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[LOGO OF EATON VANCE MUTUAL FUNDS APPEARS HERE
[PHOTO OF EDUCATION SIGN ON WALL APPEARS HERE]
Annual Report December 31, 1998
EATON VANCE
MUNICIPAL BOND
FUND
Eaton Vance
Global Management-Global Distribution
[PHOTO OF HIGHWAY APPEARS HERE]
[PHOTO OF SUSPENSION BRIDGE APPEARS HERE]
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Eaton Vance Municipal Bond Fund as of December 31, 1998
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Letter to Shareholders
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[PHOTO APPEARS HERE]
Eaton Vance Municipal Bond Fund, Class A, had a total return of 6.1% during the
period from inception on January 6, 1998 through December 31, 1998, the result
of a decline in NAV from $10.00 to $9.97, and the reinvestment of $0.522 in
dividends and $0.109 in capital gain distributions./1/
Class B shares had a total return of 4.0% for the period from inception on
January 14, 1998 through December 31, 1998, the result of a decline in NAV from
$10.00 to $9.88, and the reinvestment of $0.41 in dividends and $0.109 in
capital gain distributions./1/
Class I shares had a total return of 6.8% for the year ended December 31, 1998.
That return was the result of an increase in net asset value per share from
$10.84 on December 31, 1997 to $10.87 on December 31, 1998, and the reinvestment
of $0.576 in dividends and $0.109 in capital gain distributions./1/
Municipal bonds are now among the most undervalued asset classes...
As the year ended, municipal bonds represented one of the most undervalued asset
classes in the financial markets. Historically, municipal bond yields have
averaged around 85% of Treasury bond yields. However, in the flight to
Treasuries that characterized the bond market in late 1998, that ratio has been
skewed dramatically. At December 31, 1998, representative 30-year tax-exempt
bonds were yielding 5.1%, or 100% of 30-year Treasury yields! Considering their
tax-exemption, that is one of the true market anomalies of the decade. By any
measure of historical valuation, municipal bonds today represent a remarkable
bargain.
Taxes remain high, while tax reform is stalled in Congress...
The election year promises of tax cuts appear to have reached a roadblock in
Washington. Meanwhile, it is estimated that the average American worked until
May 10 to pay his or her taxes in 1998, according to the Tax Foundation. That
poses an enormous financial burden - and an increasing challenge for those who
may be simultaneously paying for college tuition, caring for elderly parents, or
trying to plan for their own retirement.
Amid low inflation and growing federal budget surpluses, we believe that the
outlook for bonds remains attractive. At their recent levels, municipal bonds
are especially attractive. Moreover, municipal bonds remain an excellent
fixed-income alternative - to diversify one's investment portfolio and to lower
one's tax burden.
Sincerely,
/s/ Thomas J. Fetter
- ----------------------
Thomas J. Fetter
President
February 9, 1999
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Fund Information
as of December 31, 1998
Performance/2/ Class A Class B Class I
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Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One Year N.A. N.A. 6.8%
Five Years N.A. N.A. 6.8
Ten Years N.A. N.A. 8.7
Life of Fund+ 6.1 4.0 7.9
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
- --------------------------------------------------------------------------------
One Year N.A. N.A. 6.8%
Five Years N.A. N.A. 6.8
Ten Years N.A. N.A. 8.7
Life of Fund+ 1.0 -0.9 7.9
+Inception dates: Class A: 1/6/98; Class B: 1/14/98; Class I: 3/16/78
Five Largest Sector Weightings/3/
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By total net assets
Escrowed - Prerefunded 20.0%
Hospital 6.9%
Insured - Hospital 6.5%
Education 5.9%
Industrial Development 5.6%
/1/ These returns do not include the 4.75% maximum sales charge for the Fund's
Class A shares or the applicable contingent deferred sales charge (CDSC) for
Class B shares. There is no sales charge for the Class I shares. /2/ Returns are
historical and are calculated by determining the percentage change in net asset
value with all distributions reinvested. SEC returns for Class A reflect the
maximum 4.75% sales charge. SEC returns for Class B reflect applicable CDSC
based on the following schedule: 5% - 1st and 2nd years; 4% - 3rd year; 3% - 4th
year; 2% - 5th year; 1% - 6th year. There is no sales charge for the Class I
shares. /3/ Five largest sector weightings account for 44.9% of the Portfolio's
investments, determined by dividing the total market value of the holdings by
the total investments of the Portfolio. Holdings are subject to change. *
Private insurance does not decrease the risk of loss of principal associated
with this investment.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
2
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Eaton Vance Municipal Bond Fund as of December 31, 1998
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Management Discussion
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[PHOTO APPEARS HERE]
Thomas J. Fetter
Portfolio Manager
An interview with Thomas J. Fetter, president and portfolio manager of Eaton
Vance Municipal Bond Fund.
Q: Tom, the bond markets were unusually volatile in 1998. What were the causes
of that volatility?
A: The fixed-income markets were extremely fragmented in 1998 and that created a
difficult environment for investors. While the Treasury market rallied
strongly, the non-Treasury market - including municipals - fared less well.
Because of concerns about global economic upheavals, investors focused
intently on quality, and, in the minds of many investors, that meant U.S.
Treasury bonds. Meanwhile, investors in non-government bonds were caught in
the turmoil of the global credit crisis, struggling Asian economies and the
Russian devaluation. Overall, it was a very challenging period for bond
investors.
Q: How did the municipal sector fare in comparison to other sectors?
A: The municipal market performed well, especially in light of the chaos in
other fixed-income areas. Municipals typically have been less volatile, a
characteristic most evident during this period. Many bonds are backed by the
good faith and credit of states and municipalities, which have benefited from
increased tax revenues in a fairly strong economy. And, that positive
performance occurred in a year when issuance of municipal bonds rose sharply,
to around $300 billion in 1998 from just $221 billion in 1997, according to
the Bond Market Association. Overall, it was a fairly good showing for the
municipal market.
Q: How would you evaluate the Fund's performance during the period?
A: The Fund again performed well relative to its peer group. The 6.8% one-year
total return for the Fund's Class I shares outperformed the Lipper General
Municipal Debt fund average, which had a total return of 5.3% for the same
period./1/ And the risk-adjusted performance of the Fund's Class I shares
earned it a Five-Star Overall Morningstar/TM/ Rating among 1,577 municipal
bond funds - a national monitor of mutual fund performance./2/
Q: How have you positioned the Fund in recent months?
A: Escrowed bonds were again the Fund's largest commitment. At December 31, they
represented 20.0% of the Fund's holdings. These are bonds that have been
pre-refunded by their issuers. Typically, these pre-refundings take place
during periods of declining interest rates, such as this past year. While the
issuer is able
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Portfolio Quality Weightings/3/
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[PIE CHART APPEARS HERE]
AAA 40.8%
AA 10.8%
A 13.8%
BBB 4.7%
BB 2.0%
Non-Rated 27.4%
Portfolio Overview/3/
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Number of Issues 96
Average Rating A+
Average Maturity 23.8 Yrs.
Effective Maturity 12.8 Yrs.
Average Call 10.9 Yrs.
Average Dollar Price $96.83
/1/ It is not possible to invest directly in an Index or Lipper category.
/2/ Morningstar ratings reflect historical risk-adjusted performance through
12/31/98 and are subject to change every month. Past performance is no guarantee
of future results. Funds are assigned ratings from 1 star (lowest) to 5 stars
(highest). Ratings are calculated from the funds' 3-,5-, and 10-year average
annual returns (with fee adjustment) in excess of 90-day Treasury bill returns,
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The top 10% of the funds in a category receive 5 stars. For the 3-year
period, the Fund was rated 5 stars (1,577 funds); for the 5-year period, 5 stars
(1,040 funds); and for the 10-year period, 5 stars (370 funds). /3/ Because the
Fund is actively managed, Portfolio Ratings and Portfolio Overview are subject
to change.
