<PAGE>
As filed with the Securities and Exchange Commission on June 23, 1999
1933 Act File No. 33-572
1940 Act File No. 811-4409
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
POST-EFFECTIVE AMENDMENT NO. 79 [x]
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 81 [x]
EATON VANCE MUNICIPALS TRUST
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 482-8260
--------------
(REGISTRANT'S TELEPHONE NUMBER)
ALAN R. DYNNER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
(NAME AND ADDRESS OF AGENT FOR SERVICE)
It is proposed that this filing will become effective pursuant to Rule 485
(check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on July 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] this post effective amendment designates a new effective date for a
previously filed post-effective amendment.
National Municipals Portfolio has also executed this Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
{LOGO} Mutual Funds
EATON VANCE for People
Mutual Funds Who Pay
Taxes
Eaton Vance
National Municipals
Fund
Institutional Shares
A mutual fund providing tax-exempt income
Prospectus Dated
July 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Information in this prospectus
Page Page
- --------------------------------------------------------------------------------
Fund Summary 2 Purchasing Shares 6
Investment Objective & Principal Redeeming Shares 6
Policies and Risks 4 Shareholder Account
Management and Organization 5 Information 7
Valuing Shares 6 Tax Information 7
- --------------------------------------------------------------------------------
This prospectus contains important information about the Fund and the services
available to shareholders. Please save it for reference.
<PAGE>
FUND SUMMARY
Investment Objective and Principal Strategies. Eaton Vance National Municipals
Fund's investment objective is to provide current income exempt from regular
federal income tax. The Fund primarily invests in investment grade municipal
obligations, but also invests in lower rated obligations. The Fund normally
invests in municipal obligations with maturities of ten years or more. The Fund
may purchase derivative instruments (such as inverse floaters and futures
contracts) and bonds that do not make periodic payments of interest. A portion
of the Fund's distributions generally will be subject to alternative minimum
tax.
The portfolio manager will purchase and sell securities to maintain a
competitive yield and to enhance return based upon the relative value of the
securities in the marketplace. The portfolio manager may also trade securities
to minimize taxable capital gains to shareholders.
The Fund currently invests its assets in National Municipals Portfolio (the
"Portfolio"), a separate registered investment company with the same investment
objective and policies as the Fund.
Principal Risk Factors. Obligations with maturities of ten years or more may
offer higher yields than obligations with shorter maturities, but they are
subject to greater fluctuations in value when interest rates change. When
interest rates rise, the value of Fund shares typically will decline. The Fund's
yield will also fluctuate over time.
The Fund invests in obligations of below investment grade quality (so-called
"junk bonds"). Lower quality obligations generally offer higher yields than
higher quality obligations, but they are subject to greater risks. Lower quality
obligations are more sensitive to adverse changes in the financial condition of
the issuer or in general market conditions (or both) and Fund shares may
fluctuate more in value than shares of a fund investing solely in high quality
obligations.
The Fund may concentrate in certain types of municipal obligations (such as
industrial development bonds, housing bonds, hospital bonds or utility bonds),
so Fund shares could be affected by events that adversely affect a particular
sector. The use of derivatives is subject to certain limitations and may expose
the Funds to increased risk of principal loss. Inverse floaters are volatile and
involve leverage risk.
The Fund is not a complete investment program and you may lose money by
investing in the Fund. An investment in the Fund is not a deposit in a bank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
2
<PAGE>
Performance Information. The following bar chart and table provide information
about the investment performance of another class of shares of Eaton Vance
National Municipals Fund. These shares (the "Retail Shares") are distributed
through retail distribution channels and are subject to higher expenses than
Institutional Shares. The returns are adjusted to eliminate the Retail Shares'
sales charge, but they are not adjusted to reflect other differences in
expenses. The returns in the bar chart and the table are for each calendar year
of the Retail Shares' operations through December 31, 1998. The table below also
contains a comparison of the Retail Shares' performance to the performance of an
index of municipal bonds. Although past performance is no guarantee of future
results, the Retail Shares' performance demonstrates the risk that the value of
your investment will change.
Annual Total Returns of the Retail Shares of the Fund
8.2% 3.4% 11.8% 10.0% 14.6% -8.0% 19.8% 3.6% 12.9% 4.8%
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
The Retail Shares' highest quarterly total return was 7.77% for the quarter
ended March 31, 1995, and their lowest quarterly total return was -6.68% for the
quarter ended March 31, 1994. The year-to-date total return through the end of
the most recent calendar quarter (December 31, 1998 to March 31, 1999) was
0.06%. For the 30 days ended March 31, 1999, the SEC yield and tax-equivalent
yield (assuming a federal tax rate of 31%) for Retail Shares were 4.35% and
6.30%, respectively.
Average Annual Total Return One Five Ten
as of December 31, 1998 Year Years Years
- --------------------------------------------------------------------------------
Retail Shares 4.81% 6.20% 7.86%
Lehman Brothers Municipal Bond Index 6.48% 6.22% 8.22%
The Lehman Brothers Municipal Bond Index is a broad-based, unmanaged index of
municipal bonds. Investors cannot invest directly in an Index. (Source for
Lehman Brothers Index returns: Lipper, Inc.)
Fees and Expenses of the Fund. These tables describe the fees and expenses that
you may pay if you buy and hold shares.
Shareholder Fees
(fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
(as a percentage of offering price) None
Maximum Deferred Sales Charge (as a
percentage of the lower net value at
time of purchase or time of redemption) None
Sales Charge Imposed on Reinvested Distributions None
Exchange Fee None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
- --------------------------------------------------------------------------------
Management Fees 0.42%
Other Expenses* 0.11%
-----
Total Annual Fund Operating Expenses 0.53%
*Other Expenses is estimated.
Example. This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years
- --------------------------------------------------------------------------------
InstitutionalShares $54 $170
3
<PAGE>
INVESTMENT OBJECTIVE & PRINCIPAL POLICIES AND RISKS
The investment objective of the Fund is to provide current income exempt from
regular federal income tax. The Fund seeks to achieve its objective by investing
primarily (i.e., at least 80% of its net assets during periods of normal market
conditions) in debt obligations issued by or on behalf of states, territories
and possessions of the United States, and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from regular federal income tax. This is a fundamental policy of the Fund
which only may be changed with shareholder approval. The Fund's investment
objective and other policies may be changed by the Trustees without shareholder
approval. The Fund currently seeks to meet its investment objective by investing
in National Municipals Portfolio (the "Portfolio"), a separate open-end
management company that has the same objective and policies as the Fund.
At least 65% of net assets will normally be invested in municipal obligations
rated at least investment grade at the time of investment (which are those rated
Baa or higher by Moody's Investors Service, Inc. ("Moody's"), or BBB or higher
by either Standard & Poor's Ratings Group ("S&P") or Fitch IBCA ("Fitch")) or,
if unrated, are determined by the investment adviser to be of at least
investment grade quality. The balance of net assets may be invested in municipal
obligations rated or considered to be below investment grade (but not lower than
B by Moody's, S&P or Fitch) and in unrated municipal obligations considered to
be of comparable quality by the investment adviser. Lower rated obligations have
speculative characteristics and are more volatile than higher rated obligations.
Also, changes in economic conditions or other circumstances are more likely to
reduce the capacity of issuers of lower-rated obligations to make principal and
interest payments. It may also be more difficult to value certain lower rated
obligations because of the inability (or perceived inability) of the issuer to
make interest and principal payments.
Municipal obligations include bonds, notes and commercial paper issued by a
municipality for a wide variety of both public and private purposes. The
interest on municipal obligations is (in the opinion of the issuer's counsel)
exempt from regular federal income tax. Interest income from certain types of
municipal obligations generally will be subject to the federal alternative
minimum tax (the "AMT") for individuals. Distributions to corporate investors
may also be subject to the AMT. The Fund may not be suitable for investors
subject to the AMT.
Although the Portfolio may invest in securities of any maturity, it is expected
that the Portfolio will normally invest a substantial portion of its assets in
securities with maturities of ten years or more. The average maturity of the
Portfolio's holdings may vary (generally between 15 and 30 years) depending on
anticipated market conditions.
The Portfolio may invest 25% or more of its total assets in municipal
obligations of the same type (such as leases, housing finance, public housing,
municipal utilities, hospital and health facilities or industrial development).
This may make the Portfolio more susceptible to adverse economic, political or
regulatory occurrences affecting a particular category of issuer.
The net asset value will change in response to changes in prevailing interest
rates and changes in the value of securities held. The value of securities held
will be affected by the credit quality of the issuer of the obligation, and
general economic and business conditions that affect the specific economic
sector of the issuer. Changes by rating agencies in the rating assigned to an
obligation may also affect the value of an obligation.
The Portfolio may purchase derivative instruments, which derive their value from
another instrument, security or index. For example, the Portfolio may invest in
municipal securities whose interest rates bear an inverse relationship to the
interest rate on another security or the value of an index ("inverse floaters").
Although they are volatile and may expose the Portfolio to leverage risk,
inverse floaters typically offer the potential for yields exceeding the yields
available on fixed-rate bonds with comparable credit quality and maturity. The
Portfolio may also purchase and sell various kinds of financial futures
contracts and options thereon to hedge against changes in interest rates or as a
substitute for the purchase of portfolio securities. The use of derivative
instruments for both hedging and investment purposes involves a risk of loss or
depreciation due to a variety of factors including counterparty risk, unexpected
market, interest rate or securities price movements, and tax and regulatory
constraints. Derivative hedging transactions may not be effective because of
imperfect correlations and other factors.
The Portfolio may invest in zero coupon bonds, which do not require the issuer
to make periodic interest payments. The values of these bonds are subject to
greater fluctuation in response to changes in market interest rates than bonds
which pay interest currently.
The limited liquidity of certain securities in which the Portfolio may invest
could affect their market prices, thereby adversely affecting net asset value
and the ability to pay income. The amount of publicly available information
about certain municipal obligations may be limited and the investment
performance of the Portfolio more dependent on the portfolio manager's analysis
than if this were not the case.
4
<PAGE>
The Portfolio may borrow amounts up to one-third of the value of its total
assets (including borrowings), but it will not borrow more than 5% of the value
of its total assets except to satisfy redemption requests or for other temporary
purposes. Such borrowings would result in increased expense to the Fund and,
while they are outstanding, would magnify increases or decreases in the value of
Fund shares. The Portfolio will not purchase additional investment securities
while outstanding borrowings exceed 5% of the value of its total assets. During
unusual market conditions, the Portfolio may temporarily invest up to 50% of its
assets in cash or cash equivalents. Interest income from temporary investments
may be taxable.
The investment adviser's process for selecting securities for purchase and sale
is research intensive and emphasizes the creditworthiness of the issuer or other
person obligated to repay the obligation. The investment adviser seeks to invest
in obligations that it believes will retain their value in varying interest rate
climates.
Like most mutual funds, the Fund and Portfolio rely on computers in conducting
daily business and processing information. There is a concern that on January 1,
2000 some computer programs will be unable to recognize the new year and as a
consequence computer malfunctions will occur. Eaton Vance is taking steps that
it believes are reasonably designed to address this potential problem and to
obtain satisfactory assurance from other service providers to the Fund and the
Portfolio that they are also taking steps to address the issue. There can,
however, be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund and the Portfolio or shareholders. The Year 2000
concern may also adversely impact issuers of obligations held by the Portfolio
and the markets in which these securities trade. The foregoing statement is
subject to the Year 2000 Information and Readiness Disclosure Act, which may
protect Eaton Vance and the Fund and the Portfolio from liability arising from
the statement.
MANAGEMENT AND ORGANIZATION
Management. The Portfolio's investment adviser is Boston Management and Research
("BMR"), a subsidiary of Eaton Vance Management ("Eaton Vance"), with offices at
The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. Eaton
Vance has been managing assets since 1924 and managing mutual funds since 1931.
Eaton Vance and its subsidiaries currently manage over $37 billion on behalf of
mutual funds, institutional clients and individuals.
The investment adviser manages the investments of the Portfolio and provides
related office facilities and personnel. Under its investment advisory agreement
with the Portfolio, BMR receives a monthly advisory fee equal to the aggregate
of a daily asset based fee and a daily income based fee. The fees are applied on
the basis of the following categories.
Annual Daily
Category Daily Net Assets Asset Rate Income Rate
- --------------------------------------------------------------------------------
1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
Thomas M. Metzold is the portfolio manager of the Portfolio (since December
1993). He also manages other Eaton Vance portfolios, has been an Eaton Vance
portfolio manager for more than 5 years, and is a Vice President of Eaton Vance
and BMR.
The investment adviser and the Fund and Portfolio have adopted Codes of Ethics
governing personal securities transactions. Under the Codes, Eaton Vance
employees may purchase and sell securities (including securities held by the
Portfolio) subject to certain pre-clearance and reporting requirements and other
procedures.
Eaton Vance serves as administrator of the Fund, providing the Fund with
administrative services and related office facilities. Eaton Vance does not
currently receive a fee for serving as administrator.
Organization. The Fund is a series of Eaton Vance Municipals Trust, a
Massachusetts business trust. The Fund offers multiple classes of shares. Each
class represents a pro rata interest in the Fund, but is subject to different
expenses and rights. The Fund does not hold annual shareholder meetings, but may
hold special meetings for matters that require shareholder approval (like
electing or removing trustees, approving management contracts or changing
investment policies that may only be changed with shareholder approval). Because
the Fund invests in the Portfolio, it may be asked to vote on certain Portfolio
matters (like changes in certain Portfolio investment restrictions). When
necessary, the Fund will hold a meeting of its shareholders to consider the
Portfolio matter and then vote its interest in the Portfolio in proportion to
the votes cast by its shareholders. The Fund can withdraw from the Portfolio at
any time.
