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As filed with the Securities and Exchange Commission on July 25, 1996
File No. 811-7218
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 3 [x]
CALIFORNIA LIMITED MATURITY
MUNICIPALS PORTFOLIO
(formerly called California Limited Maturity Tax Free Portfolio)
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(Exact Name of Registrant as Specified in Charter)
24 Federal Street
Boston, Massachusetts 02110
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 482-8260
H. Day Brigham, Jr.
24 Federal Street, Boston, Massachusetts 02110
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(Name and Address of Agent for Service)
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EXPLANATORY NOTE
This Registration Statement, as amended, has been filed by the
Registrant pursuant to Section 8(b) of the Investment Company Act of 1940,
as amended. However, interests in the Registrant have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), because
such interests will be issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section
4(2) of the 1933 Act. Investments in the Registrant may be made only by
investment companies, common or commingled trust funds, or similar
organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Registration Statement,
as amended, does not constitute an offer to sell, or the solicitation of
an offer to buy, any interest in the Registrant.
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PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant
to Paragraph 4 of Instruction F of the General Instructions to Form N-1A.
Item 4. General Description of Registrant
California Limited Maturity Municipals Portfolio (the
"Portfolio") is a non-diversified, open-end management investment company
which was organized as a trust under the laws of the State of New York on
May 1, 1992. Interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within
the meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"1933 Act"). Investments in the Portfolio may be made only by U.S. and
foreign investment companies, common or commingled trust funds, or similar
organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Registration Statement,
as amended, does not constitute an offer to sell, or the solicitation of
an offer to buy, any "security" within the meaning of the 1933 Act.
The Portfolio's investment objective is to provide (1) a high
level of current income exempt from regular federal income tax and
California State personal income taxes and (2) limited principal
fluctuation. The Portfolio seeks to achieve its objective by investing
primarily in municipal obligations (as described below) having a dollar
weighted average duration of between three and nine years and which are
rated at least investment grade by a major rating agency or, if unrated,
are determined to be of at least investment grade quality by the
Portfolio's investment adviser, Boston Management and Research (the
"Investment Adviser" or "BMR").
Additional information about the investment policies of the
Portfolio appears in Part B. The Portfolio is not intended to be a
complete investment program, and a prospective investor should take into
account its objectives and other investments when considering the purchase
of interests in the Portfolio. The Portfolio cannot assure achievement of
its investment objective.
Investment Policies and Risks
The Portfolio seeks to achieve its investment objective by
investing at least 80% of its net assets during periods of normal market
conditions in municipal obligations, the interest on which is exempt from
regular federal income tax and from California State personal income
taxes.
At least 80% of the Portfolio's net assets will normally be
invested in 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
("S&P") or Fitch Investors Service, Inc. ("Fitch")) or, if unrated,
determined by the Investment Adviser to be of at least investment grade
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quality. The balance of the Portfolio's net assets may be invested in
municipal obligations rated below investment grade (but not lower than B
by Moody's, S&P or Fitch) and unrated municipal obligations considered to
be of comparable quality by the Investment Adviser. Municipal obligations
rated Baa or BBB may have speculative characteristics. Also, changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the case
of higher rated obligations. Securities rated below Baa or BBB are
commonly known as "junk bonds". The Portfolio may retain an obligation
whose rating drops below B after its acquisition if such retention is
considered desirable by the Investment Adviser. See "Additional Risk
Considerations." For a description of municipal obligation ratings, see
the Appendix to Part B.
In pursuing its investment objective, the Portfolio seeks to
invest in a portfolio having a dollar weighted average duration of between
three and nine years. Duration represents the dollar weighted average
maturity of expected cash flows (i.e., interest and principal payments) on
one or more debt obligations, discounted to their present values. The
duration of an obligation is usually not more than its stated maturity and
is related to the degree of volatility in the market value of the
obligation. Maturity measures only the time until a bond or other debt
security provides its final payment; it does not take into account the
pattern of a security's payments over time. Duration takes both interest
and principal payments into account and, thus, in the Investment Adviser's
opinion, is a more accurate measure of a debt security's sensitivity to
changes in interest rates. In computing the duration of its portfolio, the
Portfolio will have to estimate the duration of debt obligations that are
subject to prepayment or redemption by the issuer, based on projected cash
flows from such obligations.
The Portfolio may use various techniques to shorten or lengthen
the dollar weighted average duration of its portfolio, including the
acquisition of debt obligations at a premium or discount, and transactions
in futures contracts and options on futures. Subject to the requirement
that the dollar weighted average portfolio duration will not exceed nine
years, the Portfolio may invest in individual debt obligations of any
maturity.
Municipal Obligations. 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 which is, in the opinion
of bond counsel, exempt from regular federal income tax. Public purpose
municipal bonds include general obligation bonds and revenue bonds.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or
facility. Municipal notes include bond anticipation notes, tax
anticipation notes and revenue anticipation notes. Bond, tax and revenue
anticipation notes are short-term obligations that will be retired with
the proceeds of an anticipated bond issue, tax revenue or facility
revenue, respectively. Under normal market conditions, the Portfolio will
invest at least 65% of its total assets in obligations issued by the State
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of California or its political subdivisions.
Distributions to corporate investors of interest income from
certain types of municipal obligations may be subject to the federal
alternative minimum tax (the "AMT"). As at March 31, 1996, the Portfolio
had invested 20.3% of its net assets in such obligations. The Portfolio
may not be suitable for investors subject to the AMT.
Concentration in California Issuers Risks. Because the
Portfolio will normally invest at least 65% of its total assets in
obligations of California issuers, it is more susceptible to factors
adversely affecting such issuers than mutual funds that do not concentrate
in the obligations of issuers located in a single State. Municipal
obligations of issuers located in a single State may be adversely effected
by economic developments and by legislation and other governmental
activities in that State. To the extent that the Portfolio's assets are
concentrated in municipal obligations of California issuers, the Portfolio
may be subject to an increased risk of loss.
From the latter years of the 1980s through fiscal year 1992-1993,
California weathered a turbulent period of repeated budgetary imbalance.
Even as rapid population growth escalated the demand for government
services, an economic recession ravaged the State's revenue base and drove
expenditures above budget appropriations.
Bolstered by strengthening revenues, reduced caseload growth and
an improving economy, the State has begun to experience some relief from
the serious budgetary pressures that characterized a significant portion
of the decade. Reflecting the belief shared by many analysts that the
California economy would remain strong, the 1996-1997 Budget Act allocated
a State budget of some $63 billion. In the context of optimistic revenue
projections released by the Department of Finance, the Budget Act granted
a $230 million tax cut to corporations while simultaneously providing an
increase in funding for education and prisons. However, only a relatively
modest amount, $287 million, was allocated to the reserve fund available
for emergencies such as earthquakes.
Nonetheless, the State's budgetary fortunes continue to be
subject to unforeseeable events. In December, 1994, for example, Orange
County, California and its Investment Pool filed for bankruptcy. A plan
of adjustment has been approved by the court and became effective under
which all non-municipal creditors are to be paid in full. However, the
ultimate financial impact on the County and the State cannot be predicted
with any certainty. In addition, constant fluctuations in other factors
affecting the State -- including health and welfare caseloads, property
tax receipts, federal funding and extraordinary expenditures related to
natural disasters -- will undoubtedly create new budget challenges.
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Furthermore, certain California constitutional amendments,
legislative measures, executive orders, administrative regulations and
voter initiatives could produce the adverse effects on the California
economy. Among these are measures that have established tax, spending or
appropriations limits and prohibited the imposition of certain new taxes,
authorized the transfers of tax liabilities and reallocations of tax
receipts among governmental entities and provided for minimum levels of
funding.
Finally, certain bonds in the Trust may be subject to provisions
of California law that could adversely affect payments on those bonds or
limit the remedies available to bondholders. Among these are bonds of
health care institutions which are subject to the strict rules and limits
regarding reimbursement payments of California's Medi-Cal Program for
health care services to welfare beneficiaries, and bonds secured by liens
on real property.
As a result of the significant economic and fiscal problems
described above, the State's debt was downgraded by all three rating
agencies from Aa to A1 by Moody's, from A+ to A by S&P, and from AA to A
by Fitch. Recent economic and financial performance led Fitch to upgrade
the State's rating to A+ in April 1996. The bond ratings provided are
current as of the date hereof and are based on economic conditions that
may not continue; moreover, there can be no assurance that particular bond
issues may not be adversely affected by changes in economic, political or
other conditions. The State's political subdivisions may have different
ratings that are unrelated to the ratings assigned to State obligations.
Subject to the investment policies set forth above, the Portfolio
may invest in obligations of the governments of Puerto Rico, the U.S.
Virgin Islands and Guam. The Portfolio may invest up to 5% of its net
assets in obligations issued by the governments of each of the U.S. Virgin
Islands and Guam, and may invest up to 35% of its net assets in
obligations issued by the government of Puerto Rico. The economy of
Puerto Rico is dominated by the manufacturing and service sectors.
Although the economy of Puerto Rico expanded significantly from fiscal
1984 through fiscal 1990, the rate of this expansion slowed during fiscal
years 1991, 1992 and 1993. Growth in the future will depend on several
factors, including the state of the U.S. economy and the relative
stability in the price of oil, the exchange rate of the U.S. dollar and
the cost of borrowing. In addition, proposed changes to Section 936, a
tax incentive that has encouraged significant industry growth, could have
a dampening effect on the growth or even lead to declines in gross
domestic product. Although the Puerto Rico unemployment rate has declined
substantially since 1985, the seasonally adjusted unemployment rate for
March 1996 was approximately 12.8%. The North American Free Trade
Agreement ("NAFTA"), which became effective January 1, 1994, could lead to
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the loss of Puerto Rico's lower salaried or labor intensive jobs to
Mexico.
S&P rates Puerto Rico general obligation debt A, while Moody's
rates it Baa1; these ratings have been in place since 1956 and 1976,
respectively. S&P assigned a negative outlook on Puerto Rico in 1994.
In addition, the Portfolio may invest 25% or more of its total
assets in municipal obligations of the same type, including, without
limitation, the following: lease rental obligations of State and local
authorities; obligations of State and local housing finance authorities,
municipal utilities systems or public housing authorities; obligations of
hospitals or life care facilities; or industrial development or pollution
control bonds issued for electric utility systems, steel companies, paper
companies or other purposes. This may make the Portfolio more susceptible
to adverse economic, political, or regulatory occurrences affecting a
particular category of issuer. For example, health care-related issuers
are susceptible to medicaid reimbursement policies, and national and State
health care legislation. As the Portfolio's concentration increases, so
does the potential for fluctuation in the value of its interests.
Non-Diversified Status. As a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940 Act"), the
Portfolio may invest, with respect to 50% of its total assets, more than
5% (but not more than 25%) of its total assets in the securities of any
issuer. The Portfolio is likely to invest a greater percentage of its
assets in the securities of a single issuer than would a diversified fund.
Therefore, the Portfolio is more susceptible to any single adverse
economic or political occurrence or development affecting issuers of
municipal obligations.
Other Investment Practices
The Portfolio may engage in the following investment practices,
some of which may be considered to involve "derivative" instruments
because they derive their value from another instrument, security or
index. In addition, the Portfolio may temporarily borrow up to 5% of the
value of its total assets to satisfy redemption requests or settle
securities transactions.
When-Issued Securities. The Portfolio may purchase securities on
a "when-issued" basis, which means that payment and delivery occur on a
future settlement date. The price and yield of such securities are
generally fixed on the date of commitment to purchase. However, the market
value of the securities may fluctuate prior to delivery and upon delivery
the securities may be worth more or less than the Portfolio agreed to pay
for them. The Portfolio may also purchase instruments that give the
Portfolio the option to purchase a municipal obligation when and if
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issued.
Futures Transactions. The Portfolio may purchase and sell
various kinds of financial futures contracts and options thereon to hedge
against changes in interest rates. Futures contracts may be based on
various debt securities (such as U.S. Government securities and municipal
obligations) and securities indices (such as the Municipal Bond Index
traded on the Chicago Board of Trade). Such transactions involve a risk
of loss or depreciation due to unanticipated adverse changes in securities
prices, which may exceed the Portfolio's initial investment in these
contracts. The Portfolio may not purchase or sell futures contracts or
related options, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of margin deposits and
premiums paid on the Portfolio's outstanding positions would exceed 5% of
the market value of the Portfolio's net assets. These transactions
involve transaction costs. There can be no assurance that the Investment
Adviser's use of futures will be advantageous to the Portfolio.
Insured Obligations. The Portfolio may purchase municipal bonds
that are additionally secured by insurance, bank credit agreements, or
escrow accounts. The credit quality of companies which provide such credit
enhancements will affect the value of those securities. Although the
insurance feature reduces certain financial risks, the premiums for
insurance and the higher market price paid for insured obligations may
reduce current yield. Insurance generally will be obtained from insurers
with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch.