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Mutual fund shares are not insured by the FDIC and are not deposits or other
obligations of, or guaranteed by, any depository institution. Shares are subject
to investment risks, including possible loss of principal invested.
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3
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Eaton Vance Municipal Bond Fund as of December 31, 1998
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Management Discussion Cont'd
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to take advantage of lower rates, the outstanding bonds are backed by U.S.
Treasury bonds and consequently deemed to be of the very highest quality.
Investors' peace-of-mind is an important consideration and was especially so
in 1998, when many worried investors engaged in a so-called "flight to
quality."
Q: Hospital issues were also large holdings in the Fund. What did you find
attractive about that sector?
A: We've tried to focus our investments on those institutions that are
pioneering the ongoing industry changes. These may be facilities that have
been taken over by private hospital companies, or those that are the result
of a merger of equals, or facilities such as the Mayo Clinic in Minnesota,
which has a worldwide reputation in a number of health care specialties.
The industry is in the midst of a major restructuring. Changing demographics,
the need to achieve cost effectiveness, and continuing pressure from Medicare
reimbursement policies are all driving those changes. The Fund continued to
emphasize those institutions that we believe are likely to emerge on top.
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Your Investment at Work
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Massachusetts Health and Education [GRAPHIC OF GRADUATE HAT
Finance Authority APPEARS HERE]
Boston College
. Boston College is a Jesuit-run, coeducational college in Chestnut Hill. The
university maintains highly competitive admissions standards and in recent
years, has consistently been ranked among the nation's leading undergraduate
programs.
. These bonds were issued to finance the construction and renovation of
dormitories, classrooms and science office facilities.
. The bonds have a 4.75% coupon and provide excellent call protection. They
represent an investment in a well-regarded, AA-rated credit, a rarity in a
market increasingly dominated by insured bond issuance.
Q: Nursing homes and senior life care facilities are another offshoot of the
health care industry. What role did they play in your strategy?
A: We have increased our research commitment to the nursing home and life care
sectors in recent years, making them an Eaton Vance specialty. The long-term
facilities are playing a critical role in the health care revolution that I
mentioned earlier. Many families are facing the challenge of finding
complete, affordable, long-term care for aging relatives. Increasingly, these
long-term facilities represent an attractive alternative. They offer
individuals a wide range of health care options together with the
independence that many seniors crave. For investors, the life care sector has
been especially attractive. With the "spread compression" of recent years,
life care bonds have provided a very attractive yield advantage.
Typically, the bonds that finance senior care facilities are non-rated. While
they may carry very attractive coupons, the required credit analysis is very
intensive. At Eaton Vance, we apply our own internal standards, which are
especially rigorous. We have discovered good value in the life care sector
and produced excellent tax-free income for the Fund.
Q: You mentioned the "spread compression" in municipal bond yields. What exactly
does that mean?
A: The difference between yields for higher-quality and lower-quality bonds has
narrowed significantly in recent years. Whereas the coupon for a BBB-rated
hospital bond would have been 300 basis points (3%) higher than a AAA-rated
hospital bond a decade ago, the difference, or quality spread, is likely to
be only 25 to 50 basis points today.
That narrowing has resulted from the growing issuance of insured bonds to
reduce interest costs and from the tendency of investors to buy A and
AA-rated bonds when they appear. The result is that yield spreads have
declined to a historical low.
4
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Eaton Vance Municipal Bond Fund as of December 31, 1998
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Management Discussion Cont'd
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Q: You increased your exposure to education bonds. What did you emphasize in
that area?
A: The Fund's education bonds represented high-quality issuers and excellent
liquidity. The New York State Dormitory Authority is a prolific issuer that
provides funding for a wide range of educational facilities throughout New
York state. We were able to invest in a Dormitory Authority issue for
Columbia University, one of the nation's premier universities. The
Massachusetts Health and Education Finance Authority (HEFA) performs a
similar function in Massachusetts. The Fund has an investment in a HEFA issue
for Boston College, which was included in a recent survey by U.S. News and
World Report of the nation's leading undergraduate programs.
Q: Tom, what is your outlook for the municipal market in the coming year?
A: Even as the economy continues to generate fairly strong growth, inflation
appears under control. And barring a major shock, budget surpluses are
expected to rise. Therefore, the outlook for bonds in general is favorable,
and, with tax-exempt yields roughly equivalent to their Treasury
counterparts, I believe municipal bonds currently represent excellent value.
Following this volatile year and yet another 20%-plus performance for
equities, many investors may be over-weighted in equities. Now may be a good
time to re-allocate portfolios to include a larger bond weighting. Given
their recent ratios to Treasuries and their status as one of the few
remaining tax shelters, I believe that municipal bonds certainly merit strong
consideration in every investor's portfolio.
Comparison of Change in Value of a $10,000 Investment in
Eaton Vance Municipal Bond Fund, Class 1 vs. the Lehman
Brothers Municipal Bond Index
[LINE GRAPH APPEARS HERE]
Date Fund/NAV LBMBI
---- -------- -----
12/31/88 $10,000 $10,000
1/31/89 $10,129 $10,207
2/28/89 $10,056 $10,090
3/31/89 $10,039 $10,066
4/30/89 $10,341 $10,305
5/31/89 $10,553 $10,519
6/30/89 $10,709 $10,662
7/31/89 $10,796 $10,807
8/31/89 $10,673 $10,702
9/30/89 $10,632 $10,669
10/31/89 $10,803 $10,800
11/30/89 $10,987 $10,989
12/31/89 $11,065 $11,079
1/31/90 $10,927 $11,027
2/28/90 $11,054 $11,125
3/31/90 $11,072 $11,128
4/30/90 $10,882 $11,048
5/31/90 $11,221 $11,289
6/30/90 $11,338 $11,388
7/31/90 $11,544 $11,556
8/31/90 $11,237 $11,388
9/30/90 $11,268 $11,395
10/31/90 $11,427 $11,602
11/30/90 $11,766 $11,835
12/31/90 $11,836 $11,886
1/31/91 $11,998 $12,046
2/28/91 $12,082 $12,151
3/31/91 $12,089 $12,155
4/30/91 $12,267 $12,317
5/31/91 $12,389 $12,427
6/30/91 $12,353 $12,414
7/31/91 $12,557 $12,566
