As filed with the Securities and Exchange Commission on November 20, 1996
File No. 811-7208
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ X ]
AMENDMENT NO. 4 [ X ]
PENNSYLVANIA MUNICIPALS PORTFOLIO
(formerly called Pennsylvania Tax Free Portfolio)
(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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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
Pennsylvania 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 current income
exempt from regular federal income tax and Pennsylvania State and local income
taxes in the form of an investment exempt from Pennsylvania personal property
taxes. The Portfolio seeks to achieve its objective by investing primarily in
municipal obligations (as described below) 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 an interest 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
primarily (i.e., 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 Pennsylvania State and local income taxes,
and the value of which is exempt from Pennsylvania personal property taxes. The
foregoing policy is a fundamental policy of the Portfolio, which may not be
changed unless authorized by a vote of the investors in the Portfolio.
At least 70% 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 Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch")) or, if unrated, determined by the Investment Adviser to
be of at least investment grade quality. The balance of the Portfolio's net
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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.
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 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, or from the proceeds of a specific revenue
source. Some revenue bonds are payable solely or partly from funds which are
subject to annual appropriations by a State's legislature and the availability
of monies for such payments. Municipal notes include bond anticipation, tax
anticipation, 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 Commonwealth of Pennsylvania or its
political subdivisions.
Interest income from certain types of municipal obligations may be
subject to the federal alternative minimum tax (the "AMT") for individuals. As
at July 31, 1996, the Portfolio had invested 20.9% of its net assets in such
obligations. Distributions to corporate investors of certain interest income may
be subject to the AMT. The Portfolio may not be suitable for investors subject
to the AMT.
CONCENTRATION IN PENNSYLVANIA ISSUERS - RISKS. Because the Portfolio
will normally invest at least 65% of its total assets in obligations issued by
Pennsylvania and its political subdivisions, it is more susceptible to factors
adversely affecting such issuers than mutual funds that do not concentrate in a
single State. Municipal obligations of issuers in a single State may be
adversely effected by economic developments (including insolvency of an issuer)
and by legislation and other governmental activities in that State. Municipal
obligations that rely on an annual appropriation of funds by a State's
legislature for payment are also subject to the risk that the legislature will
not appropriate the necessary amounts or take other action needed to permit the
issuer of such obligations to make required payments. To the extent that the
Portfolio's assets are concentrated in municipal obligations of Pennsylvania
issuers, the Portfolio may be subject to an increased risk of loss.
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Pennsylvania has long had a large representation in the steel, mining
and manufacturing industries and adverse conditions in those or other
significant industries within Pennsylvania may from time to time have a
correspondingly adverse effect on specific issuers within Pennsylvania or on
anticipated revenue to the Commonwealth. In recent years, Pennsylvania's economy
has become more diversified with major new sources of growth in the service
sector, including trade, medical and the health services, education and
financial institutions. The unadjusted unemployment rate for Pennsylvania in
June 1996 was 5.1% versus the June 1995 level of 5.9%.
The Governor's fiscal year 1997 proposed budget contained tax
reductions totaling $60.2 million and certain cost reduction programs,
particularly in the areas of public health and welfare. Under the 1997 budget,
revenues receipts are expected to increase and approximately $95 million of
surplus from 1996 are expected to be used. The fiscal year 1997 budget projects
a $5 million fiscal year-end unappropriated surplus. All budgetary proposals
require legislative enactment.
Pennsylvania's general obligation debt is rated AA- by S&P and Fitch
and A1 by Moody's.
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 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. Section
936 (a tax incentive that has encouraged economic growth in Puerto Rico) will be
phased out over a ten year period. At this time, it is uncertain as to the
implication the change will have on the Puerto Rico economy. Although the Puerto
Rico unemployment rate has declined substantially since 1985, the seasonally
adjusted unemployment rate for July, 1996 was approximately 13.8%. 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.
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's rating on April 26, 1994, which was
still in place as of the date of this Part A.
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
dependent on annual appropriations by a State's legislature for payment;
obligations of State and local housing finance authorities, municipal utilities
systems or public housing authorities; obligations of hospitals or life care
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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 Pennsylvania 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 also 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 it the option to purchase a municipal obligation
when and if issued.