5
<PAGE>
VALUING SHARES
The Fund values its shares once each day only when the New York Stock Exchange
is open for trading (typically Monday through Friday), as of the close of
regular trading on the Exchange (normally 4:00 p.m. eastern time). The price of
Fund shares is their net asset value , which is derived from Portfolio holdings.
Municipal obligations will normally be valued on the basis of valuations
furnished by a pricing service.
When purchasing or redeeming Fund shares, your investment dealer must
communicate your order to the principal underwriter by a specific time each day
in order for the purchase price or the redemption price to be based on that
day's net asset value per share. It is the investment dealer's responsibility to
transmit orders promptly. The Fund may accept purchase and redemption orders as
of the time of their receipt by certain investment dealers (or their designated
intermediaries).
PURCHASING SHARES
Institutional Shares are offered to clients of financial intermediaries who
charge an advisory, management, consulting or similar fee for their services;
accounts affiliated with those financial intermediaries; investment and
institutional clients of Eaton Vance and its affiliates; certain persons
affiliated with Eaton Vance; and certain Eaton Vance and fund service providers.
Your initial investment must be at least $250,000. Subsequent investments of any
amount may be made at any time. The investment minimum is waived for persons
affiliated with Eaton Vance and its service providers.
The Fund provides shareholders ease of investment by allowing same day wire
purchases. You may purchase Institutional Shares through your investment dealer
or by requesting your bank to transmit immediately available funds (Federal
Funds) by wire to the address set forth below. To make an initial investment by
wire, you must first telephone the Fund Order Department at 800-225-6265
(extension 7604) to advise of your action and to be assigned an account number.
Failure to call will delay the order. The account application form which
accompanies this prospectus must be promptly forwarded to the transfer agent.
Additional investments may be made at any time through the same wire procedure.
The Fund Order Department must be advised by telephone of each transmission.
Wire funds to:
Boston Safe Deposit & Trust Co.
ABA #811001234
Account #080411
Further Credit Eaton Vance National Municipals Fund - Institutional Shares
- Fund #401
A/C # [Insert your account number]
Purchase orders will be executed at the net asset value next determined after
their receipt by the Fund only if the Fund has received payment in cash or in
Federal Funds. If you purchase shares through an investment dealer, that dealer
may charge you a fee for executing the purchase for you.
From time to time the Fund may suspend the continuous offering of its shares.
During any such suspension, shareholders who reinvest their distributions in
additional shares will be permitted to continue such reinvestments, and the Fund
may permit tax-sheltered retirement plans which own shares to purchase
additional shares of the Fund. The Fund may also refuse any order for the
purchase of shares.
REDEEMING SHARES
You can redeem shares in one of two ways:
By Wire If you have given complete written authorization in
advance you may request that redemption proceeds be
wired directly to your bank account. The bank
designated may be any bank in the United States. The
redemption request may be made by calling the Eaton
Vance Fund Order Department at 800-225-6265 (extension
7604) or by sending a signature guaranteed letter of
instruction to the transfer agent (see back cover for
address). You may be required to pay the costs of
redeeming by wire; however, no costs are currently
charged. The Fund may suspend or terminate this
expedited payment procedure upon at least 30 days
notice.
Through an
Investment Dealer Your investment dealer is responsible for transmitting
the order promptly. A dealer may charge a fee for this
service.
6
<PAGE>
If you redeem shares, your redemption price will be based on the net asset value
per share next computed after the redemption request is received. Your
redemption proceeds will be paid in cash within seven days, reduced by the
amount of any federal income tax required to be withheld. Payments will be sent
by mail unless you complete the Bank Wire Redemptions section of the account
application.
SHAREHOLDER ACCOUNT FEATURES
Distributions. You may have your Fund distributions paid in one of the following
ways:
*Full
Reinvest
Option Dividends and capital gains are reinvested in additional
shares. This option will be assigned if you do not specify
an option.
*Partial
Reinvest
Option Dividends are paid in cash and capital gains are reinvested
in additional shares.
*Cash
Option Dividends and capital gains are paid in cash.
Information from the Fund. From time to time, you may be mailed the following:
*Annual and Semi-Annual Reports, containing performance information and
financial statements.
*Periodic account statements, showing recent activity and total share balance.
*Form 1099 and tax information needed to prepare your income tax returns.
*Proxy materials, in the event a shareholder vote is required.
*Special notices about significant events affecting your Fund.
Exchange Privilege. You may exchange your Institutional Shares for other Eaton
Vance Institutional Shares. Exchanges are made at net asset value. Before
exchanging, you should read the prospectus of the new fund carefully. The
exchange privilege may be changed or discontinued at any time. You will receive
60 days' notice of any material change to the privilege. This privilege may not
be used for "market timing". If an account (or group of accounts) makes more
than two round-trip exchanges within twelve months, it will be deemed to be
market timing. The exchange privilege may be terminated for market timing
accounts.
Telephone Transactions. The transfer agent and the principal underwriter have
procedures in place to authenticate telephone instructions (such as verifying
personal account information). As long as the transfer agent and principal
underwriter follow these procedures, they will not be responsible for
unauthorized telephone transactions and you bear the risk of possible loss
resulting from telephone transactions. You may decline the telephone redemption
option on the account application. Telephone instructions are tape recorded.
Account Questions. If you have any questions about your account or the services
available, please call Eaton Vance Shareholder Services at 1-800-225-6265, or
write to the transfer agent (see back cover for address).
TAX INFORMATION
The Fund declares dividends daily and ordinarily pays distributions monthly.
Different classes will distribute different dividend amounts. Your account will
be credited with dividends beginning on the business day after the day when the
funds used to purchase your Fund shares are collected by the transfer agent. The
Fund expects that its distributions will consist primarily of federally
tax-exempt income. Distribution of any net realized gains will be distributed
once each year (usually in December). For tax purposes the entire distribution,
whether paid in cash or reinvested in additional shares, ordinarily will
constitute tax-exempt income to you.
Distributions of any taxable income and net short-term capital gains will be
taxable as ordinary income. Distributions of any long-term capital gains are
taxable as such. Distributions of interest on certain municipal obligations are
a tax preference item under the AMT provisions applicable to individuals and
corporations. A redemption of Fund shares, including an exchange for shares of
another fund, is a taxable transaction.
Shareholders, particularly corporations and those subject to state alternative
minimum tax, should consult with their advisers concerning the applicability of
state, local and other taxes to an investment.
7
<PAGE>
{LOGO} Mutual Funds
EATON VANCE for People
Mutual Funds Who Pay
Taxes
More Information
- --------------------------------------------------------------------------------
About the Fund: More information is available in the statement of
additional information. The statement of additional information is
incorporated by reference into this prospectus. Additional information
about the Portfolio's investments is available in the annual and
semi-annual reports to shareholders. In the annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the past year. You may
obtain free copies of the statement of additional information and the
shareholder reports by contacting:
EATON VANCE DISTRIBUTORS, INC.
The Eaton Vance Building
255 State Street
Boston, MA 02109
1-800-225-6265
website: www.eatonvance.com
You will find and may copy information about the Fund at the Securities and
Exchange Commission's public reference room in Washington, DC (call
1-800-SEC-0330 for information); on the SEC's Internet site
(http://www.sec.gov); or upon payment of copying fees by writing to the
SEC's public reference room in Washington, DC 20549-6009.
About Shareholder Accounts: You can obtain more information from Eaton
Vance Share- holder Services (1-800-225-6265). If you own shares and would
like to add to, redeem or change your account, please write or call the
transfer agent:
- --------------------------------------------------------------------------------
FIRST DATA INVESTOR SERVICES GROUP
P.O. BOX 5123
WESTBOROUGH, MA 01581-5123
1-800-262-1122
SEC File No. 811-4409 IHMP
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF
ADDITIONAL INFORMATION
July 1, 1999
EATON VANCE NATIONAL MUNICIPALS FUND
INSTITUTIONAL SHARES
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
(800) 225-6265
This Statement of Additional Information ("SAI") provides general
information about the Fund and the Portfolio. The Fund is a series of Eaton
Vance Municipals Trust. Capitalized terms used in this SAI and not otherwise
defined have the meanings given to them in the prospectus. This SAI contains
additional information about:
Page
Strategies and Risks ....................................... 1
Investment Restrictions .................................... 6
Management and Organization ................................ 8
Investment Advisory and Administrative Services ............ 12
Other Service Providers .................................... 13
Purchasing and Redeeming Shares ............................ 13
Performance ................................................ 15
Taxes ...................................................... 16
Portfolio Security Transactions ............................ 19
Financial Statements ....................................... 20
Appendices:
A: Institutional Shares -- Performance ..................... a-1
B: Tax Equivalent Yield Table .............................. b-1
C: Ratings ................................................. c-1
THIS IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS FOR ITS
INSTITUTIONAL SHARES DATED JULY 1, 1999, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS, WHICH MAY BE OBTAINED BY CALLING
1-800-225-6265.
<PAGE>
STRATEGIES AND RISKS
MUNICIPAL OBLIGATIONS. Municipal obligations are issued to obtain funds for
various public and private purposes. Municipal obligations include bonds as well
as tax-exempt commercial paper, project notes and municipal notes such as tax,
revenue and bond anticipation notes of short maturity, generally less than three
years. While most municipal bonds pay a fixed rate of interest semi-annually in
cash, there are exceptions. Some bonds pay no periodic cash interest, but rather
make a single payment at maturity representing both principal and interest.
Bonds may be issued or subsequently offered with interest coupons materially
greater or less than those then prevailing, with price adjustments reflecting
such deviation.
In general, there are three categories of municipal obligations, the
interest of which is exempt from federal income tax and is not a tax preference
item for purposes of the AMT: (i) certain "public purpose" obligations (whenever
issued), which include obligations issued directly by state and local
governments or their agencies to fulfill essential governmental functions; (ii)
certain obligations issued before August 8, 1986 for the benefit of
non-governmental persons or entities; and (iii) certain "private activity bonds"
issued before August 7, 1986, which include "qualified Section 501(c)(3) bonds"
or refundings of certain obligations included in the second category. Interest
on certain "private activity bonds" issued after August 7, 1986 is exempt from
regular federal income tax, but such interest (including a distribution by the
Fund derived from such interest) is treated as a tax preference item which could
subject the recipient to or increase the recipient's liability for the AMT. For
corporate shareholders, the Fund's distributions derived from interest on all
municipal obligations (whenever issued) is included in "adjusted current
earnings" for purposes of the AMT as applied to corporations (to the extent not
already included in alternative minimum taxable income as income attributable to
private activity bonds). In assessing the federal income tax treatment of
interest on any municipal obligation, the Portfolio will generally rely on an
opinion of the issuer's counsel (when available) and will not undertake any
independent verification of the basis for the opinion.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual lease rental payments from the
state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality. Industrial development and pollution
control bonds, although nominally issued by municipal authorities, are in most
cases revenue bonds and are generally not secured by the taxing power of the
municipality, but are usually secured by the revenues derived by the authority
from payments of the industrial user or users. The Portfolio may on occasion
acquire revenue bonds which carry warrants or similar rights covering equity
securities. Such warrants or rights may be held indefinitely, but if exercised,
the Portfolio anticipates that it would, under normal circumstances, dispose of
any equity securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and interest
on a municipal obligation are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a municipal obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
municipal obligations which were not foreseen by the financial and investment
communities. The Portfolio will take whatever action it considers appropriate in
the event of anticipated financial difficulties, default or bankruptcy of either
the issuer of any municipal obligation or of the underlying source of funds for
debt service. Such action may include retaining the services of various persons
or firms (including affiliates of the investment adviser) to evaluate or protect
any real estate, facilities or other assets securing any such obligation or
acquired by the Portfolio as a result of any such event, and the Portfolio may
also manage (or engage other persons to manage) or otherwise deal with any real
estate, facilities or other assets so acquired. The Portfolio anticipates that
real estate consulting and management services may be required with respect to
properties securing various municipal obligations in its portfolio or
subsequently acquired by the Portfolio. The Portfolio will incur additional
expenditures in taking protective action with respect to portfolio obligations
in default and assets securing such obligations.
The yields on municipal obligations are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of municipal obligations will normally fluctuate with changes in interest
rates, and therefore the net asset value of the Portfolio will be affected by
such changes.
ISSUER CONCENTRATION. The Portfolio will invest at least 65% of total assets in
municipal obligations and may invest 25% or more of its total assets in
municipal obligations of the same type. There could be economic, business or
political developments which might affect all municipal obligations of the same
type. In particular, investments in revenue bonds might involve (without
limitation) the following risks.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs in
an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effect of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Industrial development bonds are normally secured only by the revenues from
the project and not by state or local government tax payments, they are subject
to a wide variety of risks, many of which relate to the nature of the specific
project. Generally, IDBs are sensitive to the risk of a slowdown in the economy.
MUNICIPAL LEASES. The Portfolio may invest in municipal leases and
participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease or installment purchase
arrangement which is issued by state or local governments to acquire equipment
and facilities. Interest income from such obligations is generally exempt from
local and state taxes in the state of issuance. "Participations" in such leases
are undivided interests in a portion of the total obligation. Participations
entitle their holders to receive a pro rata share of all payments under the
lease. The obligation of the issuer to meet its obligations under such leases is
often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation.
