference securities or loans after a default by the issuer or borrower,
respectively. Market spread derivatives are based on the risk that changes in
market factors, such as credit spreads, can cause a decline in the value of a
security, loan or index. There are three basic transactional forms for credit
derivatives; swaps, options and structured instruments. The use of credit
derivatives is a highly specialized activity which involves strategies and risks
different from those associated with ordinary portfolio security transactions.
If the Adviser is incorrect in its forecasts of default risks, market spreads or
other applicable factors, the investment performance of the Trust would diminish
compared with what it would have been if these techniques were not used.
Moreover, even if the Adviser is correct in its forecasts, there is a risk that
a credit derivative position may correlate imperfectly with the price of the
asset or liability being hedged. Credit derivative transaction exposure will be
limited to 10% of the total assets of the Trust.
B-4
<PAGE> 39
Investment Restrictions. The following investment restrictions of the
Trust are designated as fundamental policies and as such cannot be changed
without the approval of the holders of a majority of the Trust's outstanding
voting securities, which as used in this Statement of Additional Information
means the lesser of (a) 67% of the shares of the Trust present or represented by
proxy at a meeting if the holders of more than 50% of the shares are present or
represented at the meeting or (b) more than 50% of the shares of the Trust. As a
matter of fundamental policy the Trust may not:
(1) Borrow money, except as permitted by the 1940 Act;
(2) Issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%, or (iii) the borrowings
permitted by investment restriction (1) above;
(3) Purchase securities on margin (but the Trust may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of loan interests, securities or other
investment assets with the proceeds of a permitted borrowing or securities
offering will not be deemed to be the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as
it may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Trust is
authorized to invest in accordance with its investment objective and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase any security if, as a result of such purchase, 25% or
more of the Trust's total assets (taken at current value) would be invested
in the securities of borrowers and other issuers having their principal
business activities in the same industry (the electric, gas, water and
telephone utility industries, commercial banks, thrift institutions and
finance companies being treated as separate industries for the purpose of
this restriction); provided that there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities;
(7) Purchase or sell real estate, although it may purchase and sell
securities which are secured by interests in real estate and securities of
issuers which invest or deal in real estate. The Trust reserves the freedom
of action to hold and to sell real estate acquired as a result of the
ownership of securities; or
(8) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices or
other financial instruments.
For the purpose of investment restriction (6), the Trust will consider all
relevant factors in determining who is the issuer of the loan interest,
including: the credit quality of the Borrower, the amount and quality of the
collateral, the terms of the Loan Agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of such
interpositioned person was deemed material to the decision to purchase the
Senior Loan, the interest rate environment, and general economic conditions
applicable to the Borrower and such interpositioned person.
The Trust has adopted the following nonfundamental investment policy which
may be changed by the Trustees without approval of the Trust's shareholders. As
a matter of nonfundamental policy, the Trust may not make short sales of
securities or maintain a short position, unless at all times when a short
position is open it either owns an equal amount of such securities or owns
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short.
Notwithstanding the investment policies and restrictions of the Trust, upon
Board of Trustee approval the Trust may invest its investable assets in one or
more other management investment companies to the extent permitted by the 1940
Act and rules thereunder.
B-5
<PAGE> 40
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Trust's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances will
not compel the Trust to dispose of such security or other asset. Notwithstanding
the foregoing, the Trust must always be in compliance with the borrowing
policies set forth above.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110. Those
Trustees who are "interested persons" of the Trust as defined in the 1940 Act by
virtue of their affiliation with Eaton Vance, BMR, EVC or EV, are indicated by
an asterisk(*).
JAMES B. HAWKES (57), PRESIDENT AND TRUSTEE* (1)
Chairman, President and Chief Executive Officer of Eaton Vance, BMR and their
corporate parent and trustee (EVC and EV). Director of EVC and EV. Trustee and
officer of various investment companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (67), TRUSTEE (1)
President of Dwight Partners, Inc. (a corporate relations and communications
company). Trustee of various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III (63), TRUSTEE (2)
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration. Trustee of Kobrick-Cendant
Investment Trust (mutual funds). Trustee of various investment companies managed
by Eaton Vance or BMR.