8/31/91 $12,763 $12,731
9/30/91 $12,942 $12,897
10/31/91 $13,068 $13,013
11/30/91 $13,112 $13,049
12/31/91 $13,433 $13,329
1/31/92 $13,408 $13,360
2/28/92 $13,412 $13,364
3/31/92 $13,429 $13,369
4/30/92 $13,545 $13,488
5/31/92 $13,776 $13,647
6/30/92 $14,037 $13,876
7/31/92 $14,485 $14,292
8/31/92 $14,245 $14,153
9/30/92 $14,307 $14,245
10/31/92 $14,006 $14,105
11/30/92 $14,420 $14,358
12/31/92 $14,630 $14,504
1/31/92 $14,797 $14,673
2/28/93 $15,351 $15,204
3/31/93 $15,206 $15,043
4/30/93 $15,391 $15,195
5/31/93 $15,516 $15,280
6/30/93 $15,807 $15,536
7/31/93 $15,809 $15,556
8/31/93 $16,134 $15,880
9/30/93 $16,398 $16,061
10/31/93 $16,432 $16,091
11/30/93 $16,247 $15,949
12/31/93 $16,608 $16,286
1/31/94 $16,798 $16,472
2/28/94 $16,326 $16,046
3/31/94 $15,488 $15,392
4/30/94 $15,539 $15,523
5/31/94 $15,733 $15,657
6/30/94 $15,622 $15,566
7/31/94 $15,899 $15,847
8/31/94 $15,998 $15,902
9/30/94 $15,706 $15,669
10/31/94 $15,395 $15,390
11/30/94 $15,000 $15,112
12/31/94 $15,401 $15,444
1/31/95 $15,937 $15,886
2/28/95 $16,443 $16,348
3/31/95 $16,546 $16,536
4/30/95 $16,565 $16,555
5/31/95 $17,045 $17,084
6/30/95 $16,841 $16,934
7/31/95 $16,913 $17,094
8/31/95 $17,054 $17,311
9/30/95 $17,127 $17,421
10/31/95 $17,480 $17,674
11/30/95 $17,834 $17,968
12/31/95 $18,085 $18,140
1/31/96 $18,194 $18,277
2/28/96 $18,105 $18,154
3/31/96 $17,817 $17,922
4/30/96 $17,745 $17,871
5/31/96 $17,763 $17,864
6/30/96 $17,872 $18,059
7/31/96 $18,074 $18,222
8/31/96 $18,056 $18,218
9/30/96 $18,371 $18,473
10/31/96 $18,650 $18,682
11/30/96 $19,006 $19,024
12/31/96 $18,949 $18,943
1/31/97 $19,025 $18,979
2/28/97 $19,196 $19,154
3/31/97 $18,948 $18,898
4/30/97 $19,121 $19,056
5/31/97 $19,410 $19,343
6/30/97 $19,875 $19,549
7/31/97 $20,693 $20,091
8/31/97 $20,420 $19,902
9/30/97 $20,774 $20,138
10/31/97 $21,070 $20,268
11/30/97 $21,190 $20,388
12/31/97 $21,626 $20,685
1/31/98 $21,884 $20,898
2/28/98 $21,953 $20,905
3/31/98 $22,033 $20,923
4/30/98 $21,907 $20,829
5/31/98 $22,251 $21,158
6/30/98 $22,328 $21,242
7/31/98 $22,347 $21,295
8/31/98 $22,758 $21,624
9/30/98 $23,063 $21,893
10/31/98 $22,917 $21,893
11/30/98 $23,038 $21,970
12/31/98 $23,086 $22,025
Performance** Class A Class B Class I
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Average Annual Total Returns (at net asset value)
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One Year N.A. N.A. 6.8%
Five Years N.A. N.A. 6.8
Ten Years N.A. N.A. 8.7
Life of Fund+ 6.1 4.0 7.9
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
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One Year N.A. N.A. 6.8%
Five Years N.A. N.A. 6.8
Ten Years N.A. N.A. 8.7
Life of Fund+ 1.0 -0.9 7.9
+Inception dates: Class A: 1/6/98; Class B: 1/14/98; Class I: 3/16/78
* Source: Towers Data Systems, Bethesda, MD.
The chart compares the Fund's total return with that of the Lehman Brothers
Municipal Bond Index, a broad-based, unmanaged market index of municipal
bonds. Returns are calculated by determining the percentage change in net
asset value (NAV) with all distributions reinvested. The lines on the chart
represent the total returns of $10,000 hypothetical investments in the Fund
and the Index. The Index's total return does not reflect commissions or
expenses that would have been incurred if an investor individually purchased
or sold the securities represented in the Index. It is not possible to invest
directly in an Index. An investment in the Fund's Class A shares on 1/31/98
at net asset value would have been worth $10,555 on December 31, 1998;
$10,053 including 4.75% sales charge. An investment in the Fund's Class B
shares on 1/31/98 at net asset value would have been worth $10,476 on
December 31, 1998; $9,979, including the Fund's applicable CDSC.
** Returns are calculated by determining the percentage change in net asset
value (NAV) with all distributions reinvested. SEC returns reflect applicable
sales charge as noted.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
5
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Eaton Vance Municipal Bond Fund as of December 31, 1998
PORTFOLIO OF INVESTMENTS
Tax-Exempt Investments -- 100.0%
Ratings (Unaudited) Principal
- ------------------- Amount
Standard (000's
Moody's & Poor's omitted) Security Value
- ---------------------------------------------------------------------------
Assisted Living -- 1.5%
- ---------------------------------------------------------------------------
NR NR $ 1,000 Bell County, TX, Health
Facilities, (Care
Institute, Inc., Texas),
9.00%, 11/1/24 $ 1,145,600
NR NR 1,000 St. Paul, MN, Housing and
Redevelopment, (Care
Institute,
Inc.-Highland), 8.75%,
11/1/24 1,155,740
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$ 2,301,340
- ---------------------------------------------------------------------------
Education -- 5.9%
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Aa3 AA- $ 2,500 Massachusetts HEFA,
(Boston College), 4.75%,
6/1/31 $ 2,341,200
Aaa AAA 1,500 New York State Dormitory
Authority, (Columbia
University), 5.00%, 7/1/22 1,482,630
A3 A- 3,250 New York State Dormitory
Authority, (State
University Educational
Facilities),
5.125%, 5/15/21(1) 3,228,419
A3 A- 1,500 New York State Dormitory
Authority, (State
University Educational
Facilities),
7.50%, 5/15/11 1,872,990
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$ 8,925,239
- ---------------------------------------------------------------------------
Electric Utilities -- 5.4%
- ---------------------------------------------------------------------------
Aa2 AA $ 1,000 Colorado Springs, CO,
Utility System, 6.75%,
11/15/21 $ 1,091,280
Ba3 B+ 1,000 Connecticut State
Development Authority,
Pollution Control
Revenue, (Connecticut
Light and Power), 5.85%,
9/1/28 1,006,570
Ba3 B+ 1,000 Connecticut State
Development Authority,
Pollution Control
Revenue, (Western
Massachusetts Electric
Co.), 5.85%, 9/1/28 1,004,680
NR NR 1,500 Long Island, NY, Power
Authority, (RITES),
Variable Rate, 12/1/29 1,595,835
Baa2 BBB+ 1,500 Massachusetts Municipal
Wholesale Electric Co.,
6.75%, 7/1/11 1,627,995
Aa1 AA 2,000 San Antonio, TX, Electric
and Natural Gas Revenue,
4.50%, 2/1/21 1,863,320
- ---------------------------------------------------------------------------
$ 8,189,680
- ---------------------------------------------------------------------------
Escrowed / Prerefunded -- 20.0%
- ---------------------------------------------------------------------------
Aaa NR $ 2,500 Boston City Hospital, MA,
FHA Insured, Prerefunded
to 8/15/00, 7.625%,
2/15/21 $ 2,712,000
Aaa NR 14,000 Dawson Ridge, CO,
Metropolitan District #1,
Escrowed to Maturity,
0.00%, 10/1/22 3,922,099
Aaa AAA 1,000 Fredericksburg, VA, IDA,
Hospital Facility,
(FGIC), "INFLOS",
Variable Rate, 8/15/23(2) 1,173,750
Aaa A 1,500 Indiana Transportation
Finance Authority,
Prerefunded to 11/1/02,
6.25%, 11/1/16 1,657,815
Aaa AAA 1,000 King County, WA, Public
Hospital District No. 1,
(AMBAC),
6.00%, 9/1/20 1,042,520
Aaa AAA 1,060 Loudoun County, VA, IDA,
(Falcons Landing),
Prerefunded to 11/1/04,
8.75%, 11/1/24 1,348,066
NR NR 1,000 Maricopa County, AZ, IDA,
(Place Five and The
Greenery), Escrowed to
Maturity, 8.625%, 1/1/11 1,319,780
Aaa NR 5,500 Massachusetts Turnpike