Certain municipal lease obligations owned by the Portfolio may be deemed
illiquid for the purpose of the Portfolio's 15% limitation on investments in
illiquid securities, unless determined by the investment adviser, pursuant to
guidelines adopted by the Trustees of the Portfolio, to be liquid securities for
the purpose of such limitation. In determining the liquidity of municipal lease
obligations, the investment adviser will consider a variety of factors
including: (1) the willingness of dealers to bid for the security; (2) the
number of dealers willing to purchase or sell the obligation and the number of
other potential buyers; (3) the frequency of trades and quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
investment adviser will consider factors unique to particular lease obligations
affecting the marketability thereof. These include the general creditworthiness
of the municipality, the importance of the property covered by the lease to the
municipality, and the likelihood that the marketability of the obligation will
be maintained throughout the time the obligation is held by the Portfolio. In
the event the Portfolio acquires an unrated municipal lease obligation, the
investment adviser will be responsible for determining the credit quality of
such obligation on an on-going basis, including an assessment of the likelihood
that the lease may or may not be cancelled.
ZERO COUPON BONDS. Zero coupon bonds are debt obligations which do not require
the periodic payment of interest and are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity at a rate of interest
reflecting the market rate of the security at the time of issuance. The
Portfolio is required to accrue income from zero-coupon bonds on a current
basis, even though it does not receive that income currently in cash and the
Fund is required to distribute its share of the Portfolio's income for each
taxable year. Thus, the Portfolio may have to sell other investments to obtain
cash needed to make income distributions.
CREDIT QUALITY. While municipal obligations rated investment grade or below and
comparable unrated municipal obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions. Lower
rated and comparable unrated municipal obligations 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 greater price volatility due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity (market risk). Lower rated or unrated
municipal obligations are also more likely to react to real or perceived
developments affecting market and credit risk than are more highly rated
obligations, which react primarily to movements in the general level of interest
rates.
Municipal obligations held by the Portfolio which are rated below investment
grade but which, subsequent to the assignment of such rating, are backed by
escrow accounts containing U.S. Government obligations may be determined by the
investment adviser to be of investment grade quality for purposes of the
Portfolio's investment policies. The Portfolio may retain in its portfolio an
obligation whose rating drops below B after its acquisition, including defaulted
obligations, if such retention is considered desirable by the investment
adviser; provided, however, that holdings of obligations rated below Baa or BBB
will be less than 35% of net assets. In the event the rating of an obligation
held by the Portfolio is downgraded, causing the Portfolio to exceed this
limitation, the investment adviser will (in an orderly fashion within a
reasonable period of time) dispose of such obligations as it deems necessary in
order to comply with the Portfolio's credit quality limitations. In the case of
a defaulted obligation, the Portfolio may incur additional expense seeking
recovery of its investment. See "Portfolio of Investments" in the "Financial
Statements" incorporated by reference into this SAI with respect to any
defaulted obligations held by the Portfolio.
The investment adviser seeks to minimize the risks of investing in below
investment grade securities through professional investment analysis and
attention to current developments in interest rates and economic conditions.
When the Portfolio invests in lower rated or unrated municipal obligations, the
achievement of the Portfolio's goals is more dependent on the investment
adviser's ability than would be the case if the Portfolio were investing in
municipal obligations in the higher rating categories. In evaluating the credit
quality of a particular issue, whether rated or unrated, the investment adviser
will normally take into consideration, among other things, the financial
resources of the issuer (or, as appropriate, of the underlying source of funds
for debt service), its sensitivity to economic conditions and trends, any
operating history of and the community support for the facility financed by the
issue, the ability of the issuer's management and regulatory matters. The
investment adviser will attempt to reduce the risks of investing in the lowest
investment grade, below investment grade and comparable unrated obligations
through active portfolio management, credit analysis and attention to current
developments and trends in the economy and the financial markets.
WHEN-ISSUED SECURITIES. New issues of municipal obligations are sometimes
offered on a "when-issued" basis, that is, delivery and payment for the
securities normally take place within a specified number of days after the date
of the Portfolio's commitment and are subject to certain conditions such as the
issuance of satisfactory legal opinions. The Portfolio may also purchase
securities on a when-issued basis pursuant to refunding contracts in connection
with the refinancing of an issuer's outstanding indebtedness. Refunding
contracts generally require the issuer to sell and the Portfolio to buy such
securities on a settlement date that could be several months or several years in
the future. The Portfolio may also purchase instruments that give the Portfolio
the option to purchase a municipal obligation when and if issued.
The Portfolio will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but may sell such
securities before the settlement date if it is deemed advisable as a matter of
investment strategy. The payment obligation and the interest rate that will be
received on the securities are fixed at the time the Portfolio enters into the
purchase commitment. When the Portfolio commits to purchase a security on a
when-issued basis it records the transaction and reflects the value of the
security in determining its net asset value. Securities purchased on a
when-issued basis and the securities held by the Portfolio are subject to
changes in value based upon the perception of the creditworthiness of the issuer
and changes in the level of interest rates (i.e., appreciation when interest
rates decline and depreciation when interest rates rise). Therefore, to the
extent that the Portfolio remains substantially fully invested at the same time
that it has purchased securities on a when-issued basis, there will be greater
fluctuations in the Portfolio's net asset value than if it solely set aside cash
to pay for when-issued securities.
REDEMPTION, DEMAND AND PUT FEATURES AND PUT OPTIONS. Issuers of municipal
obligations reserve the right to call (redeem) the bond. If an issuer redeems
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed. Also, some bonds may have
"put" or "demand" features that allow early redemption by the bondholder. Longer
term fixed-rate bonds may give the holder a right to request redemption at
certain times (often annually after the lapse of an intermediate term). These
bonds are more defensive than conventional long term bonds (protecting to some
degree against a rise in interest rates) while providing greater opportunity
than comparable intermediate term bonds, because the Portfolio may retain the
bond if interest rates decline.
LIQUIDITY AND PROTECTIVE PUT OPTIONS. The Portfolio may enter into a separate
agreement with the seller of the security or some other person granting the
Portfolio the right to put the security to the seller thereof or the other
person at an agreed upon price. The Portfolio intends to limit this type of
transaction to institutions (such as banks or securities dealers) which the
investment adviser believes present minimal credit risks and would engage in
this type of transaction to facilitate portfolio liquidity or (if the seller so
agrees) to hedge against rising interest rates. There is no assurance that this
kind of put option will be available to the Portfolio or that selling
institutions will be willing to permit the Portfolio to exercise a put to hedge
against rising interest rates. The Portfolio does not expect to assign any value
to any separate put option which may be acquired to facilitate portfolio
liquidity, inasmuch as the value (if any) of the put will be reflected in the
value assigned to the associated security; any put acquired for hedging purposes
would be valued in good faith under methods or procedures established by the
Trustees of the Portfolio after consideration of all relevant factors, including
its expiration date, the price volatility of the associated security, the
difference between the market price of the associated security and the exercise
price of the put, the creditworthiness of the issuer of the put and the market
prices of comparable put options. Interest income generated by certain bonds
having put or demand features may be taxable.
ILLIQUID OBLIGATIONS. At times, a substantial portion of the Portfolio's assets
may be invested in securities as to which the Portfolio, by itself or together
with other accounts managed by the investment adviser and its affiliates, holds
a major portion or all of such securities. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Portfolio could find it more difficult to sell such securities when
the investment adviser believes it advisable to do so or may be able to sell
such securities only at prices lower than if such securities were more widely
held. Under such circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the Portfolio's net
asset value.
The secondary market for some municipal obligations issued within a state
(including issues which are privately placed with the Portfolio) is less liquid
than that for taxable debt obligations or other more widely traded municipal
obligations. The Portfolio will not invest in illiquid securities if more than
15% of its net assets would be invested in securities that are not readily
marketable. No established resale market exists for certain of the municipal
obligations in which the Portfolio may invest. The market for obligations rated
below investment grade is also likely to be less liquid than the market for
higher rated obligations. As a result, the Portfolio may be unable to dispose of
these municipal obligations at times when it would otherwise wish to do so at
the prices at which they are valued.
SECURITIES LENDING. The Portfolio may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers.
Distributions by the Fund of any income realized by the Portfolio from
securities loans will be taxable. If the management of the Portfolio decides to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the Portfolio's total assets. Securities lending
involves risks of delay in recovery or even loss of rights on the securities
loaned if the borrower fails financially. The Portfolio has no present intention
of engaging in securities lending.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A change in the level of
interest rates may affect the value of the securities held by the Portfolio (or
of securities that the Portfolio expects to purchase). To hedge against changes
in rates or as a substitute for the purchase of securities, the Portfolio may
enter into (i) futures contracts for the purchase or sale of debt securities,
and (ii) futures contracts on securities indices. All futures contracts entered
into by the Portfolio are traded on exchanges or boards of trade that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant or brokerage firm which
is a member of the relevant exchange. The Portfolio may purchase and write call
and put options on futures contracts which are traded on a United States
exchange or board of trade. The Portfolio will be required, in connection with
transactions in futures contracts and the writing of options on futures, to make
margin deposits, which will be held by the Portfolio's custodian for the benefit
of the futures commission merchant through whom the Portfolio engages in such
futures and options transactions.
Some futures contracts and options thereon may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit transactions in an exchange-traded instrument,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or futures option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Portfolio from closing out
positions and limiting its losses.
The Portfolio will engage in futures and related options transactions for
bona fide hedging purposes or non-hedging purposes as defined in or permitted by
CFTC regulations. The Portfolio will determine that the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolio
or which it expects to purchase. The Portfolio will engage in transactions in
futures and related options contracts only to the extent such transactions are
consistent with the requirements of the Code for maintaining qualification of
the Fund as a regulated investment company for federal income tax purposes.
ASSET COVERAGE REQUIREMENTS. Transactions involving when-issued securities or
futures contracts and options (other than options that the Portfolio has
purchased) expose the Portfolio to an obligation to another party. The Portfolio
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts, or (2) cash or liquid securities (such as readily marketable
obligations and money market instruments) with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. The
Portfolio will comply with Securities and Exchange Commission ("SEC") guidelines
regarding cover for these instruments and, if the guidelines so require, set
aside cash or liquid securities in a segregated account maintained by its
custodian in the prescribed amount. The securities in the segregated account
will be marked to market daily.
Assets used as cover or held in a segregated account maintained by the
custodian cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Portfolio's assets to segregated
accounts or to cover could impede portfolio management or the Portfolio's
ability to meet redemption requests or other current obligations.
TEMPORARY INVESTMENTS Under unusual market conditions, the Portfolio may invest
temporarily in cash or cash equivalents. Cash equivalents are highly liquid,
short-term securities such as commercial paper, certificates of deposit,
short-term notes and short-term U.S. Government obligations.
DIVERSIFIED STATUS. The Portfolio is a "diversified" investment company under
the 1940 Act. This means that with respect to 75% of its total assets (1) the
Portfolio may not invest more than 5% of its total assets in the securities of
any one issuer (except U.S. Government obligations) and (2) the Portfolio may
not own more than 10% of the outstanding voting securities of any one issuer
(which generally is inapplicable because municipal debt obligations are not
voting securities).
PORTFOLIO TURNOVER. The Portfolio may sell (and later purchase) securities in
anticipation of a market decline (a rise in interest rates) or purchase (and
later sell) securities in anticipation of a market rise (a decline in interest
rates). In addition, a security may be sold and another purchased at
approximately the same time to take advantage of what the Portfolio believes to
be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of various types of
municipal obligations or changes in the investment objectives of investors. Such
trading may be expected to increase the portfolio turnover rate, which may
increase capital gains and the expenses incurred in connection with such
trading. The Portfolio cannot accurately predict its portfolio turnover rate,
but it is anticipated that the annual portfolio turnover rate will generally not
exceed 100% (excluding turnover of securities having a maturity of one year or
less). A 100% annual turnover rate could occur, for example, if all the
securities held by the Portfolio were replaced once in a period of one year. A
high turnover rate (100% or more) necessarily involves greater expenses to the
Portfolio.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the
outstanding shares are present or represented at the meeting or (b) more than
50% of the outstanding shares of the Fund. Accordingly, the Fund may not:
(1) Purchase any security (other than U.S. Government securities) if
such purchase, at the time thereof, would cause more than 5% of the total
assets of the Fund (taken at market value) to be invested in the securities
of a single issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund;
(2) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The deposit or payment by the Fund of initial or
maintenance margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin;
(3) Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Fund owns an equal amount of
such securities or 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, and unless not more than
25% of the Fund's net assets (taken at current value) is held as collateral
for such sales at any one time. (The Fund will make such sales only for the
purpose of deferring realization of gain or loss for federal income tax
purposes);
(4) Purchase securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the total outstanding voting
securities of such issuer to be held by the Fund; provided, however, that
the Fund may invest all or part of its investable assets in an open-end
management investment company with substantially the same investment
objective, policies and restrictions as the Fund;
(5) Purchase securities issued by any other open-end investment company
or investment trust; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund;
(6) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust or is a member, officer, director or trustee
of any investment adviser of the Fund, if after the purchase of the
securities of such issuer by the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities or both (all
taken at market value) of such issuer and such persons owning more than 1/2
of 1% of such shares or securities together own beneficially more than 5% of
such shares or securities or both (all taken at market value);
(7) Underwrite or participate in the marketing of securities of others,
except insofar as it may technically be deemed to be an underwriter in
selling a portfolio security under circumstances which may require the
registration of the same under the Securities Act of 1933, or participate on
a joint or a joint and several basis in any trading account in securities;
(8) Lend any of its funds or other assets to any person, directly or
indirectly, except (i) through repurchase agreements and (ii) through the
loan of a portfolio security. (The purchase of a portion of an issue of debt
obligations, whether or not the purchase is made on the original issuance,
is not considered the making of a loan);
(9) Borrow money or pledge its assets in excess of 1/3 of the value of
its net assets (excluding the amount borrowed) and then only if such
borrowing is incurred as a temporary measure for extraordinary or emergency
purposes or to facilitate the orderly sale of portfolio securities to
accommodate redemption requests; or issue securities other than its shares
of beneficial interest, except as appropriate to evidence indebtedness,
including reverse repurchase agreements, which the Fund is permitted to
incur. The Fund will not purchase securities while outstanding temporary
bank borrowings exceed 5% of its total assets; provided, however, that the
Fund may increase its interest in an open-end management investment company
with substantially the same investment objective, policies and restrictions
as the Fund while such borrowings are outstanding. The deposit of cash, cash
equivalents and liquid debt securities in a segregated account with the
custodian and/or with a broker in connection with futures contracts or
related options transactions and the purchase of securities on a
"when-issued" basis is not deemed to be a pledge;
(10) Invest for the purpose of exercising control or management of other
companies; provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund;
(11) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies
which invest or deal in real estate;
(12) Purchase or sell physical commodities or contracts for the purchase
or sale of physical commodities;
(13) Buy investment securities from or sell them to any of the officers
or Trustees of the Trust, its investment adviser or its underwriter, as
principal; however, any such person or concerns may be employed as a broker
upon customary terms; or
(14) Purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest all of its investable assets in an open-end management
investment company with substantially the same investment objective, policies
and restrictions as the Fund.