Address: 345 Nahatan Road, Westwood, Massachusetts 02090
NORTON H. REAMER (63), TRUSTEE (2)
Chairman of the Board and Chief Executive Officer, United Asset Management
Corporation (a holding company owning institutional investment management
firms); Chairman, President and Director of UAM Funds (mutual funds). Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (72), TRUSTEE (3)
Former Director of Fiduciary Company Incorporated. Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (68), TRUSTEE (3)
Investment Adviser and Consultant. Trustee of various investment companies
managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
SCOTT H. PAGE (38), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
B-6
<PAGE> 41
PAYSON F. SWAFFIELD (42), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
MICHAEL W. WEILHEIMER (37), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (53), TREASURER
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ALAN R. DYNNER (58), SECRETARY
Vice President and Chief Legal Officer of Eaton Vance, BMR, EVC and EV since
November 1, 1996. Previously, he was a Partner of the law firm of Kirkpatrick &
Lockhart LLP, New York and Washington, D.C., and was Executive Vice President of
Neuberger & Berman Management, Inc., a mutual fund management company. Officer
of various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (62), ASSISTANT TREASURER AND ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
A. JOHN MURPHY (35), ASSISTANT SECRETARY
Assistant Vice President of Eaton Vance and BMR. Officer of various investment
companies managed by Eaton Vance or BMR.
ERIC G. WOODBURY (41), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
- ---------------
(1) Class I Trustee whose term expires in 1999.
(2) Class II Trustee whose term expires in 2000.
(3) Class III Trustee whose term expires in 2001.
Messrs. Hayes (Chairman), Reamer and Thorndike are members of the Special
Committee of the Board of Trustees of the Trust. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Trust, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Trust or its shareholders.
The Nominating Committee of the Board of Trustees of the Trust is comprised
of four Trustees who are not "interested persons" as that term is defined under
the 1940 Act ("noninterested Trustees"). The Committee has four-year staggered
terms, with one member rotating off the Committee to be replaced by another
noninterested Trustee. The purpose of the Committee is to recommend to the Board
nominees for the position of noninterested Trustee and to assure that at least a
majority of the Board of Trustees is independent of Eaton Vance and its
affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust. The Audit Committee's functions include
making recommendations to the Trustees regarding the selection of the
independent certified public accountants, and reviewing matters relative to
trading and brokerage policies and practices, accounting and auditing practices
and procedures, accounting records,
B-7
<PAGE> 42
internal accounting controls, and the functions performed by the custodian,
transfer agent and dividend disbursing agent of the Trust.
Trustees of the Trust who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Trust in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Trust's assets, liabilities, and net income per share, and will not obligate the
Trust to retain the services of any Trustee or obligate the Trust to pay any
particular level of compensation to the Trustee. The Trust does not have a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Trust are paid
by the Trust. (The Trustees of the Trust who are members of the Eaton Vance
organization receive no compensation from the Trust.) During the year ended
December 31, 1997, the noninterested Trustees of the Trust earned the
compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex(1). It is estimated that the noninterested Trustees
will receive from the Trust the amounts set forth below for the fiscal year
ending June 30, 1999.
<TABLE>
<CAPTION>
ESTIMATED TOTAL COMPENSATION
COMPENSATION FROM TRUST AND
NAME FROM TRUST FUND COMPLEX
---- ------------ ------------------
<S> <C> <C>
Donald R. Dwight.................................... $2,190 $160,000(2)
Samuel L. Hayes, III................................ 2,280 170,000(3)
Norton H. Reamer.................................... 2,170 160,000
John L. Thorndike................................... 2,218 160,000(4)
Jack L. Treynor..................................... 2,441 170,000
</TABLE>
- ---------------
(1) As of January 1, 1998 the Eaton Vance fund complex consists of 159
registered investment companies or series thereof.
(2) Includes $60,000 of deferred compensation.
(3) Includes $42,500 of deferred compensation.
(4) Includes $117,524 of deferred compensation.
INVESTMENT ADVISORY AND OTHER SERVICES
Eaton Vance, its affiliates and its predecessor companies have been
managing assets of individuals and institutions since 1924 and of investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies. Eaton Vance and its affiliates act as
adviser to a family of mutual funds, and individual and various institutional
accounts, including corporations, hospitals, retirement plans, universities,
foundations and trusts.