The insurance does not guarantee the market value of the insured
obligations or the net asset value of the Portfolio's interests.
Additional Risk Considerations
Many municipal obligations offering high current income are in
the lowest investment grade category (Baa or BBB), lower categories or may
be unrated. As indicated above, the Portfolio may invest in municipal
obligations rated below investment grade (but not lower than B by Moody's,
S&P or Fitch) and comparable unrated obligations. The lowest investment
grade, lower rated and comparable unrated municipal obligations in which
the Portfolio may invest will have speculative characteristics in varying
degrees. While such 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. The
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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 and 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.
The Portfolio may retain defaulted obligations in its portfolio
when such retention is considered desirable by the Investment Adviser. In
the case of a defaulted obligation, the Portfolio may incur additional
expense seeking recovery of its investment. Municipal obligations held by
the Portfolio that are rated below investment grade, but that, 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, 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.
The net asset value of the Portfolio's interests will change in
response to fluctuations in prevailing interest rates and changes in the
value of the securities held by the Portfolio. When interest rates
decline, the value of securities held by the Portfolio can be expected to
rise. Conversely, when interest rates rise, the value of most portfolio
security holdings can be expected to decline. Because the Portfolio
intends to limit its average portfolio duration to no more than nine
years, its net asset value can be expected to be less sensitive to changes
in interest rates than that of a fund with a longer average portfolio
duration. Changes in the credit quality of the issuers of municipal
obligations held by the Portfolio will affect the principal value of (and
possibly the income earned on) such obligations. In addition, the values
of such securities are affected by changes in general economic conditions
and business conditions affecting the specific industries of their
issuers. Changes by recognized rating services in their ratings of a
security and in the ability of the issuer to make payments of principal
and interest may also affect the value of the Portfolio's investments.
The amount of information about the financial condition of an issuer of
municipal obligations may not be as extensive as that made available by
corporations whose securities are publicly traded. An investment in the
Portfolio will not constitute a complete investment program.
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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 (including
issues that 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.
Some of the securities in which the Portfolio invests may include
so-called "zero-coupon" bonds, whose values are subject to greater
fluctuation in response to changes in market interest rates than bonds
that pay interest currently. Zero-coupon bonds are issued at a
significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security. 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. Thus, the
Portfolio may have to sell other investments to obtain cash needed to make
income distributions.
The Portfolio may invest in municipal leases, and participations
in municipal leases. 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.
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The Portfolio has adopted certain fundamental investment
restrictions that are enumerated in detail in Part B and that may
not be changed unless authorized by an investor vote. Except for
such enumerated restrictions and as otherwise indicated in this
Part A, the investment objective and policies of the Portfolio
are not fundamental policies and accordingly may be changed by
the Trustees of the Portfolio without obtaining the approval of
the investors in the Portfolio. If any changes were made in the
Portfolio's investment objective, the Portfolio might have an
investment objective different from the objective that an
investor considered appropriate at the time the investor became
an interest holder in the Portfolio.
Item 5. Management of the Portfolio
The Portfolio is organized as a trust under the laws of the State
of New York. The Portfolio intends to comply with all applicable federal
and state securities laws.
Investment Adviser. The Portfolio engages BMR, a wholly-owned
subsidiary of Eaton Vance Management ("Eaton Vance"), as its investment
adviser. Eaton Vance, its affiliates and its predecessor companies have
been managing assets of individuals and institutions since 1924 and
managing investment companies since 1931.
Acting under the general supervision of the Board of Trustees of
the Portfolio, BMR manages the Portfolio's investments and affairs. BMR
also furnishes for the use of the Portfolio office space and all necessary
office facilities, equipment and personnel for servicing the investments
of the Portfolio. Under its investment advisory agreement with the
Portfolio, BMR receives a monthly advisory fee equal to the aggregate of:
(a) a daily asset-based fee computed by applying the annual asset
rate applicable to that portion of the total daily net
assets in each Category as indicated below, plus
(b) a daily income-based fee computed by applying the daily
income rate applicable to that portion of the total daily
gross income (which portion shall bear the same
relationship to the total daily gross income on such day
as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day)
in each Category as indicated below:
Annual Daily
Asset Income
Category Daily Net Assets Rate 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%
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As at March 31, 1996, the Portfolio had net assets of
$59,216,080. For the fiscal year ended March 31, 1996, the Portfolio paid
BMR advisory fees equivalent to 0.46% of the Portfolio's average daily net
assets for such year.
BMR or Eaton Vance acts as investment adviser to investment
companies and various individual and institutional clients with assets
under management of over $16 billion. Eaton Vance is a wholly-owned
subsidiary of Eaton Vance Corp., a publicly-held holding company that,
through its subsidiaries and affiliates, engages primarily in investment
management, administration and marketing activities.
Raymond E. Hender has acted as the portfolio manager of the
Portfolio since the Portfolio commenced operations. He joined Eaton Vance
and BMR as a Vice President in 1992. Prior to joining Eaton Vance, he was
a Senior Vice President of Bank of New England (1989-1992) and a Portfolio
Manager at Fidelity Management & Research Company (1977-1988).
Municipal obligations are normally traded on a net basis (without
commission) through broker-dealers and banks acting for their own account.
Such firms attempt to profit from such transactions by buying at the bid
price and selling at the higher asked price of the market, and the
difference is customarily referred to as the spread. In selecting firms
which will execute portfolio transactions, BMR judges their professional
ability and quality of service and uses its best efforts to obtain
execution at prices which are advantageous to the Portfolio and at
reasonably competitive spreads. Subject to the foregoing, BMR may consider
sales of shares of other investment companies sponsored by BMR or Eaton
Vance as a factor in the selection of firms to execute portfolio
transactions.
The Portfolio and BMR have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Eaton Vance personnel
to invest in securities (including securities that may be purchased or
held by the Portfolio) for their own accounts, subject to certain pre-
clearance, reporting and other restrictions and procedures contained in
such Codes.
The Portfolio is responsible for the payment of all of its costs
and expenses not expressly stated to be payable by BMR under the
investment advisory agreement.
Item 6. Capital Stock and Other Securities
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. Under the Declaration of Trust, the Trustees are authorized to
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issue interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments
in the Portfolio may not be transferred, but an investor may withdraw all
or any portion of its investment at any time at net asset value. Investors
in the Portfolio will each be liable for all obligations of the Portfolio.
However, the risk of an investor in the Portfolio 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.
The Declaration of Trust provides that the Portfolio will
terminate 120 days after the complete withdrawal of any investor in the
Portfolio unless either the remaining investors, by unanimous vote at a
meeting of such investors, or a majority of the Trustees of the Portfolio,
by written instrument consented to by all investors, agree to continue the
business of the Portfolio. This provision is consistent with the treatment
of the Portfolio as a partnership for federal income tax purposes.
Investments in the Portfolio have no preemptive or conversion
rights and are fully paid and nonassessable by the Portfolio, except as
set forth above. The Portfolio is not required and has no current
intention to hold annual meetings of investors, but the Portfolio may hold
special meetings of investors when in the judgment of the Trustees it is
necessary or desirable to submit matters for an investor vote. Changes in
fundamental policies or restrictions will be submitted to investors for
approval. The investment objective and all nonfundamental investment
policies of the Portfolio may be changed by the Trustees of the Portfolio
without obtaining the approval of the investors in the Portfolio.
Investors have under certain circumstances (e.g., upon application and
submission of certain specified documents to the Trustees by a specified
number of investors) the right to communicate with other investors in
connection with requesting a meeting of investors for the purpose of
removing one or more Trustees. Any Trustee may be removed by the
affirmative vote of holders of two-thirds of the interests in the
Portfolio.
Information regarding pooled investment entities or funds that
invest in the Portfolio may be obtained by contacting Eaton Vance
Distributors, Inc., 24 Federal Street, Boston, MA 02110, (617) 482-8260.
Smaller investors in the Portfolio may be adversely affected by the
actions of a larger investor in the Portfolio. For example, if a large
investor withdraws from the Portfolio, the remaining investors may
experience higher pro rata operating expenses, thereby producing lower
returns. Additionally, the Portfolio may hold fewer securities, resulting
in increased portfolio risk, and experience decreasing economies of scale.
However, this possibility exists as well for historically structured funds
that have large or institutional investors.
As of June 30, 1996, EV Marathon California Limited Maturity
Municipals Fund, a series of Eaton Vance Investment Trust, controlled the
Portfolio by virtue of owning approximately 93.9% of the outstanding
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voting interests in the Portfolio.
The net asset value of the Portfolio is determined each day on
which the New York Stock Exchange (the "Exchange") is open for trading
("Portfolio Business Day"). This determination is made each Portfolio
Business Day as of the close of regular trading on the Exchange (currently
4:00 p.m., New York time) (the "Portfolio Valuation Time").
Each investor in the Portfolio may add to or reduce its
investment in the Portfolio on each Portfolio Business Day as of 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 represents that investor's share of the aggregate interest 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.
The Portfolio will allocate at least annually among its investors
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. The Portfolio's
net investment income consists of all income accrued on the Portfolio's
assets, less all actual and accrued expenses of the Portfolio, determined
in accordance with generally accepted accounting principles.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any federal income tax. (See Part B,
Item 20.) However, each investor in the Portfolio will take into account
its allocable share of the Portfolio's ordinary income and capital gain in
determining its federal income tax liability. The determination of each
such share will be made in accordance with the governing instruments of
the Portfolio, which instruments are intended to comply with the
requirements of the Code and the regulations promulgated thereunder.
It is intended that the Portfolio's assets and income will be
managed in such a way that an investor in the Portfolio that seeks to
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qualify as a regulated investment company under the Code will be able to
satisfy the requirements for such qualification.
Item 7. Purchase of Interests in the Portfolio
Interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning
of Section 4(2) of the 1933 Act. See "General Description of Registrant"
above.
An investment in the Portfolio will be made without a sales load.
All investments received by the Portfolio will be effected as of the next
Portfolio Valuation Time. The net asset value of the Portfolio is
determined at the Portfolio Valuation Time on each Portfolio Business Day.
The Portfolio will be closed for business and will not price interests in
the Portfolio on the following business holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Portfolio's net asset value is
computed in accordance with procedures established by the Portfolio's
Trustees.
The Portfolio's net asset value is determined by Investors Bank &
Trust Company (as custodian and agent for the Portfolio) based on market
or fair value in the manner authorized by the Trustees of the Portfolio.
The net asset value is computed by subtracting the liabilities of the
Portfolio from the value of its total assets. Municipal obligations will
normally be valued on the basis of valuations furnished by a pricing
service. For further information regarding the valuations of the
Portfolio's assets, see Part B, Item 19.
There is no minimum initial or subsequent investment in the
Portfolio. The Portfolio reserves the right to cease accepting investments
at any time or to reject any investment order.
The placement agent for the Portfolio is Eaton Vance
Distributors, Inc. ("EVD"). The principal business address of EVD is 24
Federal Street, Boston, Massachusetts 02110. EVD receives no compensation
for serving as the placement agent for the Portfolio.
Item 8. Redemption or Decrease of Interest
An investor in the Portfolio may withdraw all of (redeem) or any
portion of (decrease) its interest in the Portfolio if a withdrawal
request in proper form is furnished by the investor to the Portfolio. All
withdrawals will be effected as of the next Portfolio Valuation Time. The
proceeds of a withdrawal will be paid by the Portfolio normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio reserves the right to pay the proceeds of a
withdrawal (whether a redemption or decrease) by a distribution in kind of
portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating
the net asset value for the interest (whether complete or partial) being
withdrawn. If an investor received a distribution in kind upon such
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withdrawal, the investor could incur brokerage and other charges in
converting the securities to cash. The Portfolio has filed with the
Securities and Exchange Commission a notification of election on Form N-
18F-1 committing to pay in cash all requests for withdrawals by any
investor, limited in amount with respect to such investor during any 90
day period to the lesser of (a) $250,000 or (b) 1% of the net asset value
of the Portfolio at the beginning of such period.
Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds
postponed during any period in which the Exchange is closed (other than
weekends or holidays) or trading on the Exchange is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists, or
during any other period permitted by order of the Commission for the
protection of investors.
Item 9. Pending Legal Proceedings
Not applicable.
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PART B
Item 10. Cover Page.
Not applicable.
Item 11. Table of Contents.