INVERSE FLOATERS. The Portfolio may invest in municipal securities
whose interest rates bear an inverse relationship to the interest rate on
another security or the value of an index ("inverse floaters"). An investment in
inverse floaters may involve greater risk than an investment in a fixed rate
bond. Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the value of
an inverse floater is generally more volatile than that of a fixed rate bond.
Inverse floaters have interest rate adjustment formulas which generally reduce
or, in the extreme, eliminate the interest paid to the Portfolio when short-term
interest rates rise, and increase the interest paid to the Portfolio when
short-term interest rates fall. Inverse floaters have varying degrees of
liquidity, and the market for these securities is new and relatively volatile.
These securities tend to underperform the market for fixed rate bonds in a
rising interest rate environment, but tend to outperform the market for fixed
rate bonds when interest rates decline. Shifts in long-term interest rates may,
however, alter this tendency. Although volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These securities usually
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permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising rates if exercised at an opportune time. Inverse floaters
are leveraged because they provide two or more dollars of bond market exposure
for every dollar invested. As a matter of operating policy, the Portfolio
currently may invest up to 7.5% of its net assets in inverse floaters.
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 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
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are more highly rated obligations, which react primarily to movements in
the general level of interest rates. The Investment Adviser seeks to minimize
the risks of investing in below investment grade securities through professional
investment analysis and attention to current developments in interest rates and
economic conditions. When the Portfolio invests in lower rated 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 which
are rated below investment grade but which, subsequent to the assignment of such
rating, are backed by escrow accounts containing U.S. Government obligations may
be determined by the Investment Adviser to be of investment grade quality for
purposes of the Portfolio's investment policies. The Portfolio may retain in its
portfolio an obligation whose rating drops below B after its acquisition, 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. 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.
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.
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The secondary market for some municipal obligations (including issues
which are privately placed with the Portfolio) is less liquid than that for
taxable debt obligations or other more widely traded municipal obligations. The
Portfolio will not invest in illiquid securities if more than 15% of its net
assets would be invested in securities that are not readily marketable. No
established resale market exists for certain of the municipal obligations in
which the Portfolio may invest. The market for obligations rated below
investment grade is also likely to be less liquid than the market for higher
rated obligations. As a result, the Portfolio may be unable to dispose of these
municipal obligations at times when it would otherwise wish to do so at the
prices at which they are valued.
Certain securities held by the Portfolio may permit the issuer at its
option to "call", or redeem, its securities. If an issuer redeems securities
held by the Portfolio during a time of declining interest rates, the Portfolio
may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed.
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.
THE PORTFOLIO HAS ADOPTED CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
WHICH ARE ENUMERATED IN DETAIL IN PART B AND WHICH 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 INVESTMENT OBJECTIVES DIFFERENT FROM THE OBJECTIVE
THAT AN INVESTOR CONSIDERED APPROPRIATE AT THE TIME THE INVESTOR BECAME
AN INTERESTHOLDER 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.
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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 $20 million 0.100% 1.00%
2 $20 million but less than $40 million 0.200% 2.00%
3 $40 million but less than $500 million 0.300% 3.00%
4 $500 million but less than $1 billion 0.275% 2.75%
5 $1 billion but less than $1.5 billion 0.250% 2.50%
6 $1.5 billion but less than $2 billion 0.225% 2.25%
7 $2 billion but less than $3 billion 0.200% 2.00%
8 $3 billion and over 0.175% 1.75%
As at July 31, 1996, the Portfolio had net assets of $448,181,861. For
the fiscal year ended July 31, 1996, the Portfolio paid BMR advisory fees
equivalent to 0.47% 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 which through its subsidiaries and affiliates
engages primarily in investment management, administration and marketing
activities. The Portfolio's placement agent, Eaton Vance Distributors, Inc., is
a wholly-owned subsidiary of Eaton Vance.
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Timothy T. Browse has acted as the portfolio manager of the Portfolio
since December 1, 1995. He has been a Vice President of Eaton Vance and of BMR
since 1993 and an employee of Eaton Vance since 1992. Prior to joining Eaton
Vance, he was a municipal bond trader at Fidelity Management & Research Company
(1987-1992).