The Portfolio has adopted substantially the same fundamental investment
restrictions as the foregoing investment restrictions adopted by the Fund; such
restrictions cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Portfolio.
The Fund and the Portfolio have adopted the following investment policies
which may be changed by the Trustees with respect to the Fund without approval
by the Fund's shareholders or with respect to the Portfolio without approval of
the Fund or its other investors. The Fund and the Portfolio will not:
(a) invest more than 15% of net assets in investments which are not
readily marketable, including restricted securities and repurchase
agreements maturing in more than seven days. Restricted securities for the
purposes of this limitation do not include securities eligible for resale
pursuant to Rule 144A of the Securities Act of 1933 and commercial paper
issued pursuant to Section 4(2) of said Act that the Board of Trustees of
the Trust or the Portfolio, or its delegate, determine to be liquid. Any
such determination by a delegate will be made pursuant to procedures adopted
by the Board. If the Fund or Portfolio invests in Rule 144A securities, the
level of portfolio illiquidity may be increased to the extent that eligible
buyers become uninterested in purchasing such securities;
(b) engage in options, futures or forward transactions if more than 5%
of its net assets, as measured by the aggregate of the premiums paid by the
Fund or the Portfolio, would be so invested. The Fund and the Portfolio may
purchase put options on municipal obligations only if after such purchase
not more than 5% of its net assets, as measured by the aggregate of the
premiums paid for such options held by it would be so invested; or
(c) purchase any put options, long futures contracts, or call options on
a futures contract if at the date of such purchase realized net losses from
such transactions during the fiscal year to date exceed 5% of its average
net assets during such period. Neither the Fund nor the Portfolio intend to
invest in reverse repurchase agreements during the current fiscal year.
Neither the Fund nor the Portfolio will invest 25% or more of its total
assets in any one industry. For purposes of the foregoing policy, securities of
the U.S. Government, its agencies, or instrumentalities are not considered to
represent industries. Municipal obligations backed by the credit of a
governmental entity are also not considered to represent industries. However,
municipal obligations backed only by the assets and revenues of non-governmental
users may for this purpose be deemed to be issued by such non-governmental
users. The foregoing 25% limitation would apply to these issuers. As discussed
in the prospectus and this SAI, the Fund or the Portfolio may invest more than
25% of its total assets in certain economic sectors, such as revenue bonds,
housing, hospitals and other health care facilities, and industrial development
bonds. The Fund and the Portfolio reserve the right to invest more than 25% of
total assets in each of these sectors.
For purposes of the Portfolio's investment restrictions, the determination
of the "issuer" of a municipal obligation which is not a general obligation bond
will be made by the investment adviser on the basis of the characteristics of
the obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligation.
Whenever an investment policy or investment restriction set forth in the
prospectus or this SAI 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 Fund's or the Portfolio's acquisition
of such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, or any subsequent rating
change made by a rating service, will not compel the Fund or the Portfolio, as
the case may be, to dispose of such security or other asset. Where applicable
and notwithstanding the foregoing, under normal market conditions the Fund and
the Portfolio must take actions necessary to comply with the policy of not
investing more than 15% of net assets in illiquid securities. Moreover, the Fund
and Portfolio must always be in compliance with the borrowing policies set forth
above.
MANAGEMENT AND ORGANIZATION
FUND MANAGEMENT. The Trustees of the Trust are responsible for the overall
management and supervision of the Trust's affairs. The Trustees and officers of
the Trust and the Portfolio 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 The Eaton Vance Building, 255 State Street, Boston,
Massachusetts 02109. Those Trustees who are "interested persons" of the Trust or
the Portfolio, as defined in the 1940 Act, are indicated by an asterisk(*).
JESSICA M. BIBLIOWICZ (39), Trustee*
President and Chief Executive Officer of National Financial Partners (a
financial services company) (since April 1999). President and Chief Operating
Officer of John A. Levin & Co. (a registered investment advisor) (July 1997 to
April 1999) and a Director of Baker, Fentress & Company which owns John A.
Levin & Co. (July 1997 to April 1999). Formerly Executive Vice President of
Smith Barney Mutual Funds (from July 1994 to June 1997). Elected Trustee
October 30, 1998. Trustee of various investment companies managed by Eaton
Vance or BMR since October 30, 1998.
Address: 1301 Avenue of the Americas, New York, NY 10019
DONALD R. DWIGHT (68), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company). Trustee/Director of the Royce Funds (mutual funds). Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (57), Vice President and Trustee*
Chairman, President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV,
and a Director of EVC and EV. Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
SAMUEL L. HAYES, III (64), Trustee
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration. Trustee of the 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
Chairman of the Board and Chief Executive Officer, United Asset Management
Corporation (a holding company owning institutional investment management
firms); Chairman, President and Director, UAM Funds (mutual funds). Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
LYNN A. STOUT (41), Trustee
Professor of Law, Georgetown University Law Center. Elected Trustee October
30, 1998. Trustee of various investment companies managed by Eaton Vance or
BMR since October 30, 1998.
Address: 600 New Jersey Avenue, NW, Washington, DC 20001
JACK L. TREYNOR (69), Trustee
Investment Adviser and Consultant. Trustee of various investment companies
managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
THOMAS J. FETTER (55), President
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
ROBERT B. MACINTOSH (42), Vice President
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
THOMAS M. METZOLD (40), Vice President of the Portfolio
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (54), Treasurer
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
ALAN R. DYNNER (58), Secretary
Vice President and Chief Legal Officer of BMR, Eaton Vance and EVC 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 (63), Assistant Secretary
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
A. JOHN MURPHY (36), Assistant Secretary
Vice President of BMR and Eaton Vance since March 1, 1994. Officer of various
investment companies managed by Eaton Vance or BMR.
ERIC G. WOODBURY (41), Assistant Secretary
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR.
The Nominating Committee of the Board of Trustees of the Trust and the
Portfolio is comprised of the Trustees who are not "interested persons" as that
term is defined under the 1940 Act ("noninterested Trustees"). 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. Hayes (Chairman), Dwight and Reamer and Ms. Stout are members of the
Special Committee of the Board of Trustees of the Trust and of the Portfolio.
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 Fund and the Portfolio, including
investment advisory (Portfolio only), 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 Fund, the Portfolio or investors therein.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent accountants, and reviewing matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian, transfer agent and dividend disbursing agent of the
Trust and of the Portfolio.
Trustees of the Portfolio who 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 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 Portfolio 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 Portfolio's assets, liabilities, and net
income per share, and will not obligate the Portfolio to retain the services of
any Trustee or obligate the Portfolio to pay any particular level of
compensation to the Trustee. Neither the Trust nor the Portfolio has a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Trust and the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. (The Trustees of the Trust and of the Portfolio who are
members of the Eaton Vance organization receive no compensation from the Trust
or the Portfolio.) During the fiscal year ended September 30, 1998, the
noninterested Trustees of the Trust and the Portfolio earned the following
compensation in their capacities as Trustees from the Trust and the Portfolio
and for the year ended December 31, 1998, earned the following compensation in
their capacities as Trustees of the Funds in the Eaton Vance fund complex(1):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM TRUST(2) FROM PORTFOLIO FUND COMPLEX
- ---- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Jessica M. Bibliowicz(7) ................................. $ -- $ -- $ 33,334
Donald R. Dwight .......................................... 14,811 6,433(3) 160,000(5)
Samuel L. Hayes, III ...................................... 14,340 6,538(4) 170,000(6)
Norton H. Reamer .......................................... 13,789 6,212 160,000
Lynn A. Stout(7) ......................................... -- -- 32,842
Jack L. Treynor ........................................... 15,808 6,990 170,000
(1) As of July 1, 1999, the Eaton Vance fund complex consists of 155 registered investment companies or series thereof.
(2) The Trust consisted of 29 Funds as of September 30, 1998.
(3) Includes $616 of deferred compensation.
(4) Includes $511 of deferred compensation.
(5) Includes $60,000 of deferred compensation.
(6) Includes $41,563 of deferred compensation.
(7) Ms. Bibliowicz and Ms. Stout were elected as Trustees on October 30, 1998.
</TABLE>
ORGANIZATION. The Fund is a series of the Trust, which is organized under
Massachusetts law as a business trust and is operated as an open-end management
investment company. The Fund changed its name from Eaton Vance National Tax Free
Fund to EV Marathon National Tax Free Fund on February 1, 1994 and to EV
Marathon National Municipals Fund on December 1, 1994. The Fund was reorganized
into multiple classes and changed its name to Eaton Vance National Municipals
Fund on October 1, 1997. The operations of the Class B reflect the operations of
the Fund prior to October 1, 1997. The Fund's Class A, Class B and Class C
shares are offered pursuant to a separate prospectus and SAI. Class A and Class
C are successors to the operations of separate series of the Trust. Class I
shares (referred to as "Institutional Shares") were established July 1, 1999.
The Trust may issue an unlimited number of shares of beneficial interest (no
par value per share) in one or more series (such as the Fund). The Trustees of
the Trust have divided the shares of the Fund into multiple classes. Each class
represents an interest in the Fund, but is subject to different expenses, rights
and privileges. The Trustees have the authority under the Declaration of Trust
to create additional classes of shares with differing rights and privileges.
When issued and outstanding, shares are fully paid and nonassessable by the
Trust. Shareholders are entitled to one vote for each full share held.
Fractional shares may be voted proportionately. Shares of the Fund will be voted
together except that only shareholders of a particular class may vote on matters
affecting only that class. Shares have no preemptive or conversion rights and
are freely transferable. In the event of the liquidation of the Fund,
shareholders of each class are entitled to share pro rata in the net assets
attributable to that class available for distribution to shareholders.
The Trustees of the Trust have considered the advantages and disadvantages
of investing the assets of the Fund in the Portfolio, as well as the advantages
and disadvantages of the two-tier format. The Trustees believe that the
structure offers opportunities for growth in the assets of the Portfolio, may
afford the potential for economies of scale for the Fund and may over time
result in lower expenses for the Fund.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
The Trust's By-laws provide 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 By-laws further provide
that under certain circumstances the shareholders may call a meeting to remove a
Trustee and that the Trust is required to provide assistance in communication
with shareholders about such a meeting.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust, the financial interests of which are affected by the amendment. The
Trustees may also amend the Declaration of Trust without the vote or consent of
shareholders to change the name of the Trust or any series or to make such other
changes (such as reclassifying series of classes of shares or restructuring the
Trust) as do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable federal or
state laws or regulations. The Trust or any series or class thereof may be
terminated by: (1) the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote at any meeting of
shareholders of the Trust or the appropriate series or class thereof, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of two-thirds of the shares of the Trust or a series or class thereof,
provided, however, that, if such termination is recommended by the Trustees, the
vote of a majority of the outstanding voting securities of the Trust or a series
or class thereof entitled to vote thereon shall be sufficient authorization; or
(2) by means of an instrument in writing signed by a majority of the Trustees,
to be followed by a written notice to shareholders stating that a majority of
the Trustees has determined that the continuation of the Trust or a series or a
class thereof is not in the best interest of the Trust, such series or class or
of their respective shareholders.
The Declaration of Trust further 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 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.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the Trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Fund shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Fund
shareholders. The Declaration of Trust also contains provisions limiting the
liability of a series or class to that series or class. Moreover, the Trust's
By-laws also provide for indemnification out of the property of the Fund of any
shareholder held personally liable solely by reason of being or having been a
shareholder for all loss or expense arising from such liability. The assets of
the Fund are readily marketable and will ordinarily substantially exceed its
liabilities. In light of the nature of the Fund's business and the nature of its
assets, management believes that the possibility of the Fund's liability
exceeding its assets, and therefore the shareholder's risk of personal
liability, is remote.