Page
General Information and History . . . . . . . . . . . . . . B-1
Investment Objectives and Policies . . . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . . . . . B-21
Control Persons and Principal Holder of Securities . . . . B-25
Investment Advisory and Other Services . . . . . . . . . . B-25
Brokerage Allocation and Other Practices . . . . . . . . . B-28
Capital Stock and Other Securities . . . . . . . . . . . . B-30
Purchase, Redemption and Pricing of Securities . . . . . . B-32
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . B-33
Underwriters . . . . . . . . . . . . . . . . . . . . . . . B-36
Calculation of Performance Data . . . . . . . . . . . . . . B-37
Financial Statements . . . . . . . . . . . . . . . . . . . B-37
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . a-1
Item 12. General Information and History.
Effective December 15, 1995, the Portfolio's name was changed
from "California Limited Maturity Tax Free Portfolio" to "California
Limited Maturity Municipals Portfolio."
Item 13. Investment Objectives and Policies.
Part A contains additional information about the investment
objective and policies of California Limited Maturity Municipals
Portfolio (the "Portfolio"). This Part B should be read in conjunction
with Part A. Capitalized terms used in this Part B and not otherwise
defined have the meanings given them in Part A.
Municipal Obligations
Municipal obligations are issued to obtain funds for various
public and private purposes. Such 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. In general, there are three categories of municipal
obligations the interest on which is exempt from federal income tax and is
not a tax preference item for purposes of the federal alternative minimum
tax: (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 after August 7, 1986 which include "qualified Section
501(c)(3) bonds" or refundings of certain obligations included in the
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second category. In assessing the federal income tax treatment of interest
on any such 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" bonds and
"revenue" bonds.
Interest on certain "private activity bonds" issued after August
7, 1986 is exempt from regular federal income tax, but such interest is
treated as a tax preference item that could subject the recipient to or
increase the recipient's liability for the federal alternative minimum
tax. It should be noted that, for a corporate holder (other than a
regulated investment company) of an interest in the Portfolio, interest on
all municipal obligations (whenever issued) is included in "adjusted
current earnings" for purposes of the federal alternative minimum tax as
applied to corporations (to the extent not already included in alternative
minimum taxable income as income attributable to private activity bonds).
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.
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.
The principal security for a revenue bond is generally 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
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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 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.
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.
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, that 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 that 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
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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 will be 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 such obligations will normally fluctuate with changes
in interest rates, and therefore the net asset value of the Portfolio will
be affected by such changes.
Risks of Concentration
California Obligations. The following information as to certain
California considerations is given to investors in view of the Portfolio's
policy of concentrating its investments in California issuers. Such
information supplements the information in Part A. It is derived from
sources that are generally available to investors and is believed to be
accurate. Such information constitutes only a brief summary, does not
purport to be a complete description, and is based on information from
official statements relating to securities offerings of California
issuers. The Portfolio has not independently verified this information.
Economic Factors
Fiscal Years Prior to 1996-97. By the close of the 1989-90
Fiscal Year, California's revenues had fallen below projections so that
the State's budget reserve, the Special Fund for Economic Uncertainties
(the "Special Fund"), was fully depleted by June 30, 1990. A recession
which had begun in mid-1990, combined with higher health and welfare costs
driven by the State's rapid population growth, adversely affected General
Fund revenues and raised expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted a
period of budget imbalance. Beginning with the 1990-91 Fiscal Year and
for several years thereafter, the budget required multibillion dollar
actions to bring projected revenues and expenditures into balance. During
this period, expenditures exceeded revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the Special Fund -
- approaching $2.8 billion at its peak on June 30, 1993.
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By the 1993-94 Fiscal Year, the accumulated deficit was too large
to be prudently retired in one year and a two-year program was
implemented. This program used revenue anticipation warrants to carry a
portion of the deficit over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and
transfers of $41.9 billion. Expenditures were projected to be $40.9
billion -- an increase of $1.6 billion over the prior year. As a result
of the improving economy, however, the fiscal year ultimately produced
revenues and transfers of $42.7 billion which more than offset
expenditures of $42.0 billion and thereby reduced the accumulated budget
deficit.
With strengthening revenues and reduced caseload growth driven by
an improving economy, the State entered the 1995-96 Fiscal Year budget
negotiations with the smallest nominal "budget gap" to be closed in many
years. The 1995-96 Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year,
and expenditures were budgeted at $43.4 billion. In addition, the
Department of Finance projected that after repaying the last of the
carryover budget deficit, there would be a positive balance of $28 million
in the budget reserve as of June 30, 1996.
1996-97 Fiscal Year. Reflecting the belief shared by many
analysts that the California economy would remain strong, the 1996-1997
Budget Act established a State budget of some $63 billion. Relying on the
optimistic revenue projections released by the Department of Finance, the
Budget Act granted a $230 million tax cut to corporations while
simultaneously providing an increase in funding for education and prisons.
However, only a relatively modest amount, $287 million, was allocated to
the reserve fund available for emergencies such as earthquakes. The
ultimate impact of these and other budgetary allocations is impossible to
predict. Indeed, constant fluctuations in other factors affecting the
State -- including changes in welfare caseloads, property tax receipts and
federal funding -- will undoubtedly create new budget challenges.
The Orange County Bankruptcy. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for
bankruptcy under Chapter 9 of the United States Bankruptcy Code. The
subsequent restructuring led to the sale of substantially all of the
Pool's portfolio and resulted in losses estimated to be approximately $1.7
billion (or approximately 22% of amounts deposited by the Pool investors).
Approximately 187 California public entities -- substantially all of which
are public agencies within the county -- had various bonds, notes or other
forms of indebtedness outstanding. In some instances the proceeds of such
indebtedness were invested in the Pool.
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In April, 1996, the County emerged from bankruptcy after closing
on a $900 million recovery bond deal. At that time, the County and its
financial advisors stated that the County had emerged from the bankruptcy
without any structural fiscal problems and assured that the County would
not slip back into bankruptcy. However, for many of the cities, schools
and special districts that lost money in the County portfolio, repayment
remains contingent on the outcome of litigation which is pending against
investment firms and other finance professionals. Thus, it is impossible
to determine the ultimate impact of the bankruptcy and its aftermath on
these various agencies and their claims.
Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter
initiatives could produce the adverse effects described below, among
others.
Revenue Distribution. Certain Debt Obligations in the Portfolio
may be obligations of issuers which rely in whole or in part on California
State revenues for payment of these obligations. Property tax revenues
and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes
certain obligations theretofore paid out of local funds. Whether and to
what extent a portion of the State's general fund will be distributed in
the future to counties, cities and their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the
Portfolio may be obligations which are payable solely from the revenues of
health care institutions. Certain provisions under California law may
adversely affect these revenues and, consequently, payment on those Debt
Obligations.
The Federally sponsored Medicaid program for health care services
to eligible welfare beneficiaries in California is known as the Medi-Cal
program. Historically, the Medi-Cal program has provided for a cost-based
system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal
program, provided such hospital met applicable requirements for
participation. California law now provides that the State of California
shall selectively contract with hospitals to provide acute inpatient
services to Medi-Cal patients. Medi-Cal contracts currently apply only to
acute inpatient services. Generally, such selective contracting is made
on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
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future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State
of California will be paid for non-emergency acute inpatient services
rendered to Medi-Cal beneficiaries. The State may also terminate these
contracts without notice under certain circumstances and is obligated to
make contractual payments only to the extent the California legislature
appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services
to beneficiaries on negotiated terms. Some insurers have introduced plans
known as "preferred provider organizations" ("PPOs"), which offer
financial incentives for subscribers who use only the hospitals which
contract with the plan. Under an exclusive provider plan, which includes
most health maintenance organizations ("HMOs"), private payors limit
coverage to those services provided by selected hospitals. Discounts
offered to HMOs and PPOs may result in payment to the contracting hospital
of less than actual cost and the volume of patients directed to a hospital
under an HMO or PPO contract may vary significantly from projections.
Often, HMO or PPO contracts are enforceable for a stated term, regardless
of provider losses or of bankruptcy of the respective HMO or PPO. It is
expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured Debt Obligations, the State
Treasurer will issue debentures payable out of a reserve fund established
under the insurance program or will pay principal and interest on an
unaccelerated basis from unappropriated State funds. At the request of
the Office of Statewide Health Planning and Development, Arthur D. Little,
Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially
underfunded. In September of 1986, Arthur D. Little, Inc. prepared an
update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve
fund, the update recommended maintaining the current reserve calculation
method. In March of 1990, Arthur D. Little, Inc. prepared a further
review of the study and recommended that separate reserves continue to be
established for "multi-level" facilities at a reserve level consistent
with those that would be required by an insurance company.
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Mortgages and Deeds. Certain Debt Obligations in the Portfolio
may be obligations which are secured in whole or in part by a mortgage or
deed of trust on real property. California has five principal statutory
provisions which limit the remedies of a creditor secured by a mortgage or
deed of trust. Two statutes limit the creditor's right to obtain a
deficiency judgment, one limitation being based on the method of
foreclosure and the other on the type of debt secured. Under the former,
a deficiency judgment is barred when the foreclosure is accomplished by
means of a nonjudicial trustee's sale. Under the latter, a deficiency
judgment is barred when the foreclosed mortgage or deed of trust secures
certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory
provision limits any deficiency judgment obtained by a creditor secured by
real property following a judicial sale of such property to the excess of
the outstanding debt over the fair value of the property at the time of
the sale, thus preventing the creditor from obtaining a large deficiency
judgment against the debtor as the result of low bids at a judicial sale.
The fifth statutory provision gives the debtor the right to redeem the
real property from any judicial foreclosure sale as to which a deficiency
judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are
subject to the constraints imposed by California law upon transfers of
title to real property by private power of sale. During the three-month
period beginning with the filing of a formal notice of default, the debtor
is entitled to reinstate the mortgage by making any overdue payments.
Under standard loan servicing procedures, the filing of the formal notice
of default does not occur unless at least three full monthly payments have
become due and remain unpaid. The power of sale is exercised by posting
and publishing a notice of sale for at least 20 days after expiration of
the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to
the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the
initial default. Such time delays in collections could disrupt the flow
of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could
hold that the private-right-of-sale proceedings violate the due process
requirements of the Federal or State Constitutions, consequently
preventing an issuer from using the nonjudicial foreclosure remedy
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described above.
Certain Debt Obligations in the Portfolio may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by
real property. Under California antideficiency legislation, there is no
personal recourse against a mortgagor of a single family residence
purchased with the loan secured by the mortgage, regardless of whether the
creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges
on such mortgage loans may be imposed only with respect to voluntary
prepayments made during the first five years during the term of the
mortgage loan, and then only if the borrower prepays an amount in excess
of 20% of the original principal amount of the mortgage loan in a 12-month
period; a prepayment charge cannot in any event exceed six months' advance
interest on the amount prepaid during the 12-month period in excess of 20%
of the original principal amount of the loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
Proposition 13. Certain of the Debt Obligations may be
obligations of issuers who rely in whole or in part on ad valorem real
property taxes as a source of revenue. On June 6, 1978, California voters
approved an amendment to the California Constitution known as
Proposition 13, which added Article XIIIA to the California Constitution.
The effect of Article XIIIA was to limit ad valorem taxes on real property
and to restrict the ability of taxing entities to increase real property
tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by
the counties and apportioned according to law. The 1% limitation does not
apply to ad valorem taxes or special assessments to pay the interest and
redemption charges on any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by
the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real
property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the
consumer price index or comparable local data, or reduced in the event of
declining property value caused by damage, destruction or other factors.
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Legislation enacted by the California Legislature to implement
Article XIIIA provides that notwithstanding any other law, local agencies
may not levy any ad valorem property tax except to pay debt service on
indebtedness approved by the voters prior to July 1, 1978, and that each
county will levy the maximum tax permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California
voters, which added Article XIIIB to the California Constitution. Under
Article XIIIB, State and local governmental entities have an annual
"appropriations limit" and are not allowed to spend certain moneys called
"appropriations subject to limitation" in an amount higher than the
"appropriations limit." Article XIIIB does not affect the appropriation
of moneys which are excluded from the definition of "appropriations
subject to limitation," including debt service on indebtedness existing or
authorized as of January 1, 1979, or bonded indebtedness subsequently
approved by the voters. In general terms, the "appropriations limit" is
required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and
certain services provided by these entities. Article XIIIB also provides
that if these entities' revenues in any year exceed the amounts permitted
to be spent, the excess is to be returned by revising tax rates or fee
schedules over the subsequent two years.
Proposition 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment
and statute called the "Classroom Instructional Improvement and
Accountability Act." Proposition 98 changed State funding of public
education below the university level and the operation of the State
Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (modified by
Proposition 111 as discussed below), K-14 schools are guaranteed the
greater of (a) in general, a fixed percent of General Fund revenues ("Test
1"), (b) the amount appropriated to K-14 schools in the prior year,
adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test
2"), or (c) a third test, which would replace Test 2 in any year when the
percentage growth in per capita General Fund revenues from the prior year
plus one half of one percent is less than the percentage growth in State
per capita personal income ("Test 3"). Under Test 3, schools would
receive the amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an additional small
adjustment factor. If Test 3 is used in any year, the difference between
Test 3 and Test 2 would become a "credit" to schools which would be the
basis of payments in future years when per capita General Fund revenue
growth exceeds per capita personal income growth.