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 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 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.
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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 interest in the Portfolio.
Information regarding pooled investment entities or funds which invest
in the Portfolio may be obtained by contacting Eaton Vance Distributors, Inc.,
24 Federal Street, Boston, MA 02110, (617) 482-8260.
As of November 1, 1996, EV Marathon Pennsylvania Municipals Fund, a
series of Eaton Vance Municipals Trust, controlled the Portfolio by virtue of
owning approximately 98.7% of the outstanding 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
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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 are
intended to comply with the requirements of the Internal Revenue Code of 1986,
as amended (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 which seeks to 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 determine its net asset value 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 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. 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
valuation of the Portfolio's assets, see Part B, Item 19.
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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 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 (the "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-17
Control Persons and Principal Holder of Securities ..........B-21
Investment Advisory and Other Services ......................B-21
Brokerage Allocation and Other Practices.....................B-24
Capital Stock and Other Securities ..........................B-27
Purchase, Redemption and Pricing of Securities...............B-29
Tax Status...................................................B-30
Underwriters.................................................B-34
Calculation of Performance Data..............................B-34
Financial Statements.........................................B-34
Appendix.....................................................a-1
ITEM 12. GENERAL INFORMATION AND HISTORY
Effective December 1, 1995, the Portfolio's name was changed from
"Pennsylvania Tax Free Portfolio" to "Pennsylvania Municipals Portfolio".
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES
Part A contains additional information about the investment objective
and policies of 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 AMT: (i) certain "public purpose" obligations (whenever issued),
which include obligations issued directly by state and local governments or
their agencies to fulfill essential governmental functions; (ii) certain
obligations issued before August 8, 1986 for the benefit of non-governmental
persons or entities; and (iii) certain "private activity bonds" issued after
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August 7, 1986, which include "qualified Section 501(c)(3) bonds" or
refundings of certain obligations included in the second category. In assessing
the federal income tax treatment of interest on any municipal obligation, the
Portfolio will generally rely on an opinion of the issuer's counsel (when
available) and will not undertake any independent verification of the basis for
the opinion. The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds.
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 AMT. 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 AMT 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 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
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reserve fund, some authorities provide further security in the form of a
state's ability (without legal obligation) to make up deficiencies in the debt
service reserve fund. Lease rental revenue bonds issued by a state or local
authority for capital projects are normally secured by annual lease rental
payments from the state or locality to the authority sufficient to cover debt
service on the authority's obligations. Such payments are usually subject to
annual appropriations by the state or locality.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are in most cases revenue bonds and are
generally not secured by the taxing power of the municipality, but are usually
secured by the revenues derived by the authority from payments of the industrial
user or users.
The Portfolio may on occasion acquire revenue bonds which carry
warrants or similar rights covering equity securities. Such warrants or rights
may be held indefinitely, but if exercised, the Portfolio anticipates that it
would, under normal circumstances, dispose of any equity securities so acquired
within a reasonable period of time.
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, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a municipal obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
municipal obligations which were not foreseen by the financial and investment
communities. The Portfolio will take whatever action it considers appropriate in
the event of anticipated financial difficulties, default or bankruptcy of either
the issuer of any municipal obligation or of the underlying source of funds for
debt service. Such action may include retaining the services of various persons
or firms (including affiliates of the Investment Adviser) to evaluate or protect
any real estate, facilities or other assets securing any such obligation or
acquired by the Portfolio as a result of any such event, and the Portfolio may
also manage (or engage other persons to manage) or otherwise deal with any real
estate, facilities or other assets so acquired. The Portfolio anticipates that
real estate consulting and management services may be required with respect to
properties securing various municipal obligations in its portfolio or
subsequently acquired by the Portfolio. The Portfolio will incur additional
expenditures in taking protective action with respect to portfolio obligations
in default and assets securing such obligations.
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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
PENNSYLVANIA OBLIGATIONS. The following information as to certain
Pennsylvania considerations is given to investors in view of the Portfolio's
policy of concentrating its investments in Pennsylvania 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 Pennsylvania issuers. The Portfolio has not
independently verified this information.