Authority, Escrowed to
Maturity,
5.00%, 1/1/20 5,633,539
Aaa AAA 655 New Hampshire HEFA,
(Riverwoods at Exeter),
Prerefunded to 3/1/03,
9.00%, 3/1/23 806,613
Aaa AAA 1,000 New Jersey EDA, (Keswick
Pines), Prerefunded to
1/1/04,
8.75%, 1/1/24 1,229,810
NR NR 1,500 New Jersey Sports and
Exposition Authority,
(Monmouth Park), 8.00%,
1/1/25 1,834,140
Aaa AAA 665 North Carolina Eastern
Municipal Power, Escrowed
to Maturity, 6.50%, 1/1/18 806,293
Aaa AAA 1,000 Rhode Island HEFA, (Rhode
Island Hospital),
(FGIC),"INFLOS", Variable
Rate, 8/15/21(2) 1,186,250
Aaa AAA 2,500 San Joaquin Hills
Transportation Corridor
Agency, CA, Toll Road
Bonds, Escrowed to
Maturity, 0.00%, 1/1/14 1,227,275
Aaa AAA 10,000 San Joaquin Hills
Transportation Corridor
Agency, CA, Toll Road
Bonds, Escrowed to
Maturity, 0.00%, 1/1/25 2,710,900
Aaa NR 6,000 Savannah, GA, EDA,
Escrowed to Maturity,
0.00%, 12/1/21 1,730,400
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$ 30,341,250
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See notes to financial statements
6
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Eaton Vance Municipal Bond Fund as of December 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Ratings (Unaudited) Principal
- ------------------- Amount
Standard (000's
Moody's & Poor's omitted) Security Value
- ---------------------------------------------------------------------------
General Obligations -- 3.6%
- ---------------------------------------------------------------------------
A3 A- $ 8,000 New York City, NY,
0.00%, 8/1/07 $ 5,423,599
- ---------------------------------------------------------------------------
$ 5,423,599
- ---------------------------------------------------------------------------
Hospital -- 6.9%
- ---------------------------------------------------------------------------
NR NR $ 1,500 Forsyth County, GA,
Hospital Authority
Revenue, (Georgia Baptist
Health Care System), $ 1,485,000
6.375%, 10/1/28
Aa3 AA 1,500 Greenville, SC, Hospital
System, 5.25%, 5/1/23 1,502,625
Baa BBB- 750 Illinois Health
Facilities Authority,
(Proctor Community
Hospital), 7.375%, 1/1/23 795,323
NR BBB 1,945 Louisiana Public
Facilities Authority,
(General Health Systems),
6.80%, 11/1/16 2,155,041
Caa3 NR 215 Prince George's County,
MD, (Greater Southeast
Healthcare System),
6.20%, 1/1/08 124,700
Caa3 NR 910 Prince George's County,
MD, (Greater Southeast
Healthcare System),
6.375%, 1/1/23 527,800
NR AA+ 2,270 Rochester, MN, Health
Care Facilities Revenue,
(Mayo Clinic), 5.50%,
11/15/27 2,377,802
NR NR 1,500 San Benito, CA, Health
Care District, 5.40%,
10/1/20 1,459,650
- ---------------------------------------------------------------------------
$ 10,427,941
- ---------------------------------------------------------------------------
Housing -- 3.7%
- ---------------------------------------------------------------------------
NR NR $ 1,000 Florence, KY, Housing
Facilities, (Blue Grass
Housing),
7.625%, 5/1/27 $ 1,238,250
NR NR 1,500 Lake Creek, CO,
(Affordable Housing
Corp.), Multifamily,
6.25%, 12/1/23 1,522,620
NR NR 1,000 Maricopa County, AZ, IDA,
(National Health
Facilities II), 6.375%,
1/1/19 1,013,010
NR A 1,650 Travis County, TX, HFC,
(Travis Station
Apartments),
6.75%, 4/1/19/(1)/ 1,759,791
- ---------------------------------------------------------------------------
$ 5,533,671
- ---------------------------------------------------------------------------
Industrial Development Revenue -- 5.6%
- ---------------------------------------------------------------------------
NR NR $ 775 Florence County, SC,
(Stone Container Co.),
7.375%, 2/1/07 $ 827,809
NR NR 1,000 Iowa Finance Authority,
(Southbridge Mall),
6.375%, 12/1/13 1,025,740
NR NR 1,750 New Jersey EDA, (Holt
Hauling), 7.75%, 3/1/27 1,957,043
NR BBB- 2,450 Port Camas-Washougan, WA,
(James River), 6.70%,
4/1/23 2,606,678
Aa1 AA+ 2,010 Valdez, AK Marine
Terminal, (BP Pipelines,
Inc.), (LOC: British
Petroleum America, Inc.),
5.85%, 8/1/25 2,089,315
- ---------------------------------------------------------------------------
$ 8,506,585
- ---------------------------------------------------------------------------
Insured-Electric Utilities -- 0.6%
- ---------------------------------------------------------------------------
Aaa AAA $ 800 Puerto Rico Electric
Power Authority,
"STRIPES", (FSA),
Variable Rate, 7/1/03/(2)/ 921,000
- ---------------------------------------------------------------------------
921,000
- ---------------------------------------------------------------------------
Insured-Hospital -- 6.5%
- ---------------------------------------------------------------------------
Aaa AAA $ 1,000 Illinois HFA,
(Rush-Presbyterian -
St. Lukes Medical
Center), (MBIA),
"INFLOS",Variable
Rate, 10/1/24/(2)/ 1,190,000
Aaa NR 1,000 Kalamazoo, MI, HFA,
(MBIA), 5.50%, 5/15/28 1,045,960
Aaa AAA 1,500 Maryland HEFA
(Medlantic/Helix)
(AMBAC), 4.75%, 8/15/28 1,434,480
Aaa AAA 3,000 Massachusetts HEFA,
(Caregroup), (MBIA),
5.00%, 7/1/18 2,992,590
Aaa NR 2,000 Medina County, OH,
Hospital Revenue, (Medina
Hospital), (AMBAC),
5.00%, 2/1/16 1,994,280
Aaa AAA 1,000 Salt Lake City, UT, (IHC
Hospitals, Inc.),
"INFLOS", (AMBAC),
Variable Rate, 5/15/20/(2)/ 1,168,750
- ---------------------------------------------------------------------------
$ 9,826,060
- ---------------------------------------------------------------------------
See notes to financial statements
7
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Ratings (Unaudited) Principal
- ------------------- Amount
Standard (000's
Moody's & Poor's omitted) Security Value
- ---------------------------------------------------------------------------
Insured-Housing -- 1.5%
- ---------------------------------------------------------------------------
Aaa AAA $ 1,000 SCA MFMR Receipts,
Burnsville, MN, (FSA),
7.10%, 1/1/30 $ 1,113,030
Aaa AAA 1,000 SCA MFMR Receipts,
Springfield, MO, (FSA),
7.10%, 1/1/30 1,113,030
- ---------------------------------------------------------------------------
$ 2,226,060
- ---------------------------------------------------------------------------
Insured-Special Tax Revenue -- 1.0%
- ---------------------------------------------------------------------------
Aaa AAA $ 1,500 Tampa, FL, Sports
Authority, (MBIA), 5.25%,
1/1/17 $ 1,551,300
- ---------------------------------------------------------------------------
$ 1,551,300
- ---------------------------------------------------------------------------
Insured-Transportation -- 5.0%
- ---------------------------------------------------------------------------
Aaa AAA $ 1,500 Central Puget Sound, WA,
Transportation Authority
(FGIC), 4.75%, 2/1/28(3) $ 1,421,880
Aaa AAA 1,000 Chicago Illinois Midway
Airport Revenue, (MBIA),
5.00%, 1/1/28 976,800
Aaa AAA 2,000 Columbus Municipal
Airport Authority, OH,
(AMBAC),
5.00%, 1/1/28 1,977,360
Aaa AAA 2,000 Orlando and Orange County
Expressway Authority,
(Florida Expressway),
(FGIC),
5.00%, 7/1/28 1,992,360
Aaa AAA 1,000 Triborough Bridge and
Tunnel Authority of New
York,
"RITES", (AMBAC),
Variable
Rate, 1/1/12(2)(4) 1,151,060
- ---------------------------------------------------------------------------
$ 7,519,460
- ---------------------------------------------------------------------------