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Proposition 98 permits the Legislature -- by two-thirds vote of
both houses, with the Governor's concurrence -- to suspend the K-14
schools' minimum funding formula for a one-year period. Proposition 98
also contains provisions transferring certain State tax revenues in excess
of the Article XIII B limit to K-14 schools.
During the recession years of the early 1990s, General Fund
revenues for several years were less than originally projected, so that
the original Proposition 98 appropriations turned out to be higher than
the minimum percentage provided in the law. The Legislature responded to
these developments by designating the "extra" Proposition 98 payments in
one year as a "loan" from future years' Proposition 98 entitlements, and
also intended that the "extra" payments would not be included in the
Proposition 98 "base" for calculating future years' entitlements. In
1992, a lawsuit was filed, California Teachers' Association v. Gould,
which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion
in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that
future school funding will not be in jeopardy over repayment of these so-
called loans.
Proposition 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education
funding provisions of Proposition 98. Senate Constitutional Amendment 1 -
- on the June 5, 1990 ballot as Proposition 111 -- was approved by the
voters and took effect on July 1, 1990. Among a number of important
provisions, Proposition 111 recalculated spending limits for the State and
for local governments, allowed greater annual increases in the limits,
allowed the averaging of two years' tax revenues before requiring action
regarding excess tax revenues, reduced the amount of the funding guarantee
in recession years for school districts and community college districts
(but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys
transferred to school districts and community college districts in the
base calculation for the next year, limited the amount of State tax
revenue over the limit which would be transferred to school districts and
community college districts, and exempted increased gasoline taxes and
truck weight fees from the State appropriations limit. Additionally,
Proposition 111 exempted from the State appropriations limit funding for
capital outlays.
Proposition 62. On November 4, 1986, California voters approved
an initiative statute known as Proposition 62. This initiative provided
the following:
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1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental
entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied
for other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the
voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was
imposed;
4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by
Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales
taxes on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the
electorate within two years of the adoption of the initiative;
7. Requires that, in the event a local government fails to
comply with the provisions of this measure, a reduction in the
amount of property tax revenue allocated to such local government
occurs in an amount equal to the revenues received by such entity
attributable to the tax levied in violation of the initiative;
and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the
extent that it requires a general tax by a general law city, enacted on or
after August 1, 1985 and prior to the effective date of Proposition 62, to
be subject to approval by a majority of voters. The Court held that the
California Constitution prohibits the imposition of a requirement that
local tax measures be submitted to the electorate by either referendum or
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initiative. It is impossible to predict the impact of this decision on
charter cities, on special taxes or on new taxes imposed after the
effective date of Proposition 62. The California Court of Appeal in City
of Woodlake v. Logan, (1991) 230 Cal.App.3d 1058, subsequently held that
Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the City of Westminster and the City of Woodlake
decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept.
28, 1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12
Cal.4th 344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and
specifically disapproved of the City of Woodlake decision as erroneous.
The Court did not determine the correctness of the City of Westminster
decision, because that case appeared distinguishable, was not relied on by
the parties in Guardino, and involved taxes not likely to still be at
issue. It is impossible to predict the impact of the Supreme Court's
decision on charter cities or on taxes imposed in reliance on the City of
Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would
make the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995.
The California State Senate passed the Bill on May 16, 1996 and it is
currently pending in the California State Assembly. It is not clear
whether the Bill, if enacted, would be constitutional as a non-voted
amendment to Proposition 62 or as a non-voted change to Proposition 62's
operative date.
The voters will be presented with a new initiative constitutional
amendment on the November 1996 ballot. The Right to Vote on Taxes Act,
sponsored by the Howard Jarvis Taxpayers Association, seeks to strengthen
Proposition 62 by requiring majority voter approval for general taxes,
two-thirds voter approval for special taxes (including taxes imposed for
specific purposes but placed in the general fund), voter approval of
existing local taxes enacted after January 1, 1995, and placing other
restrictions on fees and assessments. As a constitutional amendment, the
provisions would clearly apply to charter cities.
Another initiative on the November 1996 ballot, a statutory
initiative sponsored by the California Tax Reform Association, would
reimpose the now sunseted temporary 10 and 11 percent tax brackets and use
the revenues from the increase to replace a portion of the property tax
revenue shifted from cities, counties and special districts to schools on
an ongoing basis since 1992.
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Proposition 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to
prohibit redevelopment agencies from receiving any of the property tax
revenue raised by increased property tax rates levied to repay bonded
indebtedness of local governments which is approved by voters on or after
January 1, 1989.
Obligations of Puerto Rico, the U.S. Virgin Islands and Guam.
Subject to the Portfolio's investment policies as set forth in Part A, the
Portfolio may invest in the obligations of the governments of Puerto Rico,
the U.S. Virgin Islands and Guam (the "Territories"). Accordingly, the
Portfolio may be adversely affected by local political and economic
conditions and developments within the Territories affecting the issuers
of such obligations.
Puerto Rico has a diversified economy dominated by the
manufacturing and service sectors. Manufacturing is the largest sector in
terms of gross domestic product and is more diversified than during
earlier phases of Puerto Rico's industrial development. The three largest
sectors of the economy (as a percentage of employment) are services (47%),
government (22%) and manufacturing (16.4%). These three sectors represent
39%, 11% and 39%, respectively, of the gross domestic product. The
service sector is the fastest growing, while the government and
manufacturing sectors have been stagnant for the past five years. The
North American Free Trade Agreement (NAFTA), which became effective
January 1, 1994, could lead to the loss of Puerto Rico's lower salaried or
labor intensive jobs to Mexico. The November 1995 unemployment rate was
13.4%, down from 16% for 1994.
The Commonwealth of Puerto Rico exercises virtually the same
control over its internal affairs as do the fifty states; however, it
differs from the states in its relationship with the federal government.
Most federal taxes, except those such as social security taxes that are
imposed by mutual consent, are not levied in Puerto Rico. However, in
conjunction with the 1993 U.S. budget plan, Section 936 of the Code was
amended and provided for two alternative limitations to the Section 936
credit. The first option will limit the credit against such income to 40%
of the credit allowable under current law, with a five year phase-in
period starting at 60% of the allowable credit. The second option is a
wage and depreciation based credit. The reduction of the tax benefits to
those U.S. companies with operations in Puerto Rico may lead to slower
growth in the future. Furthermore, federal policymakers have proposed the
total elimination of Section 936, phased out over ten years, as a budget-
balancing measure. There can be no assurance that these modifications
will not lead to a weakened economy, a lower rating on Puerto Rico's debt
or lower prices for Puerto Rican bonds that may be held by the Portfolio.
Puerto Rico's financial reporting was first conformed to
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generally accepted accounting principles in fiscal 1990. Nonrecurring
revenues have been used frequently to balance recent years' budgets. In
November, 1993 Puerto Ricans voted on whether they wished to retain their
Commonwealth status, become a state or establish an independent nation.
The measure was defeated, with 48.5% voting to remain a Commonwealth, 46%
voting for statehood and 4% voting for independence. Retaining
Commonwealth status will leave intact the current relationship with the
federal government. There can be no assurance that the statehood issue
will not be brought to a vote in the future. A successful statehood vote
in Puerto Rico would then require ratification by the U.S. Congress to
ratify the election.
The United States Virgin Islands (USVI) are located approximately
1,100 miles east-southeast of Miami and are made up of St. Croix, St.
Thomas and St. John. Population, after reaching a peak of 110,800 in
1985, declined to 101,809 in 1990. The economy is heavily reliant on the
tourism industry, with roughly 43% of non-agricultural employment in
tourist-related trade and services. As of December, 1994, unemployment
stood at 4.8%. The tourism industry is economically sensitive and would
likely be adversely affected by a recession in either the United States or
Europe.
An important component of the USVI revenue base is the federal
excise tax on rum exports. Tax revenues rebated by the federal government
to the USVI provide the primary security of many outstanding USVI bonds.
Because more than 90% of the rum distilled in the USVI is distilled at one
plant, any interruption in its operations (as occurred after Hurricane
Hugo in 1989) would adversely affect these revenues. Consequently, there
can be no assurance that rum exports to the United States and the rebate
of tax revenues to the USVI will continue at their present levels. The
preferential tariff treatment the USVI rum industry currently enjoys could
be reduced under NAFTA. Increased competition from Mexican rum producers
could reduce USVI rum imported to the U.S., decreasing excise tax revenues
generated. The USVI incurred extensive damage from Hurricane Marilyn in
September, 1995. Widespread damage to the airport and hotels led to a
drop in tourism, which has had a negative impact on revenue collections.
There is currently no rated, unenhanced U.S. Virgin Islands debt
outstanding.
Guam, an unincorporated U.S. territory, is located 1,500 miles
southeast of Tokyo. Population, 133,000 in 1990, up 26% from the 1980
census level. The U.S. military is a key component of Guam's economy.
The federal government directly comprises more than 10% of the employment
base, with a substantial component of the service sector to support these
personnel. Guam is expected to benefit from the closure of the Subic Bay
Naval Base and the Clark Air Force Base in the Philippines. The Naval Air
Station, one of several U.S. military facilities on the island, has been
slated for closure by the Defense Base Closure and Realignment Committee;
however, the administration plans to use these facilities to expand the
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Island's commercial airport. Guam is also heavily reliant on tourists,
particularly the Japanese. For 1994, the financial position of Guam was
weakened as it incurred an unaudited General Fund operating deficit. The
administration has taken steps to improve its financial position; however,
there are no guarantees that an improvement will be realized. Guam's
general obligation debt is rated Baa by Moody's.
Obligations of Particular Types of Issuers. The Portfolio 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 a similar type. In
particular, investments in industrial 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,
effects of energy conservation and limitations on the capacity of the
capital market to absorb utility debt.
Life care facilities are an alternative form of long-term housing
for the elderly which offer residents the independence of a condominium
life style and, if needed, the comprehensive care of nursing home
services. Bonds to finance these facilities have been issued by various
state and local authorities. Because the bonds are normally secured only
by the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues sufficient to meet debt service payments. Moreover, because a
portion of housing, medical care and other services may be financed by an
initial deposit, it is important that the facility maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability
of management to accurately forecast inflationary cost pressures is an
important factor in this process. The facilities may also be affected
adversely by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
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Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative
health care or conventional housing facilities in the private or public
sector.
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 are issued by a state or local government 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. A trustee is usually
responsible for administering the terms of the participation and enforcing
the participants' rights in the underlying lease. Leases and installment
purchase or conditional sale contracts (which normally provide for title
to the leased assets to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements
for the issuance of debt. State debt-issuance limitations are deemed to be
inapplicable to these arrangements because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Such
arrangements are, therefore, subject to the risk that the governmental
issuer will not appropriate funds for lease payments.
Certain municipal lease obligations owned by the Portfolio may be
deemed illiquid for purposes of the Portfolio's 15% limitation on
investments in illiquid securities, unless determined by the Investment
Adviser, pursuant to guidelines adopted by the Trustees, to be liquid
securities for purposes 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 ongoing basis, including an assessment of
the likelihood that the lease may or may not be canceled.
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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. Zero coupon bonds benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash.
Insurance
Insured municipal obligations held by the Portfolio (if any) will
be insured as to their scheduled payment of principal and interest under
either (i) an insurance policy obtained by the issuer or underwriter of
the obligation at the time of its original issuance or (ii) an insurance
policy obtained by the Portfolio or a third party subsequent to the
obligation's original issuance (which may not be reflected in the
obligation's market value). In either event such insurance may provide
that in the event of nonpayment of interest or principal when due with
respect to an insured obligation, the insurer is not required to make such
payment until a specified time has lapsed (which may be 30 days or more
after notice).
Credit Quality
The Portfolio is dependent on the Investment Adviser's judgment,
analysis and experience in evaluating the quality of municipal
obligations. In evaluating the credit quality of a particular issue, when
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 issuer, 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.
See "Portfolio of Investments" in the "Financial Statements"
incorporated by reference into this Part B with respect to any defaulted
obligations held by the Portfolio.
Short-Term Trading
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
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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
anticipates that its annual portfolio turnover rate will generally not
exceed 100% (excluding turnover of securities having maturity of one year
or less). A 100% annual turnover rate would 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. The Portfolio engages in portfolio trading
(including short-term trading) if it believes that a transaction including
all costs will help in achieving its investment objective. The
Portfolio's portfolio turnover rates for the fiscal years ended January
31, 1996 and 1995, were 36% and 56%, respectively.