Pennsylvania historically has been identified as a heavy industry
state, although that reputation has changed with the decline of the coal, steel
and railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the service
sector, including trade, medical and health services, education and financial
institutions. Pennsylvania continues, however, to have a greater percentage of
its workers employed in manufacturing than the national average, leaving the
economy somewhat cyclical and vulnerable to recessionary forces. During 1995,
manufacturing accounted for 18% of employment. For July 1996, the adjusted
unemployment rate for Pennsylvania was 5.1% as compared to the July 1995 level
of 5.9%. Per capita income in Pennsylvania for 1994 of $22,196 was higher than
the per capita income of the United States of $21,699.
Revenues and Expenditures. Pennsylvania utilizes the fund method of
accounting. The General Fund, the State's largest fund, receives all tax
receipts, revenues, federal grants and reimbursements that are not specified by
law to be deposited elsewhere. Debt service on all obligations, except those
issued for highway purposes or for the benefit of other special revenue funds,
is payable from the General Fund. The General Fund closed fiscal year 1995 with
a balance of $688 million.
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The Governor's fiscal year 1997 proposed budget contained tax
reductions totaling $60.2 million and certain cost reduction programs,
particularly in the areas of public health and welfare. Under the 1997 budget,
revenue receipts are expected to increase and approximately $95 million of
surplus from 1996 are expected to be used. The fiscal year 1997 budget projects
a $5 million fiscal year-end unappropriated surplus. All budgetary proposals
require legislative enactment.
The Pennsylvania Constitution requires all proceeds of motor fuels
taxes, vehicle registration fees, license taxes, operators' license fees and
other excise taxes imposed on products used in motor transportation to be sued
exclusively for construction, reconstruction, maintenance and repair of and
safety on highways and bridges and for the payment of debt service on
obligations incurred for such purposes. The Motor License Fund is the fund
through which such revenues are accounted for and expended.
Pennsylvania Debt. The current Constitutional provisions pertaining to
the Pennsylvania debt permit the issuance of the following types of debt: (i)
debt to suppress insurrection or rehabilitate areas affected by disaster, (ii)
electorate approved debt, (iii) debt for capital projects subject to an
aggregate debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years (this debt need not be approved by the electorate)
and (iv) tax anticipation notes payment in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes, which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
outstanding, may not exceed in the aggregate 20% of the revenues estimated to
accrue to the appropriate fund in the fiscal year. The State is not permitted to
fund deficits between fiscal years with any form of debt. All year end deficit
balances must be funded within the succeeding fiscal year's budget.
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years.
State-Related Obligations. Certain state-created agencies have
statutory authorization to incur debt for which no legislation providing for
state appropriations to pay debt service thereon is required. The debt of these
agencies is supported by assets of or revenues derived from the various projects
financed; it is not an obligation of the State. Some of these agencies, however,
are indirectly dependent on state appropriations. State-related agencies and
their outstanding debt as of December 31, 1995 include the Delaware River Joint
Toll Bridge Commission ($55.1 million), the Delaware River Port Authority ($85.5
million), the Pennsylvania Economic Development Financing Authority ($1,050.8
million), the Pennsylvania Energy Development Authority ($121.0 million), the
Pennsylvania Higher Education Assistance Agency ($1,408.8 million), the
Pennsylvania Higher Education Facilities Authority ($2,115.1 million), the
Pennsylvania Industrial Development Authority ($344.8 million), the Pennsylvania
Infrastructure Investment Authority ($213.1 million), the Pennsylvania Turnpike
Commission ($1,228.7 million), the Philadelphia Regional Port Authority ($62.6
million) and the State Public School Building Authority ($316.2 million).
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The only obligations of state-created agencies in Pennsylvania which
bear a moral obligation of the state are those issued by the Pennsylvania
Housing Finance Agency, a state- created agency which provides housing for lower
and moderate income families in the state, which had $2,165 million of bonds
outstanding at December 31, 1995, and the Hospitals and Higher Education
Facilities Authority of Philadelphia which issued $21.1 million in bonds in
1993.
Litigation. Pennsylvania is currently involved in certain litigation
where adverse decisions could have an adverse impact on its ability to pay debt
service. In Baby Neal v. Commonwealth, the American Civil Liberties Union filed
a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. County of
Allegheny v. Commonwealth of Pennsylvania involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In Pennsylvania Association of Rural and Small Schools v.