The Trust will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Trust
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; expenses of reports to shareholders, proxy statements and
other expenses of shareholders' meetings; insurance premiums; printing and
mailing expenses;
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interest, taxes and corporate fees; legal and accounting expenses; compensation
and expenses of Trustees not affiliated with Eaton Vance; expenses of conducting
repurchase offers for the purpose of repurchasing Trust shares; and investment
advisory and administration fees. The Trust will also bear expenses incurred in
connection with any litigation in which the Trust is a party and any legal
obligation to indemnify its officers and Trustees with respect thereto, to the
extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect to February 28,
2000 and from year to year so long as such continuance is approved at least
annually (i) by the vote of a majority of the noninterested Trustees of the
Trust or of the Adviser cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the
Trust or by vote of a majority of the outstanding interests of the Trust. The
Trust's Administration Agreement continues in effect from year to year so long
as such continuance is approved at least annually by the vote of a majority of
the Trust's Trustees. Each agreement may be terminated at any time without
penalty on sixty (60) days' written notice by the Trustees of the Trust or Eaton
Vance, as applicable, or by vote of the majority of the outstanding shares of
the Trust. Each agreement will terminate automatically in the event of its
assignment. Each agreement provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Trust under such agreements on the part of Eaton Vance, Eaton Vance shall
not be liable to the Trust for any loss incurred, to the extent not covered by
insurance.
BMR and Eaton Vance are business trusts organized under Massachusetts law.
Eaton Vance, Inc. ("EV") serves as trustee of BMR and Eaton Vance. BMR, Eaton
Vance and EV are wholly-owned subsidiaries of Eaton Vance Corporation ("EVC"), a
Maryland corporation and publicly-held holding company. EVC through its
subsidiaries and affiliates engages primarily in investment management,
administration and marketing activities. The Directors of EVC are M. Dozier
Gardner, James B. Hawkes, Benjamin A. Rowland, Jr., John G.L. Cabot, John M.
Nelson, Vincent M. O'Reilly and Ralph Z. Sorenson. All of the issued and
outstanding shares of Eaton Vance are owned by EVC. All of the issued and
outstanding shares of BMR are owned by Eaton Vance. All shares of the
outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the
Voting Trustees of which are Messrs. Gardner, Hawkes, Rowland, and Alan R.
Dynner, Thomas E. Faust, Jr., William M. Steul and Wharton P. Whitaker. The
Voting Trustees have unrestricted voting rights for the election of Directors of
EVC. All of the outstanding voting trust receipts issued under said Voting Trust
are owned by certain of the officers of BMR and Eaton Vance who are also
officers, or officers and Directors of EVC and EV. As indicated under "Trustees
and Officers", all of the officers of the Trust (as well as Mr. Hawkes who is
also a Trustee) hold positions in the Eaton Vance organization.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Trust, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Trust and such banks.
DETERMINATION OF NET ASSET VALUE
The net asset value per Share of the Trust is determined no less frequently
than weekly, generally on the last day of the week that the New York Stock
Exchange (the "Exchange") is open for trading, as of the close of regular
trading on the Exchange (normally 4:00 p.m. New York time). The Trust's net
asset value per Share is determined by IBT, in the manner authorized by the
Trustees of the Trust. Net asset value is computed by dividing the value of the
Trust's total assets, less its liabilities by the number of shares outstanding.
Because Senior Loans are not currently actively traded in a public market,
the Adviser, following procedures established by the Trust's Trustees, will
value the Senior Loans held by the Trust at fair value. In valuing a Senior
Loan, Eaton Vance will consider relevant factors, data, and information,
including: (i) the characteristics of and fundamental analytical data relating
to the Senior Loan, including the cost, size, current interest rate, period
until next interest rate reset, maturity and base lending rate of the Senior
Loan, the terms and conditions of the Loan and any related agreements, and the
position of the Loan in the Borrower's debt structure; (ii) the nature, adequacy
and value of the collateral, including the Trust's rights, remedies and
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interests with respect to the collateral; (iii) the creditworthiness of the
Borrower, based on an evaluation of its financial condition, financial
statements and information about the Borrower's business, cash flows, capital
structure and future prospects; (iv) information relating to the market for the
Senior Loan, including price quotations (if considered reliable) for and trading
in the Senior Loan and interests in similar Loans and the market environment and
investor attitudes towards the Senior Loan and interests in similar Senior
Loans; (v) the reputation and financial condition of the Agent and any
intermediate participants in the Senior Loan; and (vi) general economic and
market conditions affecting the fair value of the loan interest. The Trustees
will monitor the market liquidity of Senior Loans and may require use of a
pricing service or mark-to-market procedures for some or all of such holdings in
the future.
Non-loan holdings (other than short term obligations, but including listed
issues) may be valued on the basis of prices furnished by one or more pricing
services which determine prices for normal, institutional-size trading units of
such securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. In certain circumstances, portfolio securities will be
valued at the last sale price on the exchange that is the primary market for
such securities, or the average of the last quoted bid price and asked price for
those securities for which the over-the- counter market is the primary market or
for listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.