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 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. The Portfolio's
custodian will segregate cash or high grade liquid debt securities in a
separate account of the Portfolio in an amount at least equal to the when-
issued commitments. If the value of the securities placed in the separate
account declines, additional cash or high grade liquid debt securities
will be placed in the account on a daily basis so that the value of the
account will at least equal the amount of the Portfolio's when-issued
commitments. 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).
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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.
Floating or Variable Rate Obligations
The Portfolio may purchase floating or variable rate obligations.
Floating or variable rate instruments provide for adjustments in the
interest rate at specified intervals (weekly, monthly, semi-annually,
etc.). The revised rates are usually set at the issuer's discretion, in
which case the investor normally enjoys the right to "put" the security
back to the issuer or the issuer's agent. Rate revisions may alternatively
be determined by formula or in some other contractual fashion. Floating or
variable rate obligations normally provide that the holder can demand
payment of the obligation on short notice at par with accrued interest and
are frequently secured by letters of credit or other credit support
arrangements provided by banks. To the extent that such letters of credit
or other arrangements constitute an unconditional guarantee of the
issuer's obligations, a bank may be treated as the issuer of a security
for the purpose of complying with the diversification requirements set
forth in Section 5(b) of the Investment Company Act of 1940 (the "1940
Act") and Rule 5b-2 thereunder. The Portfolio would anticipate using these
obligations as cash equivalents pending longer term investment of its
funds.
Redemption, Demand and Put Features
Most municipal bonds have a fixed final maturity date. However,
it is commonplace for the issuer to reserve the right to call the bond
earlier. 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. By acquiring these kinds of obligations
the Portfolio obtains the contractual right to require the issuer of the
security or some other person (other than a broker or dealer) to purchase
the security at an agreed upon price, which right is contained in the
obligation itself rather than in a separate agreement with the seller or
some other person. Because this right is assignable with the security,
which is readily marketable and valued in the customary manner, the
Portfolio will not assign any separate value to such right.
Liquidity and Protective Put Options
The Portfolio may also 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
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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. A separate put option may not be
marketable or otherwise assignable, and sale of the security to a third
party or lapse of time with the put unexercised may terminate the right to
exercise the put. 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 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 not qualify as tax-exempt interest.
Securities Lending
The Portfolio may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers.
Under present regulatory policies of the Commission, such loans are
required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities held by the Portfolio's
custodian and maintained on a current basis at an amount at least equal to
the market value of the securities loaned, which will be marked to market
daily. Cash equivalents include short-term municipal obligations as well
as taxable certificates of deposit, commercial paper and other short-term
money market instruments. The Portfolio would have the right to call a
loan and obtain the securities loaned at any time on up to five business
days' notice. During the existence of a loan, the Portfolio will continue
to receive the equivalent of the interest paid by the issuer on the
securities loaned and will also receive a fee, or all or a portion of the
interest on investment of the collateral, if any. However, the Portfolio
may pay lending fees to such borrowers. The Portfolio would not have the
right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important vote to
be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed
by the Portfolio's management to be of good standing and when, in the
judgment of the Portfolio's management, the consideration that can be
earned from securities loans justifies the attendant risk. Securities
lending involves administration expenses, including finders' fees.
Distributions of any income realized by the Portfolio from securities
loans will be taxable. If the management of the Portfolio decides to make
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securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the Portfolio's total assets. 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, 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 that is a member of the relevant exchange. The
Portfolio may purchase and write call and put options on futures contracts
that are traded on a United States or foreign 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 only for bona fide 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 are
substantially related to price fluctuations in securities held by the
Portfolio or that it expects to purchase. The Portfolio's futures
transactions will be entered into for traditional hedging purposes - that
is, futures contracts will be sold to protect against a decline in the
price of securities that the Portfolio owns, or futures contracts will be
purchased to protect the Portfolio against an increase in the price of
securities it intends to purchase. As evidence of this hedging intent,
the Portfolio expects that on 75% or more of the occasions on which it
takes a "long" futures (or option) position (involving the purchase of
futures contracts), the Portfolio will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the
cash market at the time when the futures (or option) position is closed
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out. However, in particular cases, when it is economically advantageous
for the Portfolio to do so, a long futures position may be terminated (or
an option may expire) without the corresponding purchase of securities.
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 the qualification of each of the
Portfolio's investment company investors as a regulated investment company
for federal income tax purposes (see "Tax Status").
Transactions using 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,
receivables and short-term debt securities with a value sufficient at all
times to cover its potential obligations not covered as provided in (1)
above. The Portfolio will comply with Commission guidelines regarding
cover for these instruments and, if the guidelines so require, set aside
cash, U.S. Government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be
sold while the position in the corresponding futures contract or option is
open, unless they are replaced with other appropriate assets. As a
result, the commitment of a large portion of the Portfolio's assets to
cover or segregated accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current
obligations.
Short-Term Obligations
Although the Portfolio will normally attempt to invest
substantially all of its assets in municipal obligations, the Portfolio
may, under normal circumstances, invest up to 20% of its net assets in
short-term obligations the interest on which is subject to regular federal
income tax, is a tax preference item for purposes of the federal
alternative minimum tax, and/or is subject to California State personal
income taxes. Such short-term taxable obligations may include, but are not
limited to, certificates of deposit, commercial paper, short-term notes
and obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. During periods of adverse market
conditions, the Portfolio may temporarily invest more than 20% of its
assets in such short-term taxable obligations, all of which will be high
quality.
Investment Restrictions
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The Portfolio has adopted the following investment restrictions
which may not be changed without the approval of the holders of a
"majority of the outstanding voting securities" of the Portfolio, which as
used in this Part B means the lesser of (a) 67% or more of the outstanding
voting securities of the Portfolio present or represented by proxy at a
meeting if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented at the meeting or
(b) more than 50% of the outstanding voting securities of the Portfolio.
The term "voting securities" as used in this paragraph has the same
meaning as in the 1940 Act. As a matter of fundamental policy, the
Portfolio may not:
(1) Borrow money or issue senior securities except as permitted
by the Investment Company Act of 1940;
(2) Purchase securities on margin (but the Portfolio 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
Portfolio 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) 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;
(4) 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;
(5) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities; or
(6) Make loans to any person except by (a) the acquisition of
debt instruments and making portfolio investments, (b) entering
into repurchase agreements and (c) lending portfolio securities.
For purposes of the investment restrictions listed above, 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.
The Portfolio has adopted the following investment policies which may
be changed by the Portfolio without approval of its investors. As a matter
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of nonfundamental policy, the Portfolio will not: (a) 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 Portfolio, would be
so invested; (b) make short sales of securities or maintain a short
position, unless at all times when a short position is open it 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 Portfolio's net assets (taken at
current value) is held as collateral for such sales at any one time (The
Portfolio will make such sales only for the purpose of deferring
realization of gain or loss for federal income tax purposes); (c) invest
more than 15% of its 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 under the Securities Act of 1933 and commercial paper issued
pursuant to Section 4(2) of said Act that the Board of Trustees of the
Portfolio, or its delegate, determines to be liquid; (d) 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 Portfolio or is a member, officer, director or trustee of any
investment adviser of the Portfolio, if after the purchase of the
securities of such issuer by the Portfolio 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);
or (e) purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development
programs.
Whenever an investment policy or investment restriction set forth
in Part A or this Part B 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 Portfolio's
acquisition of such security or other asset. Accordingly, any later
increase or decrease resulting from a change in values, assets or other
circumstances, other than a subsequent rating change below investment
grade made by a rating service, will not compel the Portfolio to dispose
of such security or other asset. Notwithstanding the foregoing, under
normal market conditions the Portfolio must take actions necessary to
comply with the policy of investing at least 65% of its total assets in
obligations of California issuers. Moreover, the Portfolio must always be
in compliance with the borrowing policy set forth above.
In order to permit the sale in certain states of shares of
certain open-end investment companies that are investors in the Portfolio,
the Portfolio may make commitments more restrictive than the policies
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described above. Should the Portfolio determine that any such commitment
is no longer in the best interests of the Portfolio and its investors, it
will revoke such commitment.
Item 14. Management of the Portfolio
The Trustees and officers of 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 24 Federal
Street, Boston, Massachusetts 02110, which is also the address of the
Portfolio's investment adviser, Boston Management and Research ("BMR" or
the "Investment Adviser"), a wholly-owned subsidiary of Eaton Vance
Management ("Eaton Vance"); of Eaton Vance's parent, Eaton Vance Corp.
("EVC"); and of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV").
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. Those
Trustees who are "interested persons" of the Portfolio, BMR, Eaton Vance,
EVC or EV, as defined in the 1940 Act by virtue of their affiliation with
any one or more of the Portfolio, BMR, Eaton Vance, EVC or EV, are
indicated by an asterisk(*).
TRUSTEES OF THE PORTFOLIO
DONALD R. DWIGHT (65), Trustee
President of Dwight Partners, Inc. (a corporate relations and
communications company) founded in 1988; Chairman of the Board of
Newspapers of New England, Inc. since 1983. Director or Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (54), Vice President and Trustee*
Executive Vice President of BMR, Eaton Vance, EVC and EV, and a Director
of EVC and EV. Director or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
SAMUEL L. HAYES, III (61), Trustee
Jacob H. Schiff Professor of Investment Banking at Harvard University
Graduate School of Business Administration. Director or Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02134
NORTON H. REAMER (60), Trustee
President and Director, United Asset Management Corporation, a holding
company owning institutional investment management firms. Chairman,
President and Director, UAM Funds (mutual funds). Director or Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
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JOHN L. THORNDIKE (69), Trustee
Director, Fiduciary Company Incorporated. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (66), Trustee
Investment Adviser and Consultant. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS OF THE PORTFOLIO
THOMAS J. FETTER (52), President
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Fetter was elected President
of the Portfolio on December 13, 1993.
RAYMOND E. HENDER (52), Vice President
Vice President of BMR, Eaton Vance and EV and an employee of Eaton Vance
since September 8, 1992. Senior Vice President, Bank of New England
(1989-1992). Officer of various investment companies managed by Eaton
Vance or BMR. Mr. Hender was elected Vice President of the Portfolio on
June 19, 1995.
ROBERT B. MACINTOSH (39), Vice President
Vice President of BMR since August 11, 1992, and of Eaton Vance and EV and
an employee of Eaton Vance since March 8, 1991. Fidelity Investments -
Portfolio Manager (1986-1991). Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (64), Secretary
Vice President and Secretary of BMR, Eaton Vance, EVC and EV. Officer of
various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (60), Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
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A. JOHN MURPHY (33), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. State Regulations Supervisor,
The Boston Company (1991-1993) and Registration Specialist, Fidelity
Management & Research Co. (1986-1991). Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Murphy was elected Assistant
Secretary of the Portfolio on March 27, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly,
associate attorney at Dechert Price & Rhoads and Gaston & Snow. Officer
of various investment companies managed by Eaton Vance or BMR. Mr.
Woodbury was elected Assistant Secretary of the Portfolio on June 19,
1995.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the
Special Committee of the Board of Trustees 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 Portfolio, including investment advisory,
custodial and fund accounting services, and (ii) all other matters in
which Eaton Vance or its affiliates has any actual or potential conflict
of interest with the Portfolio or its interestholders.
The Nominating Committee is compromised of four Trustees who are
not "interested persons" as that term is defined under the 1940 Act
("noninterested Trustees"). The Committee has four-year staggered terms,
with one member rotating off the Committee to be replaced by another
noninterested Trustee of the Portfolio. Messrs. Hayes (Chairman), Reamer,
Thorndike and Treynor are currently serving on the Committee. The purpose
of the Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board
of Trustees is independent of Eaton Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit
Committee of the Board of Trustees. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection of
the independent certified public accountants, and reviewing with such
accountants and the Treasurer of the Portfolio 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 and transfer agent of the Portfolio.
The fees and expenses of those Trustees of the Portfolio who are
not members of the Eaton Vance organization (the noninterested Trustees)
are paid by the Portfolio. (The Trustees of the Portfolio who are members
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of the Eaton Vance organization receive no compensation from the
Portfolio). During the fiscal year ended March 31, 1996, the
noninterested Trustees of the Portfolio earned the following compensation
in their capacities as Trustees of the Portfolio and in their capacities
as trustees of the funds in the Eaton Vance fund complex(1):
Aggregate Total Compensation
Compensation from Portfolio
Name from Portfolio and Fund Complex
----- -------------- -------------------
Donald R.
Dwight $1,118(2) $137,500(4)
Samuel L.
Hayes, III 1,256(3) 153,750(5)
Norton H.
Reamer 1,235 137,500
John L.
Thorndike 1,315 142,500
Jack L.
Treynor 1,236 142,500
(1) The Eaton Vance fund complex consists of 217 registered
investment companies or series thereof.
(2) Includes $375 of deferred compensation.
(3) Includes $446 of deferred compensation.