The Portfolio is organized as a trust under the laws of the state of New
York and intends to be treated as a partnership for federal tax purposes. In
accordance with the Declaration of Trust of the Portfolio, there will normally
be no meetings of the investors for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees of the Portfolio holding
office have been elected by investors. In such an event the Trustees of the
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interest
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
The Portfolio's Declaration of Trust provides that the Fund and other
entities permitted to invest in the Portfolio (e.g., other U.S. and foreign
investment companies, and common and commingled trust funds) will each be liable
for all obligations of the Portfolio. However, the risk of the Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Portfolio itself is unable to meet its
obligations. Accordingly, the Trustees of the Trust believe that neither the
Fund nor its shareholders will be adversely affected by reason of the Fund
investing in the Portfolio.
Whenever the Fund as an investor in the Portfolio is requested to vote on
matters pertaining to the Portfolio (other than the termination of the
Portfolio's business, which may be determined by the Trustees of the Portfolio
without investor approval), the Fund will hold a meeting of Fund shareholders
and will vote its interest in the Portfolio for or against such matters
proportionately to the instructions to vote for or against such matters received
from Fund shareholders. The Fund shall vote shares for which it receives no
voting instructions in the same proportion as the shares for which it receives
voting instructions. Other investors in the Portfolio may alone or collectively
acquire sufficient voting interests in the Portfolio to control matters relating
to the operation of the Portfolio, which may require the Fund to withdraw its
investment in the Portfolio or take other appropriate action. Any such
withdrawal could result in a distribution "in kind" of portfolio securities (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
shareholder redemption requests, such as borrowing.
The Fund may withdraw (completely redeem) all its assets from the Portfolio
at any time if the Board of Trustees of the Trust determines that it is in the
best interest of the Fund to do so. In the event the Fund withdraws all of its
assets from the Portfolio, or the Board of Trustees of the Trust determines that
the investment objective of such Portfolio is no longer consistent with the
investment objective of the Fund, the Trustees would consider what action might
be taken, including investing the assets of the Fund in another pooled
investment entity or retaining an investment adviser to manage the Fund's assets
in accordance with its investment objective. The Fund's investment performance
may be affected by a withdrawal of all its assets (or the assets of another
investor in the Portfolio) from the Portfolio.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
INVESTMENT ADVISORY SERVICES. BMR manages the investments and affairs of the
Portfolio subject to the supervision of the Portfolio's Board of Trustees. BMR
furnishes to the Portfolio investment research, advice and supervision,
furnishes an investment program and determines what securities will be
purchased, held or sold by the Portfolio and what portion, if any, of the
Portfolio's assets will be held uninvested. The Investment Advisory Agreement
requires BMR to pay the salaries and fees of all officers and Trustees of the
Portfolio who are members of the BMR organization and all personnel of BMR
performing services relating to research and investment activities.
For a description of the compensation that the Portfolio pays BMR, see the
prospectus. As at September 30, 1998, the Portfolio had net assets of
$2,340,124,778. For the fiscal years ended September 30, 1998, 1997 and 1996,
the Portfolio paid BMR advisory fees of $9,401,075, $9,517,084 and $9,942,568,
respectively (equivalent to 0.42%, 0.44% and 0.44%, respectively, of the
Portfolio's average net assets for each such period).
The Investment Advisory Agreement with BMR continues in effect 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 Portfolio 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 Portfolio or by vote of a majority of the
outstanding voting securities of the Portfolio. The Agreement may be terminated
at any time without penalty on sixty (60) days' written notice by the Board of
Trustees of either party, or by vote of the majority of the outstanding voting
securities of the Portfolio, and the Agreement will terminate automatically in
the event of its assignment. The Agreement provides that BMR may render services
to others. The Agreement also provides that BMR shall not be liable for any loss
incurred in connection with the performance of its duties, or action taken or
omitted under that Agreement, in the absence of willful misfeasance, bad faith,
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties thereunder, or for any losses sustained
in the acquisition, holding or disposition of any security or other investment.
ADMINISTRATIVE SERVICES. As indicated in the prospectus, Eaton Vance serves as
administrator of the Fund, but currently receives no compensation for providing
administrative services to the Fund. Under its Administrative Services Agreement
with the Fund, Eaton Vance has been engaged to administer the Fund's affairs,
subject to the supervision of the Trustees of the Trust, and shall furnish for
the use of the Fund office space and all necessary office facilities, equipment
and personnel for administering the affairs of the Fund.
INFORMATION ABOUT BMR AND EATON VANCE. 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 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. Hawkes and Rowland, Alan R. Dynner,
Thomas E. Faust, Jr., Thomas J. Fetter, Duncan W. Richardson, William M.
Steul, and Wharton P. Whitaker (all of whom are officers of Eaton Vance). 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
"Management and Organization", all of the officers of the Trust (as well as
Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance
organization.
EXPENSES. The Fund and Portfolio are responsible for all expenses not expressly
stated to be payable by another party (such as the investment adviser under the
Investment Advisory Agreement, Eaton Vance under the Administrative Services
Agreement or the principal underwriter under the Distribution Agreement). In the
case of expenses incurred by the Trust, the Fund is responsible for its pro rata
share of those expenses. The only expenses of the Fund allocated to a particular
class are those incurred under the Distribution or Service Plan applicable to
that class and those resulting from the fee paid to the principal underwriter
for repurchase transactions.
OTHER SERVICE PROVIDERS
PRINCIPAL UNDERWRITER. Eaton Vance Distributors, Inc. ("EVD"), The Eaton Vance
Building, 255 State Street, Boston, MA 02109, is the Fund's principal
underwriter. The principal underwriter acts as principal in selling shares under
a Distribution Agreement with the Trust. The expenses of printing copies of
prospectuses used to offer shares and other selling literature and of
advertising are borne by the principal underwriter. The fees and expenses of
qualifying and registering and maintaining qualifications and registrations of
the Fund and its shares under federal and state securities laws are borne by the
Fund. The Distribution Agreement is renewable annually by the Board of Trustees
of the Trust (including a majority of the noninterested Trustees), may be
terminated on six months' notice by either party and is automatically terminated
upon assignment. The principal underwriter distributes shares on a "best
efforts" basis under which it is required to take and pay for only such shares
as may be sold. EVD is a wholly-owned subsidiary of EVC. Mr. Hawkes is a Vice
President and Director and Messrs. Dynner and O'Connor are Vice Presidents of
EVD.
CUSTODIAN. Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
MA 02116, serves as custodian to the Fund and the Portfolio. IBT has the custody
of all cash and securities representing the Fund's interest in the Portfolio,
has custody of all the Portfolio's assets, maintains the general ledger of the
Portoflio and the Fund and computes the daily net asset value of interests in
the Portfolio and the net asset value of shares of the Fund. In such capacity it
attends to details in connection with the sale, exchange, substitution, transfer
or other dealings with the Portfolio's investments, receives and disburses all
funds and performs various other ministerial duties upon receipt of proper
instructions from the Trust and the Portfolio. IBT also provides services in
connection with the preparation of shareholder reports and the electronic filing
of such reports with the SEC. EVC and its affiliates and their officers and
employees from time to time have transactions with various banks, including 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 Fund or the Portfolio and such banks.
INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, 125 Summer Street, Boston,
Massachusetts, are the independent accountants of the Fund and the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
TRANSFER AGENT. First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123, serves as transfer and dividend disbursing agent
for the Fund.
PURCHASING AND REDEEMING SHARES
CALCULATION OF NET ASSET VALUE. The net asset value of the Portfolio is computed
by IBT (as agent and custodian for the Portfolio) by subtracting the liabilities
of the Portfolio from the value of its total assets. Inasmuch as the market for
municipal obligations is a dealer market with no central trading location or
continuous quotation system, it is not feasible to obtain last transation prices
for most municipal obligations held by the Portfolio, and such obligations,
including those purchased on a when-issued basis, will normally be valued on the
basis of valuations furnished by a pricing service. The pricing service uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities, various relationships between
securities, and yield to maturity in determining value. Taxable obligations for
which price quotations are readily available normally will be valued at the mean
between the latest available bid and asked prices. Open futures positions on
debt securities are valued at the most recent settlement prices, unless such
price does not reflect the fair value of the contract, in which case the
positions will be valued by or at the direction of the Trustees of the
Portfolio. Other assets are valued at fair value using methods determined in
good faith by or at the direction of the Trustees of the Portfolio. The Fund and
the Portfolio will be closed for business and will not price their respective
shares or interests on the following business holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the New York Stock Exchange (the
"Exchange") is open for trading ("Portfolio Business Day") as of the close of
regular trading on the Exchange (the "Portfolio Valuation Time"). The value of
each investor's interest in the Portfolio will be determined by multiplying the
net asset value of the Portfolio by the percentage, determined on the prior
Portfolio Business Day, which represented that investor's share of the aggregate
interests in the Portfolio on such prior day. Any additions or withdrawals for
the current Portfolio Business Day will then be recorded. Each investor's
percentage of the aggregate interest in the Portfolio will then be recomputed as
a percentage equal to a fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of the Portfolio Valuation Time on the
prior Portfolio Business Day plus or minus, as the case may be, the amount of
any additions to or withdrawals from the investor's investment in the Portfolio
on the current Portfolio Business Day and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of the Portfolio Valuation Time on
the prior Portfolio Business Day plus or minus, as the case may be, the amount
of the net additions to or withdrawals from the aggregate investment in the
Portfolio on the current Portfolio Business Day by all investors in the
Portfolio. The percentage so determined will then be applied to determine the
value of the investor's interest in the Portfolio for the current Portfolio
Business Day.
ADDITIONAL INFORMATION ABOUT PURCHASES. Institutional Shares may be sold at net
asset value to current and retired Directors and Trustees of Eaton Vance funds,
including the Portfolio; to current and retired officers and employees of Eaton
Vance, its affiliates and other investment advisers of Eaton Vance sponsored
funds; to investment clients and institutional clients (including corporations,
foundations, pension and other retirement plans and certain individuals) of
Eaton Vance and its affiliates; to officers and employees of IBT and the
transfer agent; to persons associated with law firms, accounting firms and
consulting firms providing services to Eaton Vance and the Eaton Vance funds;
and to such persons' spouses, parents, siblings and children and their
beneficial accounts. Such shares may also be issued at net asset value (1) in
connection with the merger of an investment company (or series or class thereof)
with the Fund (or class thereof), (2) to investors making an investment as part
of a fixed fee program whereby an entity unaffiliated with the investment
adviser provides multiple investment services, such as management, brokerage and
custody, and (3) to investment advisors, financial planners or other
intermediaries who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for their services;
clients of such investment advisors, financial planners or other intermediaries
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisor, financial planner or other intermediary on
the books and records of the broker or agent. Institutional shares may also be
sold at net asset value to registered representatives and employees of
investment dealers and bank employees who refer customers to registered
representatives of investment dealers. Shares may be sold at net asset value to
any investment advisory, agency, custodial or trust account managed or
administered by Eaton Vance or by any parent, subsidiary or other affiliate of
Eaton Vance.
SUSPENSION OF SALES. The Trust may, in its absolute discretion, suspend,
discontinue or limit the offering of one or more of its classes of shares at any
time. In determining whether any such action should be taken, the Trust's
management intends to consider all relevant factors, including (without
limitation) the size of the Fund or class, the investment climate and market
conditions and the volume of sales and redemptions of shares.
ACQUIRING FUND SHARES IN EXCHANGE FOR SECURITIES. IBT, as escrow agent, will
receive securities acceptable to Eaton Vance, as administrator, in exchange for
Fund shares. The minumum value of securities (or securities and cash) accepted
for deposit is $250,000. Securities accepted will be sold on the day of their
receipt or as soon thereafter as possible. The number of Fund shares to be
issued in exchange for securities will be the aggregate proceeds from the sale
of such securities, divided by net asset value on the day such proceeds are
received. Eaton Vance will use reasonable efforts to obtain the then current
market price for such securities but does not guarantee the best available
price. Eaton Vance will absorb any transaction costs, such as commissions, on
the sale of the securities. Securities determined to be acceptable should be
transferred via book entry or physically delivered, in proper form for transfer,
through an investment dealer, together with a completed and signed Letter of
Transmittal in approved form (available from investment dealers). Investors who
are contemplating an exchange of securities for shares, or their
representatives, must contact Eaton Vance to determine whether the securities
are acceptable before forwarding such securities. Eaton Vance reserves the right
to reject any securities. Exchanging securities for shares may create a taxable
gain or loss. Each investor should consult his or her tax adviser with respect
to the particular federal, state and local tax consequences of exchanging
securities.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS. The right to redeem shares of the Fund
can be suspended and the payment of the redemption price deferred when the
Exchange is closed (other than for customary weekend and holiday closings),
during periods when trading on the Exchange is restricted as determined by the
SEC, or during any emergency as determined by the SEC which makes it
impracticable for the Portfolio to dispose of its securities or value its
assets, or during any other period permitted by order of the SEC for the
protection of investors.
While normally payments will be made in cash for redeemed shares, the Trust,
subject to compliance with applicable regulations, has reserved the right to pay
the redemption price of shares of the Fund, either totally or partially, by a
distribution in kind of readily marketable securities withdrawn from the
Portfolio. The securities so distributed would be valued pursuant to the
Portfolio's valuation procedures. If a shareholder received a distribution in
kind, the shareholder could incur brokerage or other charges in converting the
securities to cash.