Insured-Utilities -- 4.2%
- ---------------------------------------------------------------------------
Aaa AAA $ 1,000 Madison County Suburban
Utility District, (MBIA),
5.00%, 2/1/19 $ 996,820
Aaa AAA 15,000 New York, NY, City
Municipal Water Finance
Authority, (MBIA), 0.00%,
6/15/19 5,397,149
- ---------------------------------------------------------------------------
$ 6,393,969
- ---------------------------------------------------------------------------
Insured-Water and Sewer -- 3.1%
- ---------------------------------------------------------------------------
Aaa NR $ 1,500 Fairmont, WV, Waterworks
Revenue (AMBAC),
4.50%, 7/1/24(3) $ 1,383,435
Aaa AAA 1,500 Honolulu, HI, City and
County Waterworks System
Revenue (FGIC), 4.50%,
7/1/28 1,370,940
Aaa AAA 2,000 Pittsburgh, PA, Water and
Sewer Authority, (FSA),
5.00%, 9/1/19 1,990,940
- ---------------------------------------------------------------------------
$ 4,745,315
- ---------------------------------------------------------------------------
Lease Revenue/
Certificates of Participation -- 1.4%
- ---------------------------------------------------------------------------
NR NR $ 1,000 Hardeman County, TN,
(Correctional Facilities
Corp.), 7.75%, 8/1/17 $ 1,122,790
A1 NR 1,000 Kenton County, KY,
(Public Properties
Corp.),
5.00%, 3/1/29 976,340
- ---------------------------------------------------------------------------
$ 2,099,130
- ---------------------------------------------------------------------------
Miscellaneous -- 3.8%
- ---------------------------------------------------------------------------
NR BB- $ 1,000 New Hampshire State
Business Finance
Authority,
7.75%, 1/1/22 $ 1,016,500
NR NR 500 San Juan, NM, Pueblo
Development Authority,
7.00%, 10/15/06 493,050
NR NR 1,000 Santa Fe, NM, (Crow
Hobbs), 8.50%, 9/1/16 1,115,400
NR NR 2,500 Tax Revenue Exempt
Securities Trust,
Community Health
Provider, (Pooled Loan
Program Various States
Trust Certificates),
5.50%, 12/1/36 2,491,950
NR NR 595 Tax Revenue Exempt
Securities Trust,
Community Health
Provider, (Pooled Loan
Program Various States
Trust Certificates),
6.00%, 12/1/36 608,587
- ---------------------------------------------------------------------------
$ 5,725,487
- ---------------------------------------------------------------------------
Nursing Home -- 5.3%
- ---------------------------------------------------------------------------
NR NR $ 1,440 Bell County, TX,
(Riverside Healthcare,
Inc. - Normandy Terrace),
9.00%, 4/1/23 $ 1,749,298
NR NR 990 Clovis, NM, IDR,
(Retirement Ranches,
Inc.), 7.75%, 4/1/19 1,093,336
See notes to financial statements
8
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Ratings (Unaudited)
- ------------------- Principal
Amount
Standard (000's
Moody's & Poor's omitted) Security Value
- ---------------------------------------------------------------------------
Nursing Home (continued)
- ---------------------------------------------------------------------------
NR NR $ 305 Covington-Allegheny
County, VA, IDA, (Beverly
Enterprises), 9.375%,
9/1/01(1) $ 323,453
NR NR 1,290 Grove City, PA, Area
Hospital
HFA, (Grove Manor),
6.625%, 8/15/29 1,290,903
NR NR 1,100 Massachusetts IFA, (Age
Institute of
Massachusetts),
8.05%, 11/1/25 1,239,755
NR NR 1,265 Montgomery, PA, IDA,
(Advancement of Geriatric
Health Care Institute),
8.375%, 7/1/23 1,367,946
NR AA+ 325 Okaloosa County, FL,
(Beverly Enterprises),
10.75%, 10/1/03 332,755
NR NR 680 Tarrant County Health
Facilities, TX, 10.25%,
9/1/19(1) 713,000
- ---------------------------------------------------------------------------
$ 8,110,446
- ---------------------------------------------------------------------------
Senior Living / Life Care -- 5.2%
- ---------------------------------------------------------------------------
NR NR $ 1,255 Albuquerque, NM,
Retirement Facility
Revenue,
5.75%, 12/15/28 $ 1,249,629
NR NR 1,500 Albuquerque, NM,
Retirement Facility
Revenue,
6.60%, 12/15/28 1,494,105
NR NR 1,000 Colorado HFA, Revenue
Refunding and
Improvement,
(Volunteers), 5.875%,
7/1/28 1,000,000
NR NR 1,500 Kansas City, MO, IDA,
Retirement Facility
Revenue, (Kingswood),
5.875%, 11/15/29 1,470,570
NR NR 1,500 North Miami, FL, HFA,
(Imperial Club), 6.75%,
1/1/33 1,500,135
NR NR 1,000 Vermont IDA, (Wake Robin
Corp.), 8.75%, 4/1/23 1,125,350
- ---------------------------------------------------------------------------
$ 7,839,789
- ---------------------------------------------------------------------------
Special Tax Revenue -- 3.4%
- ---------------------------------------------------------------------------
NR NR $ 1,000 Fontana, CA, 6.375%,
9/1/17 $ 999,950
NR NR 1,500 Frederick County, MD,
Special Obligation,
Urbana Community
Development Authority,
6.625%, 7/1/25 1,515,810
Aa3 AA- 2,500 Michigan State Trunk
Line,
5.50%, 11/1/18 2,697,700
- ---------------------------------------------------------------------------
$ 5,213,460
- ---------------------------------------------------------------------------
Transportation -- 4.9%
- ---------------------------------------------------------------------------
A1 A $ 758 Indiana Transportation
Finance Authority, 6.25%,
11/1/16 $ 822,688
Aa2 NR 1,000 New Jersey State
Transportation Trust
Fund, Variable
Rate, 6/15/17(2) 1,014,510
A1 AA- 1,000 Port Authority of New
York and New Jersey,
5.375%, 3/1/28 1,075,200
Baa1 A 2,000 Puerto Rico Highway and
Transportation Authority,
4.75%, 7/1/38 1,899,400
Baa1 A 2,500 Puerto Rico Highway and
Transportation Authority,
5.50%, 7/1/36(1) 2,661,250
- ---------------------------------------------------------------------------
$ 7,473,048
- ---------------------------------------------------------------------------
Water and Sewer -- 1.5%
- ---------------------------------------------------------------------------
A1 A+ $ 2,375 Richmond, VA, Public
Utility Revenue, 5.125%,
1/15/28 $ 2,346,643
- ---------------------------------------------------------------------------
$ 2,346,643
- ---------------------------------------------------------------------------
Total Tax-Exempt Investments -- 100.0%
(identified cost $140,245,270) $ 151,640,472
- ---------------------------------------------------------------------------
At December 31, 1998, the concentration of the Fund's investments in the
various states, determined as a percentage of total investments, is as
follows:
New York 13.3%
Massachusetts 10.9%
Others, representing less 75.8%
than 10% individually
The Fund invests primarily in debt securities issued by municipalities. The
ability of the issuers of the debt securities to meet their obligations may be
affected by economic developments in a specific industry or municipality. In
order to reduce the risk associated with such economic developments, at December
31, 1998, 24.1% of the securities in the portfolio of investments are backed by
bond insurance of various financial institutions and financial guaranty
insurance agencies. The aggregate percentages by financial institution range
from 3.4% to 9.3% of total investments.
(1) Security (or a portion thereof) has been segregated to cover when-issued
securities.
(2) Security has been issued as an inverse floater bond.
(3) When-issued security.