(4) Includes $35,312 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
Trustees of the Portfolio who are not affiliated with BMR 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
"Plan"). Under the 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 Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the 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. The Portfolio does not have a
retirement plan for its Trustees.
The Portfolio's Declaration of Trust provides that it will
indemnify its Trustees and officers against liabilities and expenses
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incurred in connection with litigation in which they may be involved
because of their offices with the Portfolio, unless, as to liability to
the Portfolio or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect
to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Portfolio. In the case of settlement, such
indemnification will not be provided unless it has been determined by a
court or other body approving the settlement or other disposition, or by a
reasonable determination, based upon a review of readily available facts,
by vote of a majority of noninterested Trustees or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in
wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
Item 15. Control Persons and Principal Holder of Securities
As of July 1, 1996, EV Marathon California Limited Maturity
Municipals Fund (the "Marathon Fund") and EV Classic California Limited
Maturity Municipals Fund (the "Classic Fund"), both series of Eaton Vance
Investment Trust, owned approximately 93.9% and 6.1%, respectively, of the
value of the outstanding interests in the Portfolio. Because the Marathon
Fund controls the Portfolio, it may take actions without the approval of
any other investor. The Marathon Fund and the Classic Fund have each
informed the Portfolio that whenever it is requested to vote on matters
pertaining to the fundamental policies of the Portfolio, it will hold a
meeting of shareholders and will cast its vote as instructed by its
shareholders. It is anticipated that any other investor in the Portfolio
which is an investment company registered under the 1940 Act would follow
the same or a similar practice. Eaton Vance Investment Trust is an open-
end management investment company organized as a business trust under the
laws of the Commonwealth of Massachusetts.
Item 16. Investment Advisory and Other Services
Investment Adviser. The Portfolio engages BMR as its investment
adviser pursuant to an Investment Advisory Agreement dated October 13,
1992. BMR or Eaton Vance acts as investment adviser to investment
companies and various individual and institutional clients with combined
assets under management of over $16 billion.
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. The
Portfolio is responsible for all expenses not expressly stated to be
payable by BMR under the Investment Advisory Agreement, including, without
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implied limitation, (i) expenses of maintaining the Portfolio and
continuing its existence, (ii) registration of the Portfolio under the
1940 Act, (iii) commissions, fees and other expenses connected with the
acquisition, holding and disposition of securities and other investments,
(iv) auditing, accounting and legal expenses, (v) taxes and interest, (vi)
governmental fees, (vii) expenses of issue, sale and redemption of
interests in the Portfolio, (viii) expenses of registering and qualifying
the Portfolio and interests in the Portfolio under federal and state
securities laws and of preparing and printing registration statements or
other offering statements or memoranda for such purposes and for
distributing the same to investors, and fees and expenses of registering
and maintaining registrations of the Portfolio and of the Portfolio's
placement agent as broker-dealer or agent under state securities laws,
(ix) expenses of reports and notices to investors and of meetings of
investors and proxy solicitations therefor, (x) expenses of reports to
governmental officers and commissions, (xi) insurance expenses, (xii)
association membership dues, (xiii) fees, expenses and disbursements of
custodians and subcustodians for all services to the Portfolio (including
without limitation safekeeping for funds, securities and other
investments, keeping of books, accounts and records, and determination of
net asset values, book capital account balances and tax capital account
balances), (xiv) fees, expenses and disbursements of transfer agents,
dividend disbursing agents, investor servicing agents and registrars for
all services to the Portfolio, (xv) expenses for servicing the accounts of
investors, (xvi) any direct charges to investors approved by the Trustees
of the Portfolio, (xvii) compensation and expenses of Trustees of the
Portfolio who are not members of the BMR organization, and (xviii) such
nonrecurring items as may arise, including expenses incurred in connection
with litigation, proceedings and claims and the obligation of the
Portfolio to indemnify its Trustees, officers and investors with respect
thereto.
For a description of the compensation that the Portfolio pays BMR
under the Investment Advisory Agreement, see "Management of the Portfolio"
in Part A. As of March 31, 1996, the Portfolio had net assets of
$59,216,080. For the fiscal year ended March 31, 1996, the Portfolio paid
BMR advisory fees of $327,056 (equivalent to 0.46% of the Portfolio's
average daily net assets for such year). For the fiscal year ended March
31, 1995, BMR earned advisory fees of $418,800 (equivalent to 0.46% of the
Portfolio's average daily net assets for such year). For the period from
the start of business, May 3, 1993, to March 31, 1994, BMR would have
earned, absent a fee reduction, advisory fees of $278,603 (equivalent to
0.45% (annualized) of the Portfolio's average daily net assets for such
period). To enhance the net income of the Portfolio, BMR made a reduction
of its advisory fee in the amount of $32,971.
The Investment Advisory Agreement with BMR remains in effect
until February 28, 1997. It may be continued indefinitely thereafter so
long as such continuance is approved at least annually (i) by the vote of
a majority of the Trustees of the Portfolio who are not interested persons
of the Portfolio or of BMR cast in person at a meeting specifically called
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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.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and
EV are both wholly-owned subsidiaries of EVC. BMR and Eaton Vance are
both Massachusetts business trusts, and EV is the trustee of BMR and Eaton
Vance. The Directors of EV are Landon T. Clay, H. Day Brigham, Jr., M.
Dozier Gardner, James B. Hawkes, and Benjamin A. Rowland, Jr. The
Directors of EVC consist of the same persons and John G.L. Cabot and Ralph
Z. Sorenson. Mr. Clay is chairman and Mr. Gardner is president and chief
executive officer of EVC, BMR, Eaton Vance and EV. All of the issued and
outstanding shares of Eaton Vance and EV 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, which expires on December 31, 1996, the Voting Trustees of which
are Messrs. Clay, Brigham, Gardner, Hawkes and Rowland. 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 and Directors of EVC and EV. As of June 30, 1996,
Messrs. Clay, Gardner and Hawkes each owned 24% of such voting trust
receipts, and Messrs. Rowland and Brigham owned 15% and 13%, respectively,
of such voting trust receipts. Messrs. Hawkes and Otis are officers or
Trustees of the Portfolio and are members of the EVC, BMR, Eaton Vance and
EV organizations. Messrs. Fetter, Hender, MacIntosh, Murphy, O'Connor and
Woodbury and Ms. Sanders are officers of the Portfolio and are also
members of the BMR, Eaton Vance and EV organizations. BMR will receive
the fees paid under the Investment Advisory Agreement.
EVC owns all of the stock of Energex Energy Corporation, which is
engaged in oil and gas exploration and development. In addition, Eaton
Vance owns all of the stock of Northeast Properties, Inc., which is
engaged in real estate investment. EVC also owns 24% of the Class A
shares of Lloyd George Management (B.V.I.) Limited, a registered
investment adviser. EVC owns all of the stock of Fulcrum Management, Inc.
and MinVen Inc., which are engaged in precious metal mining venture
investment and management. EVC, BMR, Eaton Vance and EV may also enter
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into other businesses.
EVC and its affiliates and their officers and employees from time
to time have transactions with various banks, including the custodian of
the Portfolio, Investors Bank & Trust Company. 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 Portfolio and such banks.
Custodian. Investors Bank & Trust Company ("IBT"), 89 South
Street, Boston, Massachusetts, acts as custodian for the Portfolio. IBT
has the custody of all of the Portfolio's assets, maintains the general
ledger of the Portfolio, and computes the daily net asset value of
interests in the Portfolio. In such capacity it attends to details in
connection with the sale, exchange, substitution or transfer of, 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 Portfolio. IBT charges fees which are
competitive within the industry. A portion of the fee relates to custody,
bookkeeping and valuation services and is based upon a percentage of
Portfolio net assets and a portion of the fee relates to activity charges,
primarily the number of portfolio transactions. These fees are then
reduced by a credit for cash balances of the Portfolio at the custodian
equal to 75% of the 91-day, U.S. Treasury Bill auction rate applied to the
Portfolio's average daily collected balances for the week. Landon T.
Clay, a Director of EVC and an officer, Trustee or Director of other
entities in the Eaton Vance organization, owns approximately 13% of the
voting stock of Investors Financial Services Corp., the holding company
parent of IBT. Management believes that such ownership does not create an
affiliated person relationship between the Portfolio and IBT under the
1940 Act.
Independent Certified Public Accountants. Deloitte & Touche LLP,
125 Summer Street, Boston, Massachusetts, are the independent certified
public accountants of the Portfolio, providing audit services, tax return
preparation, and assistance and consultation with respect to the
preparation of filings with the Commission.
Item 17. Brokerage Allocation and Other Practices
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 that 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
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transaction and will give consideration to various relevant factors
including, without limitation, 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 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 prices is customarily referred to
as the spread. The Portfolio may also purchase municipal obligations from
underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters. While it is anticipated that the
Portfolio will not pay significant brokerage commissions in connection
with such portfolio security transactions, 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
that 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 that 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 commission 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 that
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.
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It is a common practice of the investment advisory industry and
of the advisers of investment companies, institutions and other investors
to receive research, statistical and quotation services, data, information
and other services, products and materials that assist such advisers in
the performance of their investment responsibilities ("Research Services")
from broker-dealer firms that 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's transactions and from third parties with which
these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and
transactions and 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 that 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 only 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 commissions to such firms to ensure the
continued receipt of Research Services that BMR believes are useful or of
value to it in rendering investment advisory services to its clients.
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 any investment company sponsored by BMR or
Eaton Vance. This policy is not inconsistent with a rule of the National
Association of Securities Dealers, Inc. ("NASD"), which rule provides that
no firm that 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
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may also be appropriate for other investment accounts managed by BMR or
its affiliates. BMR will attempt to allocate equitably portfolio security
transactions among the Portfolio and the portfolios of its other
investment accounts purchasing municipal obligations whenever decisions
are made to purchase or sell securities by the Portfolio and one or more
of such other accounts simultaneously. In making such allocations, the
main factors to be considered are the respective investment objectives of
the Portfolio and such other accounts, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash
for investment by the Portfolio and such accounts, the size of investment
commitments generally held by the Portfolio and such accounts and the
opinions of the persons responsible for recommending investments to the
Portfolio and such accounts. While this procedure 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
Portfolio that the benefits available from the BMR organization outweigh
any disadvantage that may arise from exposure to simultaneous
transactions. For the fiscal year ended March 31, 1996, the Portfolio
paid brokerage commissions of $5,129 on portfolio security transactions
aggregating $45,929,728 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). For the fiscal year ended March 31, 1995, and for the
period from the start of business, May 3, 1993, to March 31, 1994, the
Portfolio paid no brokerage commissions on portfolio transactions.
Item 18. Capital Stock and Other Securities
Under the Portfolio's Declaration of Trust, the Trustees are
authorized to issue interests in the Portfolio. Investors are entitled to
participate pro rata in distributions of taxable income, loss, gain and
credit of the Portfolio. Upon dissolution of the Portfolio, the Trustees
shall liquidate the assets of the Portfolio and apply and distribute the
proceeds thereof as follows: (a) first, to the payment of all debts and
obligations of the Portfolio to third parties including, without
limitation, the retirement of outstanding debt, including any debt owed to
holders of record of interests in the Portfolio ("Holders") or their
affiliates, and the expenses of liquidation, and to the setting up of any
reserves for contingencies which may be necessary; and (b) second, in
accordance with the Holders' positive Book Capital Account balances after
adjusting Book Capital Accounts for certain allocations provided in the
Declaration of Trust and in accordance with the requirements described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2). Notwithstanding the
foregoing, if the Trustees shall determine that an immediate sale of part
or all of the assets of the Portfolio would cause undue loss to the
Holders, the Trustees, in order to avoid such loss, may, after having
given notification to all the Holders, to the extent not then prohibited
by the law of any jurisdiction in which the Portfolio is then formed or
qualified and applicable in the circumstances, either defer liquidation of
and withhold from distribution for a reasonable time any assets of the
Portfolio except those necessary to satisfy the Portfolio's debts and
obligations or distribute the Portfolio's assets to the Holders in
liquidation. Interests in the Portfolio have no preference, preemptive,
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conversion or similar rights and are fully paid and nonassessable, except
as set forth below. Interests in the Portfolio may not be transferred.
Certificates representing an investor's interest in the Portfolio are
issued only upon the written request of a Holder.
Each Holder is entitled to vote in proportion to the amount of
its interest in the Portfolio. Holders do not have cumulative voting
rights. The Portfolio is not required and has no current intention to
hold annual meetings of Holders, but the Portfolio will hold meetings of
Holders when in the judgment of the Portfolio's Trustees it is necessary
or desirable to submit matters to a vote of Holders at a meeting. Any
action which may be taken by Holders may be taken without a meeting if
Holders holding more than 50% of all interests entitled to vote (or such
larger proportion thereof as shall be required by any express provision of
the Declaration of Trust of the Portfolio) consent to the action in
writing and the consents are filed with the records of meetings of
Holders.