Due to the high cost of maintaining small accounts, the Trust reserves the
right to redeem accounts with balances of less than $750. Prior to such a
redemption, shareholders will be given 60 days' written notice to make an
additional purchase. However, no such redemption would be required by the Trust
if the cause of the low account balance was a reduction in the net asset value
of shares.
SYSTEMATIC WITHDRAWAL PLAN. The transfer agent will send to the shareholder
regular monthly or quarterly payments of any permitted amount designated by the
shareholder based upon the value of the shares held. The checks will be drawn
from share redemptions and hence, may require the recognition of taxable gain or
loss. Income dividends and capital gains distributions in connection with
withdrawal plan accounts will be credited at net asset value as of the record
date for each distribution. Continued withdrawals in excess of current income
will eventually use up principal, particularly in a period of declining market
prices. A shareholder may not have a withdrawal plan in effect at the same time
he or she has authorized Bank Automated Investing or is otherwise making regular
purchases of Fund shares. The shareholder, the transfer agent or the principal
underwriter will be able to terminate the withdrawal plan at any time without
penalty.
PERFORMANCE
Average annual total return is determined separately for each Class of the
Fund by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital appreciation/
depreciation, and distributions paid and reinvested) for the stated period and
annualizing the result. The calculation assumes (i) that all distributions are
reinvested at net asset value on the reinvestment dates during the period and
(ii) a complete redemption of the investment. For information concerning the
total return of Institutional Shares, see Appendix A.
Yield is computed separately for each Class of the Fund pursuant to a
standardized formula by dividing net investment income per share earned during a
recent thirty-day period by the maximum offering price per share on the last day
of the period and annualizing the resulting figure. Net investment income per
share is calculated from the yields to maturity of all debt obligations held by
the Portfolio based on prescribed methods, reduced by accrued Fund and Class
expenses for the period with the resulting number being divided by the average
daily number of Class shares outstanding and entitled to receive distributions
during the period. A taxable-equivalent yield is computed by dividing the
tax-exempt yield by 1 minus a stated rate.
The Fund's performance may be compared in publications to the performance of
various indices and investments for which reliable data is available, and to
averages, performance rankings, or other information prepared by recognized
mutual fund statistical services. The Fund's performance may differ from that of
other investors in the Portfolio, including other investment companies.
The Trust (or principal underwriter) may provide investors with information
on municipal bond investing, which may include comparative performance
information, evaluations of Fund performance, charts and/or illustrations
prepared by independent sources (such as Lipper, Inc., Wiesenberger,
Morningstar, Inc., The Bond Buyer, the Federal Reserve Board or The Wall Street
Journal). The Trust may also refer in investor publications to Tax Freedom Day,
as computed by the Tax Foundation, Washington, DC 20005, to help illustrate the
value of tax free investing, as well as other tax-related information.
Information, charts and illustrations showing the effects of inflation and taxes
(including their effects on the dollar and the return on various investments)
and compounding earnings may also be included in advertisements and materials
furnished to present and prospective investors.
Information about portfolio allocation and holdings of the Portfolio at a
particular date (including ratings assigned by independent ratings services such
as Moody's, S&P and Fitch) may be included in advertisements and other material
furnished to present and prospective shareholders. Such information may be
stated as a percentage of the Portfolio's bond holdings on such date.
Comparative information about the yield of the Fund and about average rates
of return on certificates of deposit, bank money market deposit accounts, money
market mutual funds and other short-term investments may also be included in
advertisements, supplemental sales literature or communications of the Fund.
Such information may also compare the taxable equivalent yield (or value) of the
Fund to the after-tax yield (or value) of such other investment vehicles. Such
information may be in the form of hypothetical illustrations. A bank certificate
of deposit, unlike the mutual fund shares, pays a fixed rate of interest and
entitles the depositor to receive the face amount of the certificate of deposit
at maturity. A bank money market deposit account is a form of savings account
which pays a variable rate of interest. Unlike the Fund's shares, bank
certificates of deposit and bank money market deposit accounts are insured by
the Federal Deposit Insurance Corporation. A money market mutual fund is
designed to maintain a constant value of $1.00 per share and, thus, a money
market fund's shares are subject to less price fluctuation than the Fund's
shares.
The average rates of return of money market mutual funds, certificates of
deposit and bank money market deposit accounts referred to in advertisements,
supplemental sales literature or communications of the Fund will be based on
rates published by the Federal Reserve Bank, Donoghues Money Fund Averages,
RateGram or The Wall Street Journal.
Information used in advertisements and in materials provided to present and
prospective shareholders may include descriptions of Eaton Vance and other Fund
and Portfolio service providers, their investment styles, other investment
products, personnel and Fund distribution channels.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- cost associated with aging parents;
- funding a college education (including its actual and estimated
cost);
- health care expenses (including actual and projected expenses);
- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in municipal bond
funds. Such information may describe the following advantages of investing in a
municipal bond mutual fund versus individual municipal bonds: regular monthly
income; free reinvestment of distributions; potential for increased income; bond
diversification; liquidity; low-cost easy access; and active management and in
depth credit analysis by investment professionals. In addition, by investing in
a municipal bond fund instead of individual bonds, an investor can avoid dealing
with the complexities of the municipal bond market, while benefitting from the
market access and lower transactions costs enjoyed by municipal bond funds.
The Trust (or principal underwriter) may provide information about Eaton
Vance, its affiliates and other investment advisers to the funds in the Eaton
Vance Family of Funds in sales material or advertisements provided to investors
or prospective investors. Such material or advertisements may also provide
information on the use of investment professionals by such investors.
TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated and intends to qualify each
year as a regulated investment company ("RIC") under the Code. Accordingly, the
Fund intends to satisfy certain requirements relating to sources of its income
and diversification of its assets and to distribute substantially all of its
ordinary income (including tax-exempt income) and net income (after reduction by
any available capital loss carryforwards) in accordance with the timing
requirements imposed by the Code, so as to maintain its RIC status and avoid
paying any federal income or excise tax. The Fund so qualified for its fiscal
year ended September 30, 1998. Because the Fund invests its assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of income
and diversification requirements in order for the Fund to also satisfy these
requirements. The Portfolio will allocate at least annually among its investors,
including the Fund, each investor's distributive share of the Portfolio's net
taxable (if any) and tax-exempt investment income, net realized capital gains,
and any other items of income, gain, loss, deduction or credit. For purposes of
applying the requirements of the Code regarding qualification as a RIC, the Fund
(i) will be deemed to own its proportionate share of each of the assets of the
Portfolio and (ii) will be entitled to the gross income of the Portfolio
attributable to such share.
In order to avoid incurring a federal excise tax obligation, the Code
requires that the Fund distribute (or be deemed to have distributed) by December
31 of each calendar year at least 98% of its ordinary income (not including
tax-exempt income) for such year, at least 98% of its capital gain net income
(which is the excess of its realized capital gains over its realized capital
losses), generally computed on the basis of the one-year period ending on
October 31 of such year, after reduction by (i) any available capital loss
carryforwards, and (ii) 100% of any income from the prior year (as previously
computed) that was not paid out during such year and on which the Fund paid no
federal income tax. Under current law, provided that the Fund qualifies as a RIC
the Portfolio is treated as a partnership for Massachusetts and federal tax
purposes, neither the Fund nor the Portfolio is liable for any income, corporate
excise or franchise tax in the Commonwealth of Massachusetts.
The Portfolio's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. Such income will be allocated daily to interests in the
Portfolio, and in order to enable the Fund to distribute its proportionate share
of this income and avoid a tax payable by the Fund, the Portfolio may be
required to liquidate portfolio securities that it might otherwise have
continued to hold in order to generate cash that the Fund may withdraw from the
Portfolio for subsequent distribution to Fund shareholders.
Investments in lower-rated or unrated securities may present special tax
issues for the Portfolio (and hence for the Fund) to the extent that the issuers
of these securities default on their obligations pertaining thereto. The Code is
not entirely clear regarding the federal income tax consequences of the
Portfolio's taking certain positions in connection with ownership of such
distressed securities. For example, the Code is unclear regarding: (i) when the
Portfolio may cease to accrue interest, original issue discount, or market
discount; (ii) when and to what extent deductions may be taken for bad debts or
worthless securities; (iii) how payments received on obligations in default
should be allocated between principal and income; and (iv) whether exchanges of
debt obligations in a workout context are taxable.
Distributions by the Fund of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Code. In order for the Fund to be entitled to pay the tax-exempt interest
income allocated to it by the Portfolio as exempt-interest dividends to its
shareholders, the Fund must and intends to satisfy certain requirements,
including the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations, the
interest on which is exempt from regular federal income tax under Code Section
103(a). For purposes of applying this 50% requirement, the Fund will be deemed
to own its proportionate share of each of the assets of the Portfolio, and the
Portfolio currently intends to invest its assets in a manner such that the Fund
can meet this 50% requirement. Interest on certain municipal obligations is
treated as a tax preference item for purposes of the AMT. Shareholders of the
Fund are required to report tax-exempt interest on their federal income tax
returns.
Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 other than, in general, at their original
issue, is taxable as ordinary income. A long-term debt obligation is generally
treated as acquired at a market discount if purchased after its original issue
at a price less than (i) the stated principal amount payable at maturity, in the
case of an obligation that does not have original issue discount or (ii) in the
case of an obligation that does have original issue discount, the sum of the
issue price and any original issue discount that accrued before the obligation
was purchased, subject to a de minimis exclusion.
From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain types of municipal obligations, and it can be expected that
similar proposals may be introduced in the future. Under federal tax legislation
enacted in 1986, the federal income tax exemption for interest on certain
municipal obligations was eliminated or restricted. As a result of such
legislation, the availability of municipal obligations for investment by the
Portfolio and the value of the securities held by it may be affected.
In the course of managing its investments, the Portfolio may realize some
short-term and long-term capital gains (and/or losses) as a result of market
transactions, including sales of portfolio securities and rights to when- issued
securities and options and futures transactions. The Portfolio may also realize
taxable income from certain short-term taxable obligations, securities loans, a
portion of discount with respect to certain stripped municipal obligations or
their stripped coupons and certain realized gains or income attributable to
accrued market discount. Any distributions by the Fund of its share of such
capital gains (after reduction by any capital loss carryforwards) or taxable
income would be taxable to shareholders of the Fund. However, it is expected
that such amounts, if any, would normally be insubstantial in relation to the
tax exempt interest earned by the Portfolio and allocated to the Fund. Certain
distributions if declared in October, November or December and paid the
following January may be taxed to shareholders as if received on December 31 of
the year in which they are declared.
The Portfolio's transactions in options and futures contracts will be
subject to special tax rules that may affect the amount, timing and character of
Fund distributions to shareholders. For example, certain positions held by the
Portfolio on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out on such day), and any resulting gain or loss
will generally be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by the Portfolio that substantially diminish the
Portfolio's risk of loss with respect to other positions in its portfolio may
constitute "straddles," which are subject to tax rules that may cause deferral
of Portfolio losses, adjustments in the holding period of Portfolio securities
and conversion of short-term into long-term capital losses. The Portfolio may
have to limit its activities in options and futures contracts in order to enable
the Fund to maintain its RIC status.
Any loss realized upon the sale or exchange of shares of the Fund with a tax
holding period of 6 months or less will be disallowed to the extent the
shareholder has received tax-exempt interest with respect to such shares and, to
the extent the loss exceeds the disallowed amount, will be treated as a
long-term capital loss to the extent of any distribution treated as net
long-term capital gains with respect to such shares. In addition, a loss
realized on a redemption or other disposition of Fund shares may be disallowed
to the extent the shareholder acquired other Fund shares (whether through the
reinvestment of distributions or otherwise) within the period beginning 30 days
before the redemption of the loss shares and ending 30 days after such date.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS"), as well as shareholders with respect to whom the Fund has received
notification from the IRS or a broker, may be subject to "backup" withholding of
federal income tax from the Fund's taxable dividends and distributions as well
as the proceeds of redemption transactions (including repurchases and
exchanges), at a rate of 31%. An individual's TIN is generally his or her social
security number.
Non-resident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% on the Fund's distributions from its ordinary income and the excess of
its net short-term capital gain over its net long-term capital loss, unless the
tax is reduced or eliminated by an applicable tax convention. Distributions from
the excess of the Fund's net long-term capital gain over its net short-term
capital loss received by such shareholders and any gain from the sale or other
disposition of shares of the Fund generally will not be subject to U.S. federal
income taxation, provided that non-resident alien status has been certified by
the shareholder. Different U.S. tax consequences may result if: (i) the
shareholder is engaged in a trade or business in the United States; (ii) the
shareholder is present in the United States for a sufficient period of time
during a taxable year to be treated as a U.S. resident, (generally 180 days or
more); or (iii) the shareholder fails to provide any required certifications
regarding its status as a non-resident alien investor. Foreign shareholders
should consult their tax advisers regarding the U.S. and foreign tax
consequences of an investment in the Fund.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, insurance
companies and financial institutions. Shareholders should consult their own tax
advisers with respect to special tax rules that may apply in their particular
situations, as well as the state, local, and, where applicable, foreign tax
consequences of investing in the Fund.
STATE AND LOCAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of the Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but taxable generally on income derived from obligations of other
jurisdictions. The Fund will report annually to shareholders, with respect to
net tax exempt income earned, the percentages representing the proportionate
ratio of such income earned in each state.