Casey, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
Local Government Debt. Local government in Pennsylvania consists of
numerous individual units. Each unit is distinct and independent of other local
units, although they may overlap geographically.
There is extensive general legislation applying to local government.
For example, the Local Government Unit Debt Act provides for uniform debt limits
for local government units, including municipalities and school districts, and
prescribes methods of incurring, evidencing, securing and collecting debt. Under
the Local Government Unit Debt Act, the ability of Pennsylvania municipalities
and school districts to engage in general obligation borrowing without electoral
approval is generally limited by their recent revenue collection experience.
Generally, such subdivisions can levy real property taxes unlimited as to rate
or amount to pay debt service on general obligation borrowings.
Municipalities may also issue revenue obligations without limit and
without affecting their general obligation borrowing capacity if the obligations
are projected to be paid solely from project revenues.
Municipal authorities and industrial development authorities are
widespread in Pennsylvania. An authority is organized by a municipality acting
singly or jointly with another municipality and is governed by a board appointed
by the governing unit of the creating municipality or municipalities. Typically,
authorities are established to acquire, own and lease or operate one or more
projects and to borrow money and issue revenue bonds to finance them.
As of the date hereof, the City of Philadelphia's general obligations
are rated Ba, B and BB, by Moody's, S&P and Fitch, respectively.
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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. Accordingly, the Portfolio may be adversely affected by local
political and economic conditions and developments within Puerto Rico, the U.S.
Virgin Islands and Guam 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.
This decline was broad based among all manufacturing industries. 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 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 the U.S. Congress to ratify the
election.
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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 June 1996, unemployment stood at 4.7%. 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. Since 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 is periodically hit by hurricanes.
During this past hurricane season, several hurricanes caused extensive damage,
which has had a negative impact on revenue collections. There is currently no
rated, unenhanced U.S. Virgin Islands debt outstanding (although there is
unrated debt outstanding).
Guam, an unincorporated U.S. territory, is located 1,500 miles
southeast of Tokyo. Population, 133,000 in 1990, is 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. 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 Island's
commercial airport. Guam is also heavily reliant on tourists, particularly the
Japanese. For 1995, the government realized a General Fund operating surplus.
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 BBB by S&P with a negative outlook.
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 the same type. In particular, investments in industrial
revenue bonds might involve (without limitation) the following risks.
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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. Since 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
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 state or local governments to acquire equipment and facilities.
Interest income from such obligations is generally exempt from local and state
taxes in the state of issuance. "Participations" in such leases are undivided
interests in a portion of the total obligation. Participations entitle their
holders to receive a pro rata share of all payments under the lease. 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
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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.
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).
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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 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
July 31, 1996 and 1995, were 30% and 44%, 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
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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. When the Portfolio commits to purchase a security
on a when-issued basis, it records the transaction and reflects the value of the
security in determining its net asset value. Securities purchased on a
when-issued basis and the securities held by the Portfolio are subject to
changes in value based upon the perception of the creditworthiness of the issuer
and changes in the level of interest rates (i.e., appreciation when interest
rates decline and depreciation when interest rates rise). Therefore, to the
extent that the Portfolio remains substantially fully invested at the same time
that it has purchased securities on a when-issued basis, there will be greater
fluctuations in the Portfolio's net asset value than if it solely set aside cash
to pay for when-issued securities.
VARIABLE RATE OBLIGATIONS
The Portfolio may purchase variable rate obligations. 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 his agent. Rate revisions may
alternatively be determined by formula or in some other contractual fashion.
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 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
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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. Since 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 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. 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
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consideration which 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 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 which is a
member of the relevant exchange. The Portfolio may purchase and write call and
put options on futures contracts which are traded on a United States 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 which 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
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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 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").
ASSET COVERAGE REQUIREMENTS
Transactions involving when-issued securities, the lending of Portfolio
securities or futures contracts and options (other than options that the
Portfolio has purchased) expose the Portfolio to an obligation to another party.
The Portfolio will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options or futures
contracts, or (2) cash or liquid securities 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 or liquid
securities in a segregated account with its custodian in the prescribed amount.