The Portfolio's Declaration of Trust may be amended by vote of
Holders of more than 50% of all interests in the Portfolio at any meeting
of Holders or by an instrument in writing without a meeting, executed by a
majority of the Trustees and consented to by the Holders of more than 50%
of all interests. The Trustees may also amend the Declaration of Trust
(without the vote or consent of Holders) to change the Portfolio's name or
the state or other jurisdiction whose law shall be the governing law, to
supply any omission or cure, correct or supplement any ambiguous,
defective or inconsistent provision, to conform the Declaration of Trust
to applicable federal law or regulations or to the requirements of the
Code, or to change, modify or rescind any provision, provided that such
change, modification or rescission is determined by the Trustees to be
necessary or appropriate and not to have a materially adverse effect on
the financial interests of the Holders. No amendment of the Declaration
of Trust which would change any rights with respect to any Holder's
interest in the Portfolio by reducing the amount payable thereon upon
liquidation of the Portfolio may be made, except with the vote or consent
of the Holders of two-thirds of all interests. References in the
Declaration of Trust and in Part A or this Part B to a specified
percentage of, or fraction of, interests in the Portfolio, means Holders
whose combined Book Capital Account balances represent such specified
percentage or fraction of the combined Book Capital Account balance of
all, or a specified group of, Holders.
The Portfolio may merge or consolidate with any other
corporation, association, trust or other organization or may sell or
exchange all or substantially all of its assets upon such terms and
conditions and for such consideration when and as authorized by the
Holders of (a) 67% or more of the interests in the Portfolio present or
represented at the meeting of Holders, if Holders of more than 50% of all
interests are present or represented by proxy, or (b) more than 50% of all
interests, whichever is less. The Portfolio may be terminated (i) by the
affirmative vote of Holders of not less than two-thirds of all interests
at any meeting of Holders or by an instrument in writing without a
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meeting, executed by a majority of the Trustees and consented to by
Holders of not less than two-thirds of all interests, or (ii) by the
Trustees by written notice to the Holders.
In accordance with the Declaration of Trust, there normally will
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 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 provides that no person shall serve as a
Trustee if investors holding two-thirds of the outstanding interests 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 is organized as a trust under the laws of the State
of New York. Investors in the Portfolio will be held personally liable
for its obligations and liabilities, subject, however, to indemnification
by the Portfolio in the event that there is imposed upon an investor a
greater portion of the liabilities and obligations of the Portfolio than
its proportionate interest in the Portfolio. The Portfolio intends to
maintain fidelity and errors and omissions insurance deemed adequate by
the Trustees. Therefore, the risk of an investor incurring financial loss
on account of investor liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself is unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, 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.
Item 19. Purchase, Redemption and Pricing of Securities
Interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning
of Section 4(2) of the Securities Act of 1933. See "Purchase of Interests
in the Portfolio" and "Redemption or Decrease of Interest" in Part A.
The Portfolio's net asset value is determined by Investors Bank &
Trust Company (as custodian and agent for the Portfolio) in the manner
described in Part A. The net asset value is computed by subtracting the
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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 transaction 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.
Item 20. Tax Status
The Portfolio has been advised by tax counsel that, provided the
Portfolio is operated at all times during its existence in accordance with
certain organizational and operational documents, the Portfolio should be
classified as a partnership under the Internal Revenue Code of 1986, as
amended (the "Code"), and it should not be a "publicly traded partnership"
within the meaning of Section 7704 of the Code. Consequently, the
Portfolio does not expect that it will be required to pay any federal
income tax, and a Holder will be required to take into account in
determining its federal income tax liability its share of the Portfolio's
income, gains, losses, deductions and tax preference items.
Under Subchapter K of the Code, a partnership is considered to be
either an aggregate of its members or a separate entity depending upon the
factual and legal context in which the question arises. Under the
aggregate approach, each partner is treated as an owner of an undivided
interest in partnership assets and operations. Under the entity approach,
the partnership is treated as a separate entity in which partners have no
direct interest in partnership assets and operations. The Portfolio has
been advised by tax counsel that, in the case of a Holder that seeks to
qualify as a regulated investment company (a "RIC"), the aggregate
approach should apply, and each such Holder should accordingly be deemed
to own a proportionate share of each of the assets of the Portfolio and to
be entitled to the gross income of the Portfolio attributable to that
share for purposes of all requirements of Sections 851(b) and 852(b)(5) of
the Code. Further, the Portfolio has been advised by tax counsel that each
Holder that seeks to qualify as a RIC should be deemed to hold its
proportionate share of the Portfolio's assets for the period the Portfolio
has held the assets or for the period the Holder has been an investor in
the Portfolio, whichever is shorter. Investors should consult their tax
advisers regarding whether the entity or the aggregate approach applies to
their investment in the Portfolio in light of their particular tax status
and any special tax rules applicable to them.
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<PAGE>
In order to enable a Holder in the Portfolio that is otherwise
eligible to qualify as a RIC, the Portfolio intends to satisfy the
requirements of Subchapter M of the Code relating to sources of income and
diversification of assets as if they were applicable to the Portfolio and
to allocate and permit withdrawals in a manner that will enable a Holder
which is a RIC to comply with those requirements. The Portfolio will
allocate at least annually to each Holder its 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 in a manner intended to comply with the Code and
applicable Treasury regulations. Tax counsel has advised the Portfolio
that the Portfolio's allocations of taxable income and loss should have
"economic effect" under applicable Treasury regulations.
To the extent the cash proceeds of any withdrawal (or, under
certain circumstances, such proceeds plus the value of any marketable
securities distributed to an investor) ("liquid proceeds") exceed a
Holder's adjusted basis of his interest in the Portfolio, the Holder will
generally realize a gain for federal income tax purposes. If, upon a
complete withdrawal (redemption of the entire interest), the Holder's
adjusted basis of his interest exceeds the liquid proceeds of such
withdrawal, the Holder will generally realize a loss for federal income
tax purposes. The tax consequences of a withdrawal of property (instead
of or in addition to liquid proceeds) will be different and will depend on
the specific factual circumstances. A Holder's adjusted basis of an
interest in the Portfolio will generally be the aggregate prices paid
therefor (including the adjusted basis of contributed property and any
gain recognized on such contribution), increased by the amounts of the
Holder's distributive share of items of income (including interest income
exempt from federal income tax) and realized net gain of the Portfolio,
and reduced, but not below zero, by (i) the amounts of the Holder's
distributive share of items of Portfolio loss, and (ii) the amount of any
cash distributions (including distributions of interest income exempt from
federal income tax and cash distributions on withdrawals from the
Portfolio) and the basis to the Holder of any property received by such
Holder other than in liquidation, and (iii) the Holder's distributive
share of the Portfolio's nondeductible expenditures not properly
chargeable to capital account. Increases or decreases in a Holder's share
of the Portfolio's liabilities may also result in corresponding increases
or decreases in such adjusted basis. Distributions of liquid proceeds in
excess of a Holder's adjusted basis in its interest in the Portfolio
immediately prior thereto generally will result in the recognition of gain
to the Holder in the amount of such excess.
The Portfolio may acquire zero coupon or other securities issued
with original issue discount. As the holder of those securities, the
Portfolio must account for the original issue discount (even on municipal
securities) that accrues on the securities during the taxable year, even
if it receives no corresponding payment on the securities during the year.
Because each Holder that is a RIC annually must distribute substantially
all of its investment company taxable income and net tax-exempt income,
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including any original issue discount, to qualify for treatment as a RIC,
any such Holder may be required in a particular year to distribute as an
"exempt-interest dividend" an amount that is greater than its pro-
portionate share of the total amount of cash the Portfolio actually
receives. Those distributions will be made from the Holder's cash assets,
if any, or from its proportionate share of the Portfolio's cash assets or
the proceeds of sales of the Portfolio's securities, if necessary. The
Portfolio may realize capital gains or losses from those sales, which
would increase or decrease the investment company taxable income and/or
net capital gain (the excess of net long-term capital gain over net short-
term capital loss) of a Holder that is a RIC. In addition, any such gains
may be realized on the disposition of securities held for less than three
months. Because of the Short-Short Limitation (defined below), any such
gains would reduce the Portfolio's ability to sell other securities, or
options or futures contracts, held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.
Investments in lower rated or unrated securities may present
special tax issues for the Portfolio and hence to an investor in the
Portfolio to the extent actual or anticipated defaults may be more likely
with respect to such securities. Tax rules are not entirely clear about
issues such as when the Portfolio may cease to accrue interest, original
issue discount, or market discount; when and to what extent deductions may
be taken for bad debts or worthless securities; how payments received on
obligations in default should be allocated between principal and income;
and whether exchanges of debt obligations in a workout context are
taxable.
In order for a Holder that is a RIC to be entitled to pay the
tax-exempt interest income the Portfolio allocates to it as
exempt-interest dividends to its shareholders, the Holder must 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 excludable from gross
income under Section 103(a) of the Code. The Portfolio intends to
concentrate its investments in such tax-exempt obligations to an extent
that will enable a RIC that invests its investable assets in the Portfolio
to satisfy this 50% requirement.
Interest on certain municipal obligations is treated as a tax
preference item for purposes of the federal alternative minimum tax.
Holders that are required to file federal income tax returns are required
to report tax-exempt interest allocated to them by the Portfolio on such
returns.
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
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municipal obligations for investment by the Portfolio and the value of the
Portfolio 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 original issue
discount with respect to certain stripped municipal obligations or their
stripped coupons and certain realized accrued market discount. Any
allocations of such capital gains or other taxable income to Holders would
be taxable to Holders that are subject to tax. However, it is expected
that such amounts, if any, would normally be insubstantial in relation to
the tax-exempt interest earned by the Portfolio.
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 its items of income, gain or loss and hence the
allocations of such items to investors. 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 periods of Portfolio securities and conversion
of short-term into long-term capital losses.
Income from transactions in options and futures contracts derived
by the Portfolio with respect to its business of investing in securities
will qualify as permissible income for its Holders that are RICs under the
requirement that at least 90% of a RIC's gross income each taxable year
consist of specified types of income. However, income from the dispo-
sition by the Portfolio of options and futures contracts held for less
than three months will be subject to the requirement applicable to those
Holders that less than 30% of a RIC's gross income each taxable year
consist of certain short-term gains ("Short-Short Limitation").
If the Portfolio satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be offset by
any decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether the Holders that are RICs satisfy the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. The Portfolio
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Portfolio does not so qualify, it
may be forced to defer the closing out of options and futures contracts
beyond the time when it otherwise would be advantageous to do so, in order
for Holders that are RICs to continue to qualify as such.
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Interest on indebtedness incurred or continued by an investor to
purchase or carry an investment in the Portfolio is not deductible to the
extent it is deemed attributable to the investor's investment, through the
Portfolio, in tax-exempt obligations. Further, persons who are
"substantial users" (or persons related to "substantial users") of
facilities financed by industrial development or private activity bonds
should consult their tax advisers before investing in the Portfolio.
"Substantial user" is defined in applicable Treasury regulations to
include a "non-exempt person" who regularly uses in trade or business a
part of a facility financed from the proceeds of industrial development
bonds and would likely be interpreted to include private activity bonds
issued to finance similar facilities.
An entity that is treated as a partnership under the Code, such
as the Portfolio, is generally treated as a partnership under state and
local tax laws, but certain states may have different entity
classification criteria and may therefore reach a different conclusion.
Entities that are classified as partnerships are not treated as separate
taxable entities under most state and local tax laws, and the income of a
partnership is considered to be income of partners both in timing and in
character. The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under the income or tax
laws of any state or local taxing authority. The laws of the various
states and local taxing authorities vary with respect to the taxation of
such interest income, as well as to the status of a partnership interest
under state and local tax laws, and each holder of an interest in the
Portfolio is advised to consult his own tax adviser.
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. Investors 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 or foreign tax
consequences of investing in the Portfolio.
Item 21. Underwriters
The placement agent for the Portfolio is Eaton Vance
Distributors, Inc., which receives no compensation for serving in this
capacity. Investment companies, common and commingled trust funds and
similar organizations and entities may continuously invest in the
Portfolio.
Item 22. Calculation of Performance Data
Not applicable.
Item 23. Financial Statements
The following audited financial statements of the Portfolio are
incorporated by reference into this Part B and have been so incorporated
in reliance upon the report of Deloitte and Touche LLP, independent
certified public accountants, as experts in accounting and auditing.