(4) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. It is the
Portfolio's intention to hold the security until maturity. At December 31,
1998, the value of these securities amounted to $1,151,060 or 0.8% of the
Portfolio's net assets.
See notes to financial statements
9
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of December 31, 1998
Assets
- ---------------------------------------------------------------------------
Investments, at value (identified cost, $140,245,270) $151,640,472
Cash 139
Receivable for Fund shares sold 472,663
Interest receivable 2,222,605
- ---------------------------------------------------------------------------
Total assets $154,335,879
- ---------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------
Payable for investments purchased $ 2,394,158
Payable for when-issued securities 2,821,385
Demand note payable 441,000
Dividends payable 351,211
Payable for Fund shares redeemed 100,796
Payable to affiliate for Trustees' fees 2,493
Other accrued expenses 40,607
- ---------------------------------------------------------------------------
Total liabilities $ 6,151,650
- ---------------------------------------------------------------------------
Net Assets $148,184,229
- ---------------------------------------------------------------------------
Sources of Net Assets
- ---------------------------------------------------------------------------
Paid-in capital $136,896,917
Accumulated net realized loss (computed on the basis of
identified cost) (107,890)
Net unrealized appreciation (computed on the basis of
identified cost) 11,395,202
- ---------------------------------------------------------------------------
Total $148,184,229
- ---------------------------------------------------------------------------
Class A Shares
- ---------------------------------------------------------------------------
Net Assets $ 32,352,021
Shares Outstanding 3,243,848
Net Asset Value and Redemption Price Per Share
(net assets / shares of beneficial interest $ 9.97
outstanding)
Maximum Offering Price Per Share
(100 / 95.25 of $9.97) $ 10.47
- ---------------------------------------------------------------------------
Class B Shares
- ---------------------------------------------------------------------------
Net Assets $ 10,008,093
Shares Outstanding 1,012,932
Net Asset Value, Offering Price and Redemption Price
Per Share (net assets / shares of beneficial
interest outstanding) $ 9.88
- ---------------------------------------------------------------------------
Class I Shares
- ---------------------------------------------------------------------------
Net Assets $105,824,115
Shares Outstanding 9,732,090
Net Asset Value, Offering Price and Redemption Price
Per Share (net assets / shares of beneficial
interest outstanding) $ 10.87
- ---------------------------------------------------------------------------
On sales of $25,000 or more, the offering price of Class A shares is reduced.
Statement of Operations
For the Year Ended
December 31, 1998
Investment Income
- ---------------------------------------------------------------------------
Interest $ 6,859,732
- ---------------------------------------------------------------------------
Total investment income $ 6,859,732
- ---------------------------------------------------------------------------
Expenses
- ---------------------------------------------------------------------------
Investment adviser fee $ 567,054
Trustees fees and expenses 8,964
Distribution fees
Class B 28,567
Custodian fee 74,502
Transfer agent and dividend disbursing agent fees 71,267
Registration fees 36,705
Printing and postage 16,758
Legal and accounting services 4,565
Miscellaneous 31,723
- ---------------------------------------------------------------------------
Total expenses $ 840,105
- ---------------------------------------------------------------------------
Deduct--
Reduction of custodian fee $ 62,988
- ---------------------------------------------------------------------------
Total expense reductions $ 62,988
- ---------------------------------------------------------------------------
Net expenses $ 777,117
- ---------------------------------------------------------------------------
Net investment income $ 6,082,615
- ---------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss)
- ---------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 1,869,382
Financial futures contracts (83,990)
- ---------------------------------------------------------------------------
Net realized gain $ 1,785,392
- ---------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis) $ (555,744)
- ---------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $ (555,744)
- ---------------------------------------------------------------------------
Net realized and unrealized gain $ 1,229,648
- ---------------------------------------------------------------------------
Net increase in net assets from operations $ 7,312,263
- ---------------------------------------------------------------------------
See notes to financial statements
10
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------
From operations--
Net investment income $ 6,082,615 $ 5,084,860
Net realized gain 1,785,392 2,037,037
Net change in unrealized
appreciation
(depreciation) (555,744) 4,742,435
- -------------------------------------------------------------------------
Net increase in net assets from
operations $ 7,312,263 $ 11,864,332
- -------------------------------------------------------------------------
Distributions to shareholders --
From net investment income
Class A $ (729,146) $ --
Class B (164,930) --
Class I (5,188,539) (5,084,860)
In excess of net investment
income
Class A -- --
Class B -- --
Class I -- (125,335)
From net realized gain
Class A (194,132) --
Class B (49,556) --
Class I (1,053,475) --
In excess of net realized
gain
Class A (152,749) --
Class B (57,351) --
Class I -- --
- -------------------------------------------------------------------------
Total distributions to
shareholders $ (7,589,878) $ (5,210,195)
- -------------------------------------------------------------------------
Transactions in shares of
beneficial interest --
Proceeds from sales of shares
Class A $ 32,686,526 $ --
Class B 10,386,143 --
Class I 21,582,811 8,318,871
Net asset value of shares issued
to shareholders in payment
of distributions declared
Class A 590,413 --
Class B 181,597 --
Class I 3,347,030 2,708,543
Cost of shares redeemed
Class A (577,172) --
Class B (480,650) --
Class I (11,630,237) (13,489,827)
- -------------------------------------------------------------------------
Net increase (decrease) in net
assets from Fund share
transactions $ 56,086,461 $ (2,462,413)
- -------------------------------------------------------------------------
Net increase in net assets $ 55,808,846 $ 4,191,724
- -------------------------------------------------------------------------
Year Ended Year Ended
Net Assets December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------
At beginning of year $ 92,375,383 $ 88,183,659
- -------------------------------------------------------------------------
At end of year $ 148,184,229 $ 92,375,383
- -------------------------------------------------------------------------
Accumulated
distributions in excess
of net investment income
included in net assets
- -------------------------------------------------------------------------
At end of year $ -- $ (203,488)
- -------------------------------------------------------------------------
See notes to financial statements
11
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994
-------------------------------- --------------------------------------------
Class A Class B Class Class Class Class Class
(2) (3) I I I I I
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $10.000 $10.000 $ 10.840 $10.070 $10.210 $ 9.260 $10.630
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.502 $ 0.416 $ 0.574 $ 0.584 $ 0.605 $ 0.604 $ 0.611
Net realized and unrealized gain (loss) 0.099 0.006 0.141 0.785 (0.143) 0.962 (1.369)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 0.601 $ 0.422 $ 0.715 $ 1.369 $ 0.462 $ 1.566 $(0.758)
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions
- -----------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.522) $(0.433) $ (0.576) $(0.584) $(0.594) $(0.604) $(0.611)
In excess of net investment income -- -- -- (0.015) (0.008) (0.012) (0.001)
From net realized gain (0.061) (0.051) (0.109) -- -- -- --
In excess of net realized gain (0.048) (0.058) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $(0.631) $(0.542) $ (0.685) $(0.599) $(0.602) $(0.616) $(0.612)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value-- End of year $ 9.970 $ 9.880 $ 10.870 $10.840 $10.070 $10.210 $ 9.260
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (4) 6.07% 4.03% 6.75% 14.13% 4.78% 17.40% (7.27)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $32,352 $10,008 $105,824 $92,375 $88,184 $96,410 $90,802
Ratios (As a percentage of average daily net assets):
Expenses (5) 0.65% 1.39% 0.70% 0.81% 0.78% 0.76% 0.80%
Expenses after custodian fee reduction (5) 0.60% 1.34% 0.65% 0.77% 0.74% -- --
Net investment income 5.07% 4.33% 5.25% 5.69% 6.12% 6.16% 6.26%
Portfolio Turnover 38% 38% 38% 34% 30% 58% 58%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income per share was computed using average shares
outstanding.
(2) For the period from the commencement of offering of Class A shares, January
6, 1998, to December 31, 1998.