The securities in the segregated account will be marked to market daily.
Assets used as cover or held in a segregated account cannot be sold
while the position requiring coverage or segregation is outstanding unless they
are replaced with other appropriate assets. As a result, the commitment of a
large portion of the Portfolio's assets to segregated accounts or to cover could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
INVESTMENT RESTRICTIONS
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;
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(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 (including limited partnership
interests in real estate, but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of companies which
invest or deal in real estate or securities which are secured by 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.
The Portfolio has adopted the following investment policies which may
be changed by the Portfolio without approval of its investors. As a matter of
nonfundamental policy, the Portfolio may 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 the Portfolio 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, or its delegate, determines to be liquid;
or (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 of trustee of any
investment adviser of the Portfolio, if after the purchase of the securities of
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such issuer by the Portfolio one or more of such persons owns beneficially
more than 1/2 of 1% of the shares of 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).
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.
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 Pennsylvania issuers. Moreover, the Portfolio must
always be in compliance with the borrowing policy set forth above.
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"), which is 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 (*).
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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 (55), Vice President and Trustee*
President and Chief Executive Officer 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, 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 (61), 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
JOHN L. THORNDIKE (70), 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 (53), 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.
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TIMOTHY T. BROWSE (37), Vice President
Vice President of Eaton Vance and of BMR since 1993 and an employee of Eaton
Vance since 1992. Municipal Bond Trader, Fidelity Management & Research Company
(1987- 1992). Officer of various investment companies managed by Eaton Vance or
BMR. Mr. Browse was elected Vice President of the Portfolio effective December
1, 1995.
ROBERT B. MACINTOSH (39), Vice President
Vice President of BMR since August 11, 1992, and of Eaton Vance and EV. Officer
of various investment companies managed by Eaton Vance or BMR. Mr. MacIntosh was
elected Vice President of the Portfolio on March 22, 1993.
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 (65), 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 (61), Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
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). 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. Hayes (Chairman), Reamer and Thorndike 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 comprised of four Trustees who are not
"interested persons" as that term is defined under the 1940 Act ("noninterested
Trustees"). The Committee has four-year staggered terms, with one member
rotating off the Committee to be replaced by another noninterested Trustee of
the Portfolio. The purpose of the Committee is to recommend to the Board
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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 of the Eaton Vance
organization receive no compensation from the Portfolio). During the fiscal year
ended July 31, 1996, the noninterested Trustees of the Portfolio earned the
following compensation in their capacities as Trustees of the Portfolio and,
during the year ended September 30, 1996, 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 $3,845(2) $142,500(4)
Samuel L.
Hayes, III 3,807(3) 153,750(5)
Norton H.
Reamer 3,753 142,500
John L.
Thorndike 3,864 147,500
Jack L.
Treynor 3,971 147,500
(1) The Eaton Vance fund complex consists of 228 registered investment
companies or series thereof.
(2) Includes $1,439 of deferred compensation.
(3) Includes $1,236 of deferred compensation.
(4) Includes $42,500 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
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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
the Trustees.
The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses 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 willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDER OF SECURITIES
As of November 1, 1996, EV Marathon Pennsylvania Municipals Fund (the
"Marathon Fund"), a series of Eaton Vance Municipals Trust, owned approximately
98.7% 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 has 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 votes 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 Municipals
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 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.
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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
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 any legal obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto, to the extent not covered by
insurance.
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 at July 31, 1996, the Portfolio had net assets of $448,181,861. For the
fiscal year ended July 31, 1996, the Portfolio paid BMR advisory fees of
$2,262,320 (equivalent to 0.47% of the Portfolio's average daily net assets for
such year). For the fiscal year ended July 31, 1995, the Portfolio paid BMR
advisory fees of $2,416,419 (equivalent to 0.48% of the Portfolio's average
daily net assets for such year). For the ten months ended July 31, 1994, the
Portfolio paid BMR advisory fees of $2,054,802 (equivalent to 0.46% (annualized)
of the Portfolio's average daily net assets for such period).