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Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the fiscal year ended March 31, 1996
Statement of Changes in Net Assets for the fiscal years ended
March 31, 1996 and 1995
Supplementary Data for the fiscal years ended March 31, 1996 and
1995, and for the period from the start of business, May 3, 1993,
to March 31, 1994
Notes to Financial Statements
Independent Auditors' Report
For purposes of the EDGAR filing of this amendment to the
Portfolio's registration statement, the Portfolio incorporates by
reference the above audited financial statements, as previously filed
electronically with the Commission (Accession Number 0000928816-96-
000146).
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APPENDIX
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.
---------------
+ 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
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given to these securities on the date of the Portfolio's fiscal year
end.
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.
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 in its corporate bond rating
system. 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
a - 2
<PAGE>
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
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
a - 3
<PAGE>
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.
p: 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.
a - 4
<PAGE>
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 Investors Service, Inc.
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.
a - 5
<PAGE>
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
BB: 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.
a - 6
<PAGE>
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 Strong 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.
a - 7
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
The financial statements called for by this Item are incorporated
by reference into Part B and listed in Item 23 hereof.
(b) Exhibits
1. (a) Declaration of Trust dated May 1, 1992 filed as Exhibit
No. 1(a) to Amendment No. 2 (filed electronically with the
Commission on July 26, 1995) (Accession No. 0000898432-95-
000281) and incorporated herein by reference.
(b) Amendment to Declaration of Trust dated February 22, 1993
filed as Exhibit No. 1(b) to Amendment No. 2 and incorporated
herein by reference.
(c) Amendment to Declaration of Trust dated December 8, 1995
filed herewith.
2. By-Laws of the Registrant adopted May 1, 1992 filed as Exhibit
No. 2 to Amendment No. 2 and incorporated herein by reference.
5. Investment Advisory Agreement between the Registrant and
Boston Management and Research dated October 13, 1992 filed as
Exhibit No. 5 to Amendment No. 2 and incorporated herein by
reference.
6. Placement Agent Agreement with Eaton Vance Distributors, Inc.
dated May 3, 1993 filed as Exhibit No. 6 to Amendment No. 2
and incorporated herein by reference.
7. 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).
8. (a) Custodian Agreement with Investors Bank & Trust Company
dated May 3, 1993 filed as Exhibit No. 8 to Amendment No. 2
and incorporated herein by reference.
C - 1
<PAGE>
(b) Amendment to Custodian Agreement dated October 23, 1995
filed herewith.
13. Investment representation letter of Eaton Vance Investment
Trust, on behalf of Eaton Vance California Limited Maturity
Tax Free Fund, dated April 12, 1993 filed as Exhibit No. 13 to
Amendment No. 2 and incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
(1) (2)
Title of Class Number of
Record Holders
as of July 1, 1996
Interests 4
Item 27. Indemnification.
Reference is hereby made to Article V of the Registrant's
Declaration of Trust, filed as Exhibit 1(a) to Amendment No. 2 and
incorporated herein by reference.
The Trustees and officers of the Registrant and the personnel of
the Registrant's investment adviser are insured under an errors and
omissions liability insurance policy. The Registrant and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
Item 28. Business and Other Connections.
To the knowledge of the Portfolio, none of the trustees or officers
of the Portfolio's investment adviser, except as set forth on its Form ADV
as filed with the Securities and Exchange Commission, is engaged in any
other business, profession, vocation or employment of a substantial
nature, except that certain trustees and officers also hold various
positions with and engage in business for affiliates of the investment
adviser.
Item 29. Principal Underwriters.
Not applicable.
Item 30. 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, 89
South Street, Boston, MA 02111, with the exception of certain corporate
C - 2
<PAGE>
documents and portfolio trading documents which are in the possession and
custody of the Registrant's investment adviser at 24 Federal Street,
Boston, MA 02110. The 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 the Registrant's
investment adviser.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Not applicable.
C - 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this Amendment No. 3 to the Registration
Statement on Form N-1A to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts, on this 24th day of July, 1996.
CALIFORNIA LIMITED MATURITY
MUNICIPALS PORTFOLIO
By /s/ Thomas J. Fetter
---------------------
Thomas J. Fetter
President
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
1. (c) Amendment to Declaration of Trust dated December 8,
1995 filed herewith.
8. (b) Amendment to Custodian Agreement dated October 23,
1995 filed herewith.
<PAGE>
CALIFORNIA LIMITED MATURITY MUNICIPALS PORTFOLIO
(formerly called California Limited Maturity Tax Free Portfolio)
AMENDMENT TO DECLARATION OF TRUST
December 8, 1995
AMENDMENT, made December 8, 1995 to the Declaration of Trust made
May 1, 1992, as amended February 22, 1993, (hereinafter called the
"Declaration") of California Limited Maturity Tax Free Portfolio, a New
York trust (hereinafter called the "Trust") by the undersigned, being at
least a majority of the Trustees of the Trust in office on December 8,
1995.
WHEREAS, Section 10.4 of Article X of the Declaration empowers a
majority of the Trustees of the Trust to amend the Declaration without the
vote or consent of Holders to change the name of the Trust;
NOW, THEREFORE, the undersigned Trustees, do hereby amend the
Declaration in the following manner:
1. The caption at the head of the Declaration is hereby
amended to read as follows:
CALIFORNIA LIMITED MATURITY MUNICIPALS PORTFOLIO
2. Section 1.1 of Article I of the Declaration is hereby
amended to read as follows:
ARTICLE I
1.1. Name. The name of the trust created hereby (the "Trust")
shall be California Limited Maturity Municipals Portfolio and so far as
may be practicable the Trustees shall conduct the Trust's activities,
execute all documents and sue or be sued under that name, which name (and
the word "Trust" wherever hereinafter used) shall refer to the Trustees as
Trustees, and not individually, and shall not refer to the officers,
employees, agents or independent contractors of the Trust or holders of
interests in the Trust.
IN WITNESS WHEREOF, the undersigned Trustees have executed this
instrument this 8th day of December, 1995.
/s/ Donald R. Dwight /s/ Norton H. Reamer
--------------------------------- --------------------------------
<PAGE>
Donald R. Dwight Norton H. Reamer
/s/ James B. Hawkes /s/ John L. Thorndike
--------------------------------- --------------------------------
James B. Hawkes John L. Thorndike
/s/ Samuel L. Hayes, III /s/ Jack L. Treynor
--------------------------------- --------------------------------
Samuel L. Hayes, III Jack L. Treynor
-2-
<PAGE>
AMENDMENT TO
MASTER CUSTODIAN AGREEMENT
between
EATON VANCE HUB PORTFOLIOS
and
INVESTORS BANK & TRUST COMPANY
This Amendment, dated as of October 23, 1995, is made to the
MASTER CUSTODIAN AGREEMENT (the "Agreement") between each investment
company advised by Boston Management and Research which has adopted the
Agreement (the "Trusts") and Investors Bank & Trust Company (the
"Custodian") pursuant to Section 10 of the Agreement.
The Trusts and the Custodian agree that Section 10 of the
Agreement shall, as of October 23, 1995, be amended to read as follows:
Unless otherwise defined herein, terms which are defined in the
Agreement and used herein are so used as so defined.
10. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated by either party after
August 31, 2000 by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
that the Trust may at any time by action of its Board, (i) substitute
another bank or trust company for the Custodian by giving notice as
described above to the Custodian in the event the Custodian assigns this
Agreement to another party without consent of the noninterested Trustees
of the Trust, or (ii) immediately terminate this Agreement in the event of
the appointment of a conservator or receiver for the Custodian by the
Federal Deposit Insurance Corporation or by the Banking Commissioner of
The Commonwealth of Massachusetts or upon the happening of a like event at
the direction of an appropriate regulatory agency or court of competent
jurisdiction. Upon termination of the Agreement, the Trust shall pay to
the Custodian such compensation as may be due as of the date of such
termination (and shall likewise reimburse the Custodian for its costs,
expenses and disbursements).
This Agreement may be amended at any time by the written
agreement of the parties hereto. If a majority of the non-interested
trustees of any of the Trusts determines that the performance of the
Custodian has been unsatisfactory or adverse to the interests of Trust
holders of any Trust or Trusts or that the terms of the Agreement are no
longer consistent with publicly available industry standards, then the
Trust or Trusts shall give written notice to the Custodian of such
determination and the Custodian shall have 60 days to (1) correct such
performance to the satisfaction of the non-interested trustees or (2)
renegotiate terms which are satisfactory to the non-interested trustees of
the Trusts. If the conditions of the preceding sentence are not met then
the Trust or Trusts may terminate this Agreement on sixty (60) days
written notice.
<PAGE>
The Board of the Trust shall, forthwith, upon giving or receiving
notice of termination of this Agreement, appoint as successor custodian, a
bank or trust company having the qualifications required by the Investment
Company Act of 1940 and the Rules thereunder. The Bank, as Custodian,
Agent or otherwise, shall, upon termination of the Agreement, deliver to
such successor custodian, all securities then held hereunder and all funds
or other properties of the Trust deposited with or held by the Bank
hereunder and all books of account and records kept by the Bank pursuant
to this Agreement, and all documents held by the Bank relative thereto.
In the event that no written order designating a successor custodian shall
have been delivered to the Bank on or before the date when such
termination shall become effective, then the Bank shall not deliver the
securities, funds and other properties of the Trust to the Trust but shall
have the right to deliver to a bank or trust company doing business in
Boston, Massachusetts of its own selection meeting the above required
qualifications, all funds, securities and properties of the Trust held by
or deposited with the Bank, and all books of account and records kept by
the Bank pursuant to this Agreement, and all documents held by the Bank
relative thereto. Thereafter such bank or trust company shall be the
successor of the Custodian under this Agreement.
Except as expressly provided herein, the Agreement shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their duly authorized officers, as of the day and year
first above written.
Alabama Tax Free Portfolio
Arizona Tax Free Portfolio
Arkansas Tax Free Portfolio
Cash Management Portfolio
Colorado Tax Free Portfolio
Connecticut Tax Free Portfolio
Florida Insured Tax Free Portfolio
Florida Tax Free Portfolio
Georgia Tax Free Portfolio
Government Obligations Portfolio
Growth Portfolio
Hawaii Tax Free Portfolio
High Yield Municipals Portfolio
Investors Portfolio
Kansas Tax Free Portfolio
Kentucky Tax Free Portfolio
Louisiana Tax Free Portfolio
Maryland Tax Free Portfolio
Massachusetts Tax Free Portfolio
Michigan Tax Free Portfolio
Minnesota Tax Free Portfolio
Mississippi Tax Free Portfolio
Missouri Tax Free Portfolio
2
<PAGE>
National Municipals Portfolio
New Jersey Tax Free Portfolio
New York Tax Free Portfolio
North Carolina Tax Free Portfolio
Ohio Tax Free Portfolio
Oregon Tax Free Portfolio
Pennsylvania Tax Free Portfolio
Rhode Island Tax Free Portfolio
South Carolina Tax Free Portfolio
Special Investment Portfolio
Stock Portfolio
Strategic Income Portfolio
Tax Free Reserves Portfolio
Tennessee Tax Free Portfolio
Texas Tax Free Portfolio
Total Return Portfolio
Virginia Tax Free Portfolio
West Virginia Tax Free Portfolio
Arizona Limited Maturity Tax Free Portfolio
California Tax Free Portfolio
California Limited Maturity Tax Free Portfolio
Connecticut Limited Maturity Tax Free Portfolio
Florida Limited Maturity Tax Free Portfolio
Massachusetts Limited Maturity Tax Free Portfolio
Michigan Limited Maturity Tax Free Portfolio
National Limited Maturity Tax Free Portfolio
New Jersey Limited Maturity Tax Free Portfolio
New York Limited Maturity Tax Free Portfolio
North Carolina Limited Maturity Tax Free Portfolio
Ohio Limited Maturity Tax Free Portfolio
Pennsylvania Limited Maturity Tax Free Portfolio
Virginia Limited Maturity Tax Free Portfolio
By: /s/James L. O'Connor
----------------------
Treasurer
INVESTORS BANK & TRUST COMPANY
By: /s/Michael F. Rogers
-----------------------
3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892304
<NAME> CALIFORNIA LIMITED MATURITY MUNICIPALS PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 58,559
<INVESTMENTS-AT-VALUE> 59,597
<RECEIVABLES> 1,011
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 87
<TOTAL-ASSETS> 60,695
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,479
<TOTAL-LIABILITIES> 1,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,178
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,038
<NET-ASSETS> 59,216
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,809
<OTHER-INCOME> 0
<EXPENSES-NET> 393
<NET-INVESTMENT-INCOME> 3,416
<REALIZED-GAINS-CURRENT> 691
<APPREC-INCREASE-CURRENT> 500
<NET-CHANGE-FROM-OPS> 4,607
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (23,128)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 327
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 420
<AVERAGE-NET-ASSETS> 70,842
<PER-SHARE-NAV-BEGIN> 0.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PAGE>
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 0.000
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
</TABLE>