(3) For the period from the commencement of offering of Class B shares, January
14, 1998, to December 31, 1998.
(4) Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed
reinvested at the net asset value on the reinvestment date. Total return is
not computed on an annualized basis.
(5) The expense ratios for the year ended December 31, 1995 and periods
thereafter have been adjusted to reflect a change in reporting
requirements. The new reporting guidelines require the Fund to increase its
expense ratio by the effect of any expense offset arrangements with its
service providers. The expense ratio for the prior period has not been
adjusted to reflect this change.
See notes to financial statements
12
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
-----------------------------------------------------------------------------
Eaton Vance Municipal Bond Fund (the Fund) (formerly the Eaton Vance
Municipal Bond Fund, L.P.) is a diversified entity of the type commonly known
as a Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company. The Fund is a series of Eaton Vance Mutual Funds Trust (the Trust).
The Fund offers three classes of shares. Class A shares are sold subject to a
sales charge imposed at the time of purchase. Class B shares are sold at net
asset value and are subject to a contingent deferred sales charge (see Note
6). Class I shares are sold at net asset value. All classes of shares have
equal rights to assets and voting privileges. Realized and unrealized gains
and losses are allocated daily to each class of shares based on the relative
net assets of each class to the total net assets of the Fund. Net investment
income, other than class specific expenses, is allocated daily to each class
of shares based upon the ratio of the value of each class' paid shares to the
total value of all paid shares. Each class of shares differs in its
distribution plan and certain other class specific expenses. The following is
a summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A Investment Valuations -- Municipal bonds are normally valued on the basis
of valuations furnished by a pricing service. Taxable obligations, if any,
for which price quotations are readily available are normally valued at the
mean between the latest available bid and asked prices. Futures contracts and
options on financial futures contracts listed on commodity exchanges are
valued at closing settlement prices. Over-the-counter options on financial
futures are normally valued at the mean between the latest bid and asked
prices. Investments, if any, for which there are no such valuations are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees. Short-term obligations, maturing in sixty days or
less, are valued at amortized cost, which approximates value.
B Income -- Interest income is determined on the basis of interest accrued
and discount earned, adjusted for amortization of premium or discount on
long-term debt securities when required for federal income tax purposes.
C Income Taxes -- The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable and tax-exempt
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is necessary. Dividends paid by
the Fund from net interest on tax-exempt municipal bonds are not includable
by shareholders as gross income for federal income tax purposes because the
Fund intends to meet certain requirements of the Internal Revenue Code
applicable to regulated investment companies which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned
on private activity bonds issued after August 7, 1986, may be considered a
tax preference item for shareholders.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$89,290 of distributions from tax-exempt income as a long-term capital gain
distribution for its taxable year ended December 31, 1998.
D Financial Futures Contracts -- Upon the entering of a financial futures
contract, the Fund is required to deposit ("initial margin") either in cash
or securities an amount equal to a certain percentage of the purchase price
indicated in the financial futures contract. Subsequent payments are made or
received by the Fund ("margin maintenance") each day, dependent on the daily
fluctuations in the value of the underlying security, and are recorded for
book purposes as unrealized gains or losses by the Fund. The Fund's
investment in financial futures contracts is designed only to hedge against
anticipated future changes in interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss.
E Put Options on Financial Futures Contracts -- Upon the purchase of a put
option on a financial futures contract by the Fund, the premium paid is
recorded as an investment, the value of which is marked-to-market daily. When
a purchased option expires, the Fund will realize a loss in the amount of the
cost of the option. When the Fund enters into a closing sale transaction, the
Fund will realize a gain or loss depending on whether the sales proceeds from
the closing sale transaction are greater or less than the cost of the option.
When the Fund exercises a put option, settlement is made in cash. The risk
associated with purchasing options is limited to the premium originally paid.
13
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT`D
F When-issued and Delayed Delivery Transactions -- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked-to-market daily and begin accruing interest on settlement date.
G Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian of the Fund. Pursuant to the custodian agreement, IBT receives a
fee reduced by credits which are determined based on the average daily cash
balances the Fund maintains with IBT. All significant credit balances used to
reduce the Fund's custodian fees are reported as a reduction of expenses in
the Statement of Operations.
H Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could
differ from those amounts.
I Other -- Investment transactions are accounted for on a trade date basis.
2 Distributions to Shareholders
-----------------------------------------------------------------------------
The net income of the Fund is determined daily and substantially all of the
net income so determined is declared as a dividend to shareholders of record
at the time of declaration. Distributions are paid monthly. Distributions are
paid in the form of additional shares or, at the election of the shareholder,
in cash. Distributions of realized capital gains, if any, are made at least
annually. Shareholders may reinvest capital gain distributions in additional
shares of the Fund at the net asset value as of the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis. Generally accepted accounting principles require that only
distributions in excess of tax basis earnings and profits be reported in the
financial statements as a return of capital. Differences in the recognition
or classification of income between the financial statements and tax earnings
and profits which result in temporary over distributions for financial
statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains. Permanent differences
between book and tax accounting relating to distributions are reclassified to
paid-in capital.
During the year ended December 31, 1998, the Fund has reclassified amounts to
reflect an increase in paid-in capital of $10,001,090, a decrease in
accumulated undistributed net realized gain of $10,204,578 and a decrease in
accumulated distributions in excess of net investment income of $203,488 due
to permanent differences between book and tax accounting for distributions to
shareholders. Net investment income, net realized gains and net assets were
not affected by these reclassifications.
3 Shares of Beneficial Interest
-----------------------------------------------------------------------------
Transactions in shares of beneficial interest were as follows:
Year Ended
Class A December 31, 1998/(1)/
---------------------------------------------------------------------
Sales 3,242,591
Issued to shareholders electing
to receive payment of
distributions in Fund shares 58,980
Redemptions (57,723)
---------------------------------------------------------------------
Net increase 3,243,848
---------------------------------------------------------------------
/(1)/For the period from the commencement of offering of Class A shares,
January 6, 1998, to December 31, 1998.
Year Ended
Class B December 31, 1998/(2)/
---------------------------------------------------------------------
Sales 1,042,463
Issued to shareholders electing
to receive payment of
distributions in Fund shares 18,306
Redemptions (47,837)
---------------------------------------------------------------------
Net increase 1,012,932
---------------------------------------------------------------------
/(2)/For the period from the commencement of offering of Class B shares,
January 14, 1998, to December 31, 1998.
14
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT`D
Year Ended
Class I December 31, 1998
----------------------------------------------------------
Sales 1,969,000
Issued to shareholders electing
to receive payment of
distributions in Fund shares 306,746
Redemptions (1,064,820)
Issued to Eaton Vance Municipal Bond Fund,
L.P. Partners 8,521,164
----------------------------------------------------------
Net increase 9,732,090
----------------------------------------------------------
Transactions in shares of partnership interest of Eaton Vance Municipal Bond
Fund, L.P. (See Note 11) for the year ended December 31, 1997 were as
follows:
Year Ended December 31, 1997
----------------------------------------------------------------------------
General Partners Limited Partners
----------------------------------------------------------------------------
Sales -- 811,929
Issued to partners electing to
receive payment of distributions 8,204 256,996
in shares
Redemptions -- (1,310,465)
----------------------------------------------------------------------------
Net increase (decrease) 8,204 (241,540)
----------------------------------------------------------------------------
4 Investment Adviser Fee and Other Transactions with Affiliates
-----------------------------------------------------------------------------
The investment adviser fee, computed at the monthly rate of 0.025% (0.300%
per annum) of the average daily net assets and 3.00% of gross income
(excluding net realized gains on sales of securities) up to $500 million and
at reduced rates as daily net assets exceed that level, was earned by Eaton
Vance Management (EVM), as compensation for management and investment
advisory services rendered to the Fund. For the year ended December 31, 1998,
the fee was equivalent to 0.48% of the Fund's average daily net assets for
such period and amounted to $567,054. Except as to Trustees of the Fund who
are not members of EVM's organization, officers and Trustees receive
remuneration for their services to the Fund out of such investment adviser
fee. Eaton Vance Distributors, Inc. (EVD), a subsidiary of EVM and the Fund's
principal underwriter, received $30,195 from the Fund as its portion of the
sales charge on sales of Class A shares for the year ended December 31, 1998.