Shareholders should consult their own tax advisers with respect to the
state, local and foreign tax consequences of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it. BMR places the portfolio security transactions of the Portfolio
and of all other accounts managed by it for execution with many firms. BMR uses
its best efforts to obtain execution of portfolio security transactions at
prices which are advantageous to the Portfolio and at reasonably competitive
spreads or (when a disclosed commission is being charged) at reasonably
competitive commission rates. In seeking such execution, BMR will use its best
judgment in evaluating the terms of a transaction, and will give consideration
to various relevant factors, including without limitation the full range and
quality of the executing firm's services, the value of the brokerage and
research services provided, the responsiveness of the firm to BMR, the size and
type of the transaction, the nature and character of the market for the
security, the confidentiality, speed and certainty of effective execution
required for the transaction, the general execution and operational capabilities
of the executing firm, the reputation, reliability, experience and financial
condition of the firm, the value and quality of the services rendered by the
firm in this and other transactions, and the reasonableness of the spread or
commission, if any. Municipal obligations, including state obligations,
purchased and sold by the Portfolio are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through broker-dealers and
banks acting for their own account rather than as brokers, or otherwise involve
transactions directly with the issuer of such obligations. Such firms attempt to
profit from such transactions by buying at the bid price and selling at the
higher asked price of the market for such obligations, and the difference
between the bid and asked price is customarily referred to as the spread. The
Portfolio may also purchase municipal obligations from underwriters, and dealers
in fixed-price offerings, the cost of which may include undisclosed fees and
concessions to the underwriters. On occasion it may be necessary or appropriate
to purchase or sell a security through a broker on an agency basis, in which
case the Portfolio will incur a brokerage commission. Although spreads or
commissions on portfolio security transactions will, in the judgment of BMR, 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 Portfolio and BMR's
other clients for providing brokerage and research services to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such compensation was reasonable in relation to
the value of the brokerage and research services provided. This determination
may be made either on the basis of that particular transaction or on the basis
of overall responsibilities which BMR and its affiliates have for accounts over
which they exercise investment discretion. In making any such determination, BMR
will not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include advice as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and the "Research
Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, analytical, statistical and quotation services, data, information and
other services, products and materials which assist such advisers in the
performance of their investment responsibilities ("Research Services") from
broker-dealer firms which execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, BMR receives Research Services from
many broker-dealer firms with which BMR places the Portfolio transactions and
from third parties with which these broker-dealers have arrangements. These
Research Services include such matters as general economic, political, business
and market information, industry and company reviews, evaluations of securities
and portfolio strategies and transactions, proxy voting data and analysis
services, technical analysis of various aspects of the securities market,
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by BMR in connection with
client accounts other than those accounts which pay commissions to such
broker-dealer. Any such Research Service may be broadly useful and of value to
BMR in rendering investment advisory services to all or a significant portion of
its clients, or may be relevant and useful for the management of only one
client's account or of a few clients' accounts, or may be useful for the
management of merely a segment of certain clients' accounts, regardless of
whether any such account or accounts paid commissions to the broker-dealer
through which such Research Service was obtained. The advisory fee paid by the
Portfolio is not reduced because BMR receives such Research Services. BMR
evaluates the nature and quality of the various Research Services obtained
through broker-dealer firms and attempts to allocate sufficient portfolio
security transactions to such firms to ensure the continued receipt of Research
Services which BMR believes are useful or of value to it in rendering investment
advisory services to its clients.
The Portfolio and BMR may also receive Research Services from underwriters
and dealers in fixed-price offerings, which Research Services are reviewed and
evaluated by BMR in connection with its investment responsibilities. The
investment companies sponsored by BMR or Eaton Vance may allocate trades in such
offerings to acquire information relating to the performance, fees and expenses
of such companies and other mutual funds, which information is used by the
Trustees of such companies to fulfill their responsibility to oversee the
quality of the services provided by various entities, including BMR, to such
companies. Such companies may also pay cash for such information.
Subject to the requirement that BMR shall use its best efforts to seek and
execute portfolio security transactions at advantageous prices and at reasonably
competitive spreads or commission rates, BMR is authorized to consider as a
factor in the selection of any broker-dealer firm with whom portfolio orders may
be placed the fact that such firm has sold or is selling shares of the Fund or
of other investment companies sponsored by BMR or Eaton Vance. This policy is
not inconsistent with a rule of the NASD, which rule provides that no firm which
is a member of the NASD shall favor or disfavor the distribution of shares of
any particular investment company or group of investment companies on the basis
of brokerage commissions received or expected by such firm from any source.
Municipal obligations considered as investments for the Portfolio may also
be appropriate for other investment accounts managed by BMR or its affiliates.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR 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 Portfolio 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 invesment 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
BMR 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
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. For the
fiscal years ended September 30, 1998, 1997 and 1996, the Portfolio paid
brokerage commissions of $57,350, $145,625 and $123,200, respectively, on
portfolio security transactions aggregating $1,164,943,417, $2,781,589,000 and
$1,545,011,045, respectively, to firms which provided some research services to
BMR or its affiliates (although many of such firms may have been selected in any
particular transaction primarily because of their execution capabilities).
FINANCIAL STATEMENTS
The audited financial statements, and independent auditors' report, and the
unaudited semi-annual financial statements for the Fund and the Portfolio,
appear in the Fund's most recent annual and semi-annual reports to shareholders
and are incorporated by reference into this SAI. A copy of the Fund's annual and
semi-annual reports accompany this SAI. Consistent with applicable law,
duplicate mailings of shareholder reports and certain other Fund information to
shareholders residing at the same address may be eliminated.
Registrant incorporates by reference the audited and unaudited financial
information for the Fund and the Portfolio for the fiscal year ended September
30, 1998 (Accession No. 0000950109-98-005361) and the unaudited semi-annual
period ended March 31, 1999 (Accession No. 0001047469-99-021998), respectively,
as previously filed electronically with the SEC.
<PAGE>
APPENDIX A
INSTITUTIONAL SHARES
PERFORMANCE
PERFORMANCE INFORMATION
The table below indicates the cumulative and average total return on a
hypothetical investment in shares of $1,000 in the Retail Shares of the Fund,
adjusted to eliminate the sales charge applicable to Retail Shares (but not
adjusted to reflect certain other differences in expenses). Past performance is
not indicative of future results. Investment return and principal value will
fluctuate; shares, when redeemed, may be worth more or less than their original
cost.
VALUE OF A $1,000 INVESTMENT
VALUE OF TOTAL RETURN
INVESTMENT INVESTMENT AMOUNT OF INVESTMENT ----------------------
PERIOD* DATE INVESTMENT ON 3/31/99 CUMULATIVE ANNUALIZED
- ---------------------- --------- ---------- ---------- ---------- ----------
10 Years Ended 3/31/99 3/31/89 $1,000 $2,108.23 110.82% 7.74%
5 Years Ended 3/31/99 3/31/94 $1,000 $1,448.10 44.81% 7.69%
1 Year Ended 3/31/99 3/31/98 $1,000 $1,030.87 13.09% 3.09%
<PAGE>
APPENDIX B: TAX EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields to those of tax-exempt bonds
yielding from 4% to 7% under the regular federal income tax laws and tax rates
applicable to 1999.
<TABLE>
<CAPTION>
MARGINAL
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- --------------------- ------------------- TAX --------------------------------------------------------------------------
(TAXABLE INCOME)* BRACKET 4% 4.5% 5% 5.5% 6% 6.5% 7%
- ------------------------------------------ ----------- --------------------------------------------------------------------------
Equivalent Taxable Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Up to $ 25,750 Up to $ 43,050 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
$ 25,751-$ 62,450 $ 43,051-$104,050 28.00 5.56 6.25 6.94 7.64 8.33 9.03 9.72
$ 62,451-$130,250 $104,051-$158,550 31.00 5.80 6.52 7.25 7.97 8.70 9.42 10.14
$130,251-$283,150 $158,551-$283,150 36.00 6.25 7.03 7.81 8.59 9.38 10.16 10.94
Over $283,150 Over $283,150 39.60 6.62 7.45 8.28 9.11 9.93 10.76 11.59
- ------------------------------------------ ----------- --------------------------------------------------------------------------
*Net amount subject to federal personal income tax after deductions and exemptions.
</TABLE>
Note: The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
taxpayers with adjusted gross income in excess of $126,600. The tax brackets
also do not show the effects of phase out of personal exemptions for single
filers with adjusted gross incomes in excess of $126,600 and joint filers with
adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of such taxpayers will be higher than those indicated
above.
Yields shown are for illustration purposes only and are not meant to represent
the Fund's actual yield. No assurance can be given that the Fund will achieve
any specific tax exempt yield. While it is expected that the Portfolio will
invest principally in obligations, the interest from which is exempt from the
regular federal income tax, other income received by the Portfolio and allocated
to the Fund may be taxable. The table does not take into account state or local
taxes, if any, payable on Fund distributions. It should also be noted that the
interest earned on certain "private activity bonds" issued after August 7, 1986,
while exempt from the regular federal income tax, is treated as a tax preference
item which could subject the recipient to the federal alternative minimum tax.
The illustrations assume that the federal alternative minimum tax is not
applicable and do not take into account any tax credits that may be available.
The information set forth above is as of the date of this SAI. Subsequent tax
law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax equivalent yields set forth above. Investors should
consult their tax adviser for additional information.
<PAGE>
APPENDIX C: RATINGS
DESCRIPTION OF SECURITIES RATINGS+
MOODY'S INVESTORS SERVICE, INC.
MUNICIPAL BONDS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." 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 are generally 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 risk appear somewhat larger than the Aaa securities.
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 thereby not well safeguarded
during other 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 represent 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.
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
- ----------
+The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which would be given to these securities on the
date of the Portfolio's fiscal year end.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
MUNICIPAL SHORT-TERM OBLIGATIONS
Ratings: Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such rating recognizes the
differences between short term credit risk and long term risk. Factors effecting
the liquidity of the borrower and short term cyclical elements are critical in
short term ratings, while other factors of major importance in bond risk, long
term secular trends for example, may be less important over the short run.
A short term rating may also be assigned on an issue having a demand feature,
variable rate demand obligation (VRDO). Such ratings will be designated as
VMIG1, SG or if the demand feature is not rated, NR. A short term rating on
issues with demand features are differentiated by the use of the VMIG1 symbol to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it 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 debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces 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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Deposit Insurance Corp. and interest is adequately collateralized.
In the case of certificates of deposit, the letter "L" indicates that the
deposit, combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the federal
insurance limits within 30 days after closing of the insured institution or, in
the event that the deposit is assumed by a successor insured institution, upon
maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MUNICIPAL NOTES
S&P note ratings reflect the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus(+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH IBCA
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
AAA: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified that could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D' represents
the lowest potential for recovery.
Plus (+) or Minus (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Stong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the 'F-1+' and 'F-1' categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Portfolio is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
<PAGE>
PART C - OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Amended and Restated Declaration of Trust of Eaton Vance Municipals
Trust dated January 11, 1993, filed as Exhibit (1)(a) to
Post-Effective Amendment No. 55 and incorporated herein by
reference.
(2) Amendment dated June 23, 1997 to the Declaration of Trust filed as
Exhibit (1)(b) to Post-Effective Amendment No. 67 and incorporated
herein by reference.
(3) Establishment and Designation of Classes of Shares of Beneficial
Interest, without Par Value, dated November 18, 1996 filed as
Exhibit (1)(c) to Post-Effective Amendment No. 62 and incorporated
herein by reference.
(b)(1) By-Laws as amended October 21, 1987 filed as Exhibit (2)(a) to
Post-Effective Amendment No. 55 and incorporated herein by
reference.
(2) Amendment to By-Laws of Eaton Vance Municipals Trust dated December
13, 1993 filed as Exhibit (2)(b) to Post-Effective Amendment No. 55
and incorporated herein by reference.
(c) Reference is made to Item 23(a) and 23(b) above.
(d) Not applicable
(e)(1) Distribution Agreement between Eaton Vance Municipals Trust and
Eaton Vance Distributors, Inc. effective June 23, 1997 with attached
Schedule A effective June 23, 1997 filed as Exhibit (6)(a)(7) to
Post-Effective Amendment No. 67 and incorporated herein by
reference.
(2) Selling Group Agreement between Eaton Vance Distributors, Inc. and
Authorized Dealers filed as Exhibit (6)(b) to the Post-Effective
Amendment No. 61 to the Registration Statement of Eaton Vance Growth
Trust (File Nos. 2-22019, 811-1241) and incorporated herein by
reference.
(f) The Securities and Exchange Commission has granted the Registrant an
exemptive order that permits the Registrant to enter into deferred
compensation arrangements with its independent Trustees. See in the
Matter of Capital Exchange Fund, Inc., Release No. IC-20671
(November 1, 1994).
(g)(1) Custodian Agreement with Investors Bank & Trust Company dated
October 15, 1992 filed as Exhibit (8) to Post-Effective Amendment
No. 55 and incorporated herein by reference.
(2) Amendment to Custodian Agreement with Investors Bank & Trust Company
dated October 23, 1995 filed as Exhibit (8)(b) to Post-Effective
Amendment No. 57 and incorporated herein by reference.
(3) Amendment to Master Custodian Agreement with Investors Bank & Trust
Company dated December 21, 1998 filed as Exhibit (g)(3) to
Post-Effective Amendment No. 78 and incorporated herein by
reference.
(h)(1)(a) Amended Administrative Services Agreement between Eaton Vance
Municipals Trust (on behalf of each of its series) and Eaton Vance
C-1
<PAGE>
Management with attached schedules (including Amended Schedule A
dated September 29, 1995) filed as Exhibit (9)(a) to
Post-Effective Amendment No. 55 and incorporated herein by
reference.