Short-term obligations which mature in 60 days or less are valued at
amortized cost, if their original term to maturity when acquired by the Trust
was 60 days or less, or are valued at amortized cost using their value on the
61st day prior to maturity, if their original term to maturity when acquired by
the Trust was more than 60 days, unless in each case this is determined not to
represent fair value. Repurchase agreements will be valued by the Trust at cost
plus accrued interest. Securities for which there exist no price quotations or
valuations and all other assets are valued at fair value as determined in good
faith by or on behalf of the Trustees of the Trust.
PORTFOLIO TRADING
Specific decisions to purchase or sell securities for the Trust are made by
employees of the Adviser who are appointed and supervised by its senior
officers. Such employees may serve other clients of the Adviser in a similar
capacity. Changes in the Trust's investments are reviewed by the Board.
The Trust will acquire Senior Loans from major international banks,
selected domestic regional banks, insurance companies, finance companies and
other financial institutions. In selecting financial institutions from which
Senior Loans may be acquired, the Adviser will consider, among other factors,
the financial strength, professional ability, level of service and research
capability of the institution. While these financial institutions are generally
not required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with their sale by the Trust.
Other fixed-income obligations which may be purchased and sold by the Trust
are generally traded in the over-the-counter market on a net basis (i.e.,
without commission) through broker-dealers or banks acting for their own account
rather than as brokers, or otherwise involve transactions directly with the
issuers of such obligations. The Trust may also purchase fixed-income and other
securities from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters. While it is anticipated that the Trust will not
pay significant brokerage commissions, on occasion it may be necessary or
desirable to purchase or sell a security through a broker on an agency basis, in
which case the Trust will incur a brokerage commission. Although spreads or
commissions on portfolio transactions will, in the judgment of the Adviser, be
reasonable in relation to the value of the services provided, spreads or
commissions exceeding those which another firm might charge may be paid to firms
who were selected to execute transactions on behalf of the Trust and the
Adviser's other clients for providing brokerage and research services to the
Adviser.
The frequency of portfolio purchases and sales, known as the "turnover
rate," will vary from year to year, and is expected to be less than 100% per
annum.
Securities considered as investments for the Trust may also be appropriate
for other investment accounts managed by the Adviser or its affiliates. Whenever
decisions are made to buy or sell securities by the Trust and
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one or more of such other accounts simultaneously, the Adviser will allocate the
security transactions (including "hot" issues) in a manner which it believes to
be equitable under the circumstances. As a result of such allocations, there may
be instances where the Trust will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
the Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Trust from time to time, it is the opinion of the Trustees of the Trust that the
benefits from the Eaton Vance organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
TAXES
The following discussion is for general information purposes only.
Prospective investors should consult their tax advisors regarding the specific
federal income tax consequences of purchasing, holding and disposing of Shares,
as well as the effects of state, local and foreign tax laws and any proposed tax
law changes.
The Trust intends to qualify each year for treatment as a regulated
investment company ("RIC"), under the Internal Revenue Code of 1986, as amended
(the "Code"), in order to reduce or eliminate federal income tax. Accordingly,
the Trust intends to satisfy certain requirements relating to sources of its
income and diversification of its assets and to distribute a sufficient amount
of its investment company taxable income so as to effect such qualification.
Dividends and other distributions declared by the Trust in October,
November or December of any year and payable to Shareholders of record on a date
in any of those months will be deemed to have been paid by the Trust and
received by the Shareholders on December 31st of that year if the distributions
are paid by the Trust during January of the following year. Accordingly, those
distributions will be taxed to Shareholders for the year in which that December
31st falls.
To avoid a non-deductible 4% federal excise tax, the Trust must distribute
to its Shareholders by the end of each calendar year substantially all of its
ordinary income and capital gain net income, plus certain other amounts. Under
current law, provided that the Trust qualifies as a RIC, it should not be liable
for any income, corporate excise or franchise tax in the Commonwealth of
Massachusetts.
Income and gains from investments in securities of foreign issuers may be
subject to foreign income, withholding or other taxes, which may reduce the
Trust's yield and/or total return. Tax conventions between certain countries and
the United States may reduce or eliminate these foreign taxes. Shareholders will
not be able to claim any foreign tax credit or deduction with respect to these
foreign taxes.