Trustees of the Fund that are not affiliated with the Investment Adviser may
elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of the Trustees Deferred Compensation Plan. For the
year ended December 31, 1998, no significant amounts have been deferred.
Certain of the officers and Trustees of the Fund are officers and
directors/trustees of the above organizations.
5 Distribution and Service Plans
-----------------------------------------------------------------------------
The Fund has adopted a distribution plan (Class B Plan) pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (Class A
Plan) (collectively, the Plans). The Plans require the Fund to pay the
principal underwriter, EVD, amounts equal to 1/365 of 0.75% of the Fund's
daily net assets attributable to Class B shares for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the sum
of (i) 5% of the aggregate amount received by the Fund for the Class B shares
sold plus, (ii) interest calculated by applying the rate of 1% over the
prevailing prime rate to the outstanding balance of Uncovered Distribution
Charges of EVD reduced by the aggregate amount of contingent deferred sales
charges (see Note 6) and amounts theretofore paid to or payable to EVD. The
amount payable to EVD with respect to each day is accrued on such day as a
liability of the Fund and, accordingly, reduces the Class B net assets. The
Fund paid or accrued distribution fees of $28,567 for Class B shares to EVD
for the period ended December 31, 1998, representing 0.75% (annualized) of
the average daily net assets for Class B shares. At December 31, 1998, the
amount of Uncovered Distribution Charges EVD calculated under the Plan was
approximately $427,000 for Class B shares.
In addition, the Plans authorize the Fund to make payments of service fees to
EVD, Authorized Firms and other persons in amounts not exceeding 0.25% of the
Fund's average daily net assets attributable to Class A and Class B shares
for any fiscal year. The Trustees have initially implemented the Plans by
authorizing the Fund to make quarterly service fee payments to EVD and
Authorized Firms in amounts not expected to exceed
0.25% per annum of the Fund's average daily net assets
15
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT`D
attributable to Class A and Class B shares based on the value of Fund shares
sold by such persons and remaining outstanding for at least one year. Service
fee payments will be made for personal services and/or the maintenance of
shareholder accounts. Service fees are separate and distinct from the sales
commissions and distribution fees payable by the Fund to EVD, and, as such
are not subject to automatic discontinuance when there are no outstanding
Uncovered Distribution Charges of EVD. Class A and Class B shares expect to
begin making service fee payments during the quarter ending March 31, 1999.
6 Contingent Deferred Sales Charge
-----------------------------------------------------------------------------
A contingent deferred sales charge (CDSC) is imposed on any redemption of
Class B shares made within six years of purchase. Generally, the CDSC is
based upon the lower of the net asset value at date of redemption or date of
purchase. No charge is levied on shares acquired by reinvestment of dividends
or capital gain distributions. The Class B CDSC is imposed at declining rates
that begin at 5% in the first and second year of redemption after purchase,
declining one percentage point each subsequent year. No CDSC is levied on
shares which have been sold to EVM or its affiliates or to their respective
employees or clients. CDSC charges are paid to EVD to reduce the amount of
Uncovered Distribution Charges calculated under the Fund's Distribution
Plans. CDSC charges received when no Uncovered Distribution Charges exist
will be credited to the Fund. EVD received approximately $4,000 of CDSC paid
by Class B shareholders for the period ended December 31, 1998.
7 Purchases and Sales of Investments
-----------------------------------------------------------------------------
The Fund invests primarily in debt securities. The ability of the issuers of
the debt securities held by the Fund to meet their obligations may be
affected by economic developments in a specific industry or municipality.
Purchases and sales of investments, other than short-term obligations and put
option transactions, aggregated $100,303,184 and $43,990,227, respectively.
8 Line of Credit
-----------------------------------------------------------------------------
The Fund participates with other portfolios and funds managed by EVM and
affiliates in a $130 million unsecured line of credit with a group of banks.
Borrowings will be made by the Fund solely to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Interest is
charged to each participating portfolio or fund based on its borrowings at an
amount above either the Eurodollar rate or federal funds rate. In addition, a
fee computed at an annual rate of 0.10% on the daily unused portion of the
line of credit is allocated among the participating portfolios and funds at
the end of each quarter. At December 31, 1998, amounts outstanding under the
line of credit totaled $441,000.
9 Federal Income Tax Basis of Investments
-----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at December 31, 1998, as computed on a federal income tax basis, were
as follows:
Aggregate cost $140,245,270
-----------------------------------------------------------------------------
Gross unrealized appreciation $11,749,315
Gross unrealized depreciation (354,113)
-----------------------------------------------------------------------------
Net unrealized appreciation $11,395,202
-----------------------------------------------------------------------------
10 Financial Instruments
-----------------------------------------------------------------------------
The Fund regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment the Fund
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the
risks associated with these instruments is meaningful only when all related
and offsetting transactions are considered. There were no open obligations
under these financial instruments at December 31, 1998.
11 Transfer of Net Assets
-----------------------------------------------------------------------------
On January 1, 1998, Eaton Vance Municipal Bond Fund, L.P. transferred
substantially all of its assets and liabilities to Eaton Vance Municipal Bond
Fund pursuant to a Plan of Reorganization dated December 12, 1997. In
accordance with the agreement, Eaton Vance Municipal Bond Fund, L.P., at the
closing, issued 8,521,164 Class I shares of the Fund having an aggregate
value of $92,375,383. As a
16
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT`D
result, the Fund issued one Class I share for each share of Eaton Vance
Municipal Bond Fund, L.P. The transaction was structured for tax purposes to
qualify as a tax free reorganization under the Internal Revenue Code. The
Eaton Vance Municipal Bond Fund, L.P.'s net assets at the date of the
transaction were $92,375,383, including $11,950,946 of unrealized
appreciation.
17
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
Eaton Vance Municipal Bond Fund:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Eaton Vance Municipal Bond Fund as of December
31, 1998, the related statement of operations for the year then ended, the
statements of changes in net assets for the two years then ended and the
financial highlights for each of the years in the five-year period ended
December 31, 1998. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits 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 statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities held as of
December 31, 1998 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other audit procedures. 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 audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Eaton Vance
Municipal Bond Fund as of December 31, 1998, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 12, 1999
18
<PAGE>
Eaton Vance Municipal Bond Fund as of December 31, 1998
INVESTMENT MANAGEMENT
Eaton Vance Municipal Bond Fund
Officers
James B. Hawkes
President and Trustee
William H. Ahern, Jr.
Vice President
Thomas J. Fetter
Vice President and
Portfolio Manager
Robert B. MacIntosh
Vice President
Michael B. Terry
Vice President
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Independent Trustees
Jessica M. Bibliowicz
President and Chief Operating Officer,
John A. Levin & Co.
Director, Baker, Fentress & Company
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Emeritus, Harvard University
Graduate School of Business Administration
Norton H. Reamer
Chairman and Chief Executive Officer,
United Asset Management Corporation
Lynn A. Stout
Professor of Law, Georgetown
University Law Center
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
19
<PAGE>
Investment Adviser
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
Custodian
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
Transfer Agent
First Data Investor Services Group
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
Eaton Vance
Municipal Bond Fund
24 Federal Street
Boston, MA 02110
- --------------------------------------------------------------------------------
This report must be preceded or accompanied by a current prospectus which
contains more complete information on the Fund, including its sales charges and
expenses. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
MBSRC-2/99