(b) Amendment to Schedule A dated June 23, 1997 to the Amended
Administrative Services Agreement dated June 19, 1995 filed as
Exhibit (9)(a)(2) to Post-Effective Amendment No. 67 and
incorporated herein by reference.
(2) Transfer Agency Agreement dated January 1, 1998 filed as Exhibit
(k)(b) to the Registration Statement on Form N-2 of Eaton Vance
Advisers Senior Floating-Rate Fund (File Nos. 333-46853, 811-08671)
(Accession No. 0000950156-98-000172) and incorporated herein by
reference.
(i)(1) Opinion of Internal Counsel filed as Exhibit (i) to Post-Effective
Amendment No. 73 and incorporated herein by reference.
(2) Consent of Counsel filed herewith.
(j) Consent of Independent Accountants for Eaton Vance National
Municipals Fund and National Municipals Portfolio filed herewith.
(k) Not applicable
(l) Not applicable
(m)(1) Eaton Vance Municipals Trust Class A Service Plan adopted June 23,
1997 with attached Schedule A effective June 23, 1997 filed as
Exhibit (15)(g) to Post-Effective Amendment No. 67 and incorporated
herein by reference.
(2) Eaton Vance Municipals Trust Class B Distribution Plan adopted June
23, 1997 with attached Schedule A effective June 23, 1997 filed as
Exhibit (15)(b) to Post-Effective Amendment No. 69 and incorporated
herein by reference.
(3) Eaton Vance Municipals Trust Class C Distribution Plan adopted June
23, 1997 with attached Schedule A effective June 23, 1997 filed as
Exhibit (15)(c) to Post-Effective Amendment No. 69 and incorporated
herein by reference.
(n) Not applicable
(o) Multiple Class Plan for Eaton Vance Funds dated June 23, 1997 filed
as Exhibit (18) to Post-Effective Amendment No. 67 and incorporated
herein by reference.
(p)(1) Power of Attorney for Eaton Vance Municipals Trust dated April 22,
1997 filed as Exhibit (17)(a) to Post-Effective Amendment No. 65 and
incorporated herein by reference.
(2) Power of Attorney for Eaton Vance Municipals Trust dated November
16, 1998 filed as Exhibit (p)(2) to Post-Effective Amendment No. 75
and incorporated herein by reference.
(3) Power of Attorney for Alabama Municipals Portfolio, Arizona
Municipals Portfolio, Arkansas Municipals Portfolio, California
Municipals Portfolio, Colorado Municipals Portfolio, Connecticut
Municipals Portfolio, Florida Municipals Portfolio, Georgia
Municipals Portfolio, Kentucky Municipals Portfolio, Louisiana
Municipals Portfolio, Maryland Municipals Portfolio, Massachusetts
Municipals Portfolio, Michigan Municipals Portfolio, Minnesota
C-2
<PAGE>
Municipals Portfolio, Mississippi Municipals Portfolio, Missouri
Municipals Portfolio, National Municipals Portfolio, New Jersey
Municipals Portfolio, New York Municipals Portfolio, North Carolina
Municipals Portfolio, Ohio Municipals Portfolio, Oregon Municipals
Portfolio, Pennsylvania Municipals Portfolio, Rhode Island
Municipals Portfolio, South Carolina Municipals Portfolio, Tennessee
Municipals Portfolio, Texas Municipals Portfolio, Virginia
Municipals Portfolio and West Virginia Municipals Portfolio dated
April 22, 1997 filed as Exhibit (17)(b) to Post-Effective Amendment
No. 65 and incorporated herein by reference.
(4) Power of Attorney for Alabama Municipals Portfolio, Arizona
Municipals Portfolio, Arkansas Municipals Portfolio, California
Municipals Portfolio, Colorado Municipals Portfolio, Connecticut
Municipals Portfolio, Florida Municipals Portfolio, Georgia
Municipals Portfolio, Kentucky Municipals Portfolio, Louisiana
Municipals Portfolio, Maryland Municipals Portfolio, Massachusetts
Municipals Portfolio, Michigan Municipals Portfolio, Minnesota
Municipals Portfolio, Mississippi Municipals Portfolio, Missouri
Municipals Portfolio, National Municipals Portfolio, New Jersey
Municipals Portfolio, New York Municipals Portfolio, North Carolina
Municipals Portfolio, Ohio Municipals Portfolio, Oregon Municipals
Portfolio, Pennsylvania Municipals Portfolio, Rhode Island
Municipals Portfolio, South Carolina Municipals Portfolio, Tennessee
Municipals Portfolio, Texas Municipals Portfolio, Virginia
Municipals Portfolio and West Virginia Municipals Portfolio dated
November 16, 1998 filed as Exhibit (p)(4) to Post-Effective
Amendment No. 75 and incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not applicable
ITEM 25. INDEMNIFICATION
Article IV of the Registrant's Amended and Restated Declaration of Trust
permits Trustee and officer indemnification by By-law, contract and vote.
Article XI of the By-Laws contains indemnification provisions. Registrant's
Trustees and officers are insured under a standard mutual fund errors and
omissions insurance policy covering loss incurred by reason of negligent errors
and omissions committed in their capacities as such.
The distribution agreements of the Registrant also provide for reciprocal
indemnity of the principal underwriter, on the one hand, and the Trustees and
officers, on the other.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the caption
"Management and Organization" in the Statement of Additional Information; (ii)
the Eaton Vance Corp. 10-K filed under the Securities Exchange Act of 1934 (File
No. 1-8100); and (iii) the Form ADV of Eaton Vance Management (File No.
801-15930) and Boston Management and Research (File No. 801-43127) filed with
the Commission, all of which are incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Registrant's principal underwriter, Eaton Vance Distributors, Inc., a
wholly-owned subsidiary of Eaton Vance Management, is the principal
underwriter for each of the investment companies named below:
Eaton Vance Advisers Senior Eaton Vance Municipals Trust II
C-3
<PAGE>
Floating-Rate Fund
Eaton Vance Growth Trust Eaton Vance Mutual Funds Trust
Eaton Vance Income Fund of Boston Eaton Vance Prime Rate Reserves
Eaton Vance Institutional Senior Eaton Vance Special Investment Trust
Floating-Rate Fund
Eaton Vance Investment Trust EV Classic Senior Floating-Rate Fund
Eaton Vance Municipals Trust
(b)
<TABLE>
<CAPTION>
<S> <C> <C>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
----------------- -------------------------- ---------------------
Albert F. Barbaro Vice President None
Chris Berg Vice President None
Kate B. Bradshaw Vice President None
Mark Carlson Vice President None
Daniel C. Cataldo Vice President None
Raymond Cox Vice President None
Peter Crowley Vice President None
Mark P. Doman Vice President None
Alan R. Dynner Vice President Secretary
Richard A. Finelli Vice President None
Kelly Flynn Vice President None
James Foley Vice President None
Michael A. Foster Vice President None
William M. Gillen Senior Vice President None
Hugh S. Gilmartin Vice President None
James B. Hawkes Vice President and Director Vice President and Trustee
Perry D. Hooker Vice President None
Brian Jacobs Senior Vice President None
Thomas P. Luka Vice President None
John Macejka Vice President None
Stephen Marks Vice President None
Joseph T. McMenamin Vice President None
Morgan C. Mohrman Senior Vice President None
James A. Naughton Vice President None
Joseph Nelson Vice President None
Mark D. Nelson Vice President None
Linda D. Newkirk Vice President None
James L. O'Connor Vice President Treasurer
Andrew Ogren Vice President None
Thomas Otis Secretary and Clerk None
George D. Owen, II Vice President None
Enrique M. Pineda Vice President None
F. Anthony Robinson Vice President None
Frances Rogell Vice President None
Jay S. Rosoff Vice President None
Benjamin A. Rowland, Jr. Vice President, Treasurer and Director None
Stephen M. Rudman Vice President None
Kevin Schrader Vice President None
George V.F. Schwab, Jr. Vice President None
Teresa A. Sheehan Vice President None
William M. Steul Vice President and Director None
Cornelius J. Sullivan Senior Vice President None
Peter Sykes Vice President None
David M. Thill Vice President None
John M. Trotsky Vice President None
Jerry Vainisi Vice President None
Chris Volf Vice President None
Wharton P. Whitaker President and Director None
Sue Wilder Vice President None
</TABLE>
- -----------------------------------------
* Address is The Eaton Vance Building, 255 State Street, Boston, MA 02109
C-4
<PAGE>
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
16th Floor, Mail Code ADM27, Boston, MA 02116, and its transfer agent, First
Data Investor Services Group, 4400 Computer Drive, Westborough, MA 01581-5120,
with the exception of certain corporate documents and portfolio trading
documents which are in the possession and custody, Eaton Vance Management, The
Eaton Vance Building, 255 State Street, Boston, MA 02109. Registrant is informed
that all applicable accounts, books and documents required to be maintained by
registered investment advisers are in the custody and possession of Eaton Vance
Management and Boston Management and Research.
ITEM 29. MANAGEMENT SERVICES
Not applicable
ITEM 30. UNDERTAKINGS
Not applicable
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Boston, and the
Commonwealth of Massachusetts, on June 23, 1999.
EATON VANCE MUNICIPALS TRUST
By: /s/ THOMAS J. FETTER
-------------------------------------
Thomas J. Fetter, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in their capacities on June 23, 1999.
Signature Title
- --------- -----
/s/ Thomas J. Fetter President (Chief Executive Officer)
- -----------------------------
Thomas J. Fetter
/s/ James L. O'Connor Treasurer (Principal Financial and
- ----------------------------- Accounting Officer)
James L. O'Connor
Jessica M. Bibliowicz* Trustee
- -----------------------------
Jessica M. Bibliowicz
Donald R. Dwight* Trustee
- -----------------------------
Donald R. Dwight
/s/ James B. Hawkes Trustee
- -----------------------------
James B. Hawkes
Samuel L. Hayes, III* Trustee
- -----------------------------
Samuel L. Hayes, III
Norton H. Reamer* Trustee
- -----------------------------
Norton H. Reamer
Lynn A. Stout* Trustee
- -----------------------------
Lynn A. Stout
John L. Thorndike* Trustee
- -----------------------------
John L. Thorndike
Jack L. Treynor* Trustee
- -----------------------------
Jack L. Treynor
*By: /s/ Alan R. Dynner
------------------------
Alan R. Dynner (As attorney-in-fact)
C-6
<PAGE>
SIGNATURES
National Municipals Portfolio has duly caused this Amendment to the
Registration Statement on Form N-1A of Eaton Vance Municipals Trust (File No.
33-572) to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of Boston and the Commonwealth of Massachusetts on June 23, 1999.
NATIONAL MUNICIPALS PORTFOLIO
By: /s/ THOMAS J. FETTER
-------------------------------------
Thomas J. Fetter, President
This Amendment to the Registration Statement on Form N-1A of Eaton Vance
Municipals Trust (File No. 33-572) has been signed below by the following
persons in their capacities on June 23, 1999.
Signature Title
- --------- -----
/s/ Thomas J. Fetter President (Chief Executive Officer)
- -----------------------------
Thomas J. Fetter
/s/ James L. O'Connor Treasurer (Principal Financial and
- ----------------------------- Accounting Officer)
James L. O'Connor
Jessica M. Bibliowicz* Trustee
- -----------------------------
Jessica M. Bibliowicz
Donald R. Dwight* Trustee
- -----------------------------
Donald R. Dwight
/s/ James B. Hawkes Trustee
- -----------------------------
James B. Hawkes
Samuel L. Hayes, III* Trustee
- -----------------------------
Samuel L. Hayes, III
Norton H. Reamer* Trustee
- -----------------------------
Norton H. Reamer
Lynn A. Stout* Trustee
- -----------------------------
Lynn A. Stout
John L. Thorndike* Trustee
- -----------------------------
John L. Thorndike
Jack L. Treynor* Trustee
- -----------------------------
Jack L. Treynor
*By: /s/ Alan R. Dynner
------------------------
Alan R. Dynner (As attorney-in-fact)
C-7
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this amendment to the
Registration Statement pursuant to Rule 483 of Regulation C.
Exhibit No. Description
- ----------- -----------
(i)(2) Consent of Internal Counsel to Opinion
(j) Consent of Independent Auditors for Eaton Vance National
Municipals Fund and National Municipals Portfolio
C-8
<PAGE>
EXHIBIT (I)(2)
CONSENT OF COUNSEL
I consent to the incorporation by reference in this Post-Effective
Amendment No. 79 to the Registration Statement of Eaton Vance Municipals Trust
(1933 Act File No. 33-572) of my opinion dated September 25, 1998, which was
filed as Exhibit (i) to Post-Effective Amendment No. 73.
/s/ Maureen A. Gemma
--------------------------------
Maureen A. Gemma, Esq.
June 23, 1999
Boston, Massachusetts
<PAGE>
EXHIBIT (J)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into the Prospectus and
Statement of Additional Information in this Post-Effective Amendment No. 79 to
the Registration Statement of Eaton Vance Municipals Trust (1933 Act File No.
33-572) of our reports each dated October 30, 1998 on the financial statements,
supplementary data and financial highlights of National Municipals Portfolio and
Eaton Vance National Municipals Fund included in the September 30, 1998 Annual
Report to Shareholders of Eaton Vance National Municipals Fund.
We also consent to the reference to our Firm under the heading "Other
Service Providers" in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
------------------------------------
DELOITTE & TOUCHE LLP
June 23, 1999
Boston, Massachusetts