Certain investments of the Trust may bear original issue discount or market
discount for tax purposes. The Trust will be required to include in income each
year a portion of such original issue discount and may elect to include in
income each year a portion of such market discount. In addition, the Trust may
be required to include in income each year, for federal income tax purposes,
income with respect to these or other investments even though the collectibility
by the Trust of cash payments corresponding to such income is doubtful. The
Trust may have to dispose of investments that it would otherwise have continued
to hold to provide cash to enable it to satisfy its distribution requirements
with respect to such income.
Some of the Trust's investment practices (including those involving certain
risk management transactions) may be subject to special provisions of the Code
that, among other things, may defer the Trust's deduction of certain losses and
affect the holding period of certain securities it holds and the character of
certain gains or losses it realizes. These provisions may also require the Trust
to recognize income or gain without receiving cash with which to make
distributions in the amounts necessary to satisfy the distribution requirements
for avoiding income and excise taxes. The Trust will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent its disqualification as a RIC.
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OTHER INFORMATION
The Trust is an organization of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, Shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
Shareholder liability in connection with the Trust property or the acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust property of any Shareholder held personally
liable for the claims and liabilities to which a Shareholder may become subject
by reason of being or having been a Shareholder. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself is unable to meet its obligations. The
Trust believes the risk of any Shareholder incurring any liability for the
obligations of the Trust is remote.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to the Trust or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. Voting rights are not cumulative, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees and, in such event, the holders of the remaining less
than 50% of the shares voting on the matter will not be able to elect any
Trustees.
The Declaration of Trust provides that no person shall serve as a Trustee
if shareholders holding two-thirds of the outstanding shares have removed him
from that office either by a written declaration filed with the Trust's
custodian or by votes cast at a meeting called for that purpose. The Declaration
of Trust further provides that the Trustees of the Trust shall promptly call a
meeting of the shareholders for the purpose of voting upon a question of removal
of any such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10 per centum of the outstanding shares.
The Trust's Prospectus and Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the SEC. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its Rules and Regulations.
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent accountants for the Trust, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the SEC.
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INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Senior Income Trust:
We have audited the accompanying statement of assets and liabilities of
Eaton Vance Senior Income Trust (the "Fund") as of October 23, 1998. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Eaton Vance
Senior Income Trust as of October 23, 1998, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 26, 1998
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<PAGE> 48
EATON VANCE SENIOR INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 23, 1998
<TABLE>
<S> <C>
ASSETS:
Cash................................................... $100,000
Deferred initial offering expenses..................... 400,000
Deferred organization expenses......................... 110,000
--------
Total assets........................................... $610,000
--------
LIABILITIES:
Organization expenses accrued.......................... $110,000
Initial offering expenses accrued...................... 400,000
--------
Total liabilities...................................... $510,000
--------
Net assets applicable to 10,000 common shares of beneficial
interest issued and outstanding........................... $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 10.00
========
</TABLE>
NOTE TO FINANCIAL STATEMENT
Eaton Vance Senior Income Trust was formed under a Declaration of Trust
dated September 23, 1998 and has been inactive since that date except for
matters relating to its organization and registration as an investment company
under the Investment Company Act of 1940 and the sale of 10,000 shares of its
beneficial interest to Eaton Vance Management, the Fund's administrator. The
deferred organization expenses are estimated to amount to $110,000. These
expenses will be deferred and amortized over the period from the commencement of
operations to June 30, 1999. The initial offering expenses, including federal
and state registration and qualification fees, will be deducted from net
proceeds, and will not exceed $0.02 per share, as Eaton Vance Management or an
affiliate will pay any such expenses in excess of $0.02 per share. The initial
offering expenses reflected above assume the initial sale of 20,000,000 shares.
The amount paid by the Fund on any repurchase during the amortization period of
any of the initial 10,000 common shares will be reduced by a pro rata portion of
any unamortized organization expenses. Such proration is to be calculated by
dividing the number of initial shares repurchased by the number of initial
shares outstanding at the time of purchase.
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APPENDIX A
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATING GROUP:
AAA -- Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative grade debt. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but presently
have the capacity to meeting interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC -- Bonds rated CCC have a current identifiable vulnerability to default
and are dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC -- The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC -- debt rating.
D -- Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
DESCRIPTION OF BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
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<PAGE> 50
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, therefore, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca present obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
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EATON VANCE SENIOR INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 27, 1998
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
24 Federal Street
Boston, MA 02110
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
First Data Investor Services Group
P.O. Box 5123
Westborough; MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
SITSAI