B-22
<PAGE>
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 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. Hawkes 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 October 31, 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, Investment Adviser, Eaton Vance and EV organizations. Messrs. Browse,
Fetter, MacIntosh, Murphy, O'Connor and Woodbury and Ms. Sanders are officers or
Trustees 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 engages
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 owns all of the stock of Fulcrum Management, Inc. and MinVen
Inc., which are engaged in precious metal mining venture investment and
management. EVC also owns 24% of the Class A shares of Lloyd George Management
(B.V.I.) Limited, a registered investment adviser. EVC, BMR, Eaton Vance and EV
may also enter into other businesses.
B-23
<PAGE>
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 members of the Eaton Vance
organization, owns approximately 13% of the 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.
IBT also provides services in connection with the preparation of
interestholder reports and the electronic filing of such reports with the
Commission for which it receives a separate fee.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. Deloitte & Touche LLP, 125
Summer Street, Boston, Massachusetts, are the independent certified public
accountants for 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
which are advantageous to the Portfolio and at reasonably competitive spreads or
(when a disclosed commission is being charged) at reasonably competitive
commission rates. In seeking such execution, BMR will use its best judgment in
evaluating the terms of a transaction and will give consideration to various
relevant factors including, without limitation, the 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
B-24
<PAGE>
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 price 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 which another firm might charge may be paid to firms who were
selected to execute transactions on behalf of the Portfolio and BMR's other
clients for providing brokerage and research services to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934,
a broker or dealer who executes a portfolio transaction on behalf of the
Portfolio may receive a commission which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if BMR determines in good faith that such 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 which BMR and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, BMR will not attempt to place a specific dollar value on the
brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, BMR receives Research Services from many broker-dealer firms
with which BMR places the Portfolio'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
B-25
<PAGE>
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 which pay
commissions to such broker-dealer. Any such Research Service may be broadly
useful and of value to BMR in rendering investment advisory services to all or a
significant portion of its clients, or may be relevant and useful for the
management of only one client's account or of a few clients' accounts, or may be
useful for the management of merely a segment of certain clients' accounts,
regardless of whether any such account or accounts paid commissions to the
broker-dealer through which such Research Service was obtained. The advisory fee
paid by the Portfolio is not reduced because BMR receives such Research
Services. BMR evaluates the nature and quality of the various Research Services
obtained through broker-dealer firms and attempts to allocate sufficient
commissions to such firms to ensure the continued receipt of Research Services
which BMR believes are useful or of value to it in rendering investment advisory
services to its clients.
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 which is a member of the NASD
shall favor or disfavor the distribution of shares of any particular investment
company or group of investment companies on the basis of brokerage commissions
received or expected by such firm from any source.
Municipal obligations considered as investments for the Portfolio may
also be appropriate for other investment accounts managed by BMR or its
affiliates. BMR will attempt to allocate in a manner it deems equitable
portfolio security transactions among the Portfolio and the portfolios of its
other investment accounts 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. However, there may be instances
when the Portfolio will not participate in a securities transaction that is
allocated among other accounts. While these procedures 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.
B-26
<PAGE>
For the fiscal year ended July 31, 1996, the Portfolio paid brokerage
commissions of $106,001 on portfolio security transactions aggregating
$688,954,042 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 July 31, 1995, and for the ten months ended July 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, 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.
B-27
<PAGE>
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
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.
B-28
<PAGE>
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 IBT (as custodian and
agent for the Portfolio) in the manner described in Part A. The net asset value
is computed by subtracting the liabilities of the Portfolio from the value of
its total assets. Inasmuch as the market for municipal obligations is a dealer
market with no central trading location or continuous quotation system, it is
not feasible to obtain last 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.
B-29
<PAGE>
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 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.
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
B-30
<PAGE>
(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, 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 proportionate 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.
B-31
<PAGE>
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 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 discount with respect to certain stripped
municipal obligations or their stripped coupons and certain realized gains or
income attributable to 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.
B-32
<PAGE>
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 disposition 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.
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.
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<PAGE>
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 & Touche LLP, independent certified public
accountants, as experts in accounting and auditing.
Portfolio of Investments as of July 31, 1996 Statement of Assets and
Liabilities as of July 31, 1996 Statement of Operations for the fiscal
year ended July 31, 1996
Statement of Changes in Net Assets for the fiscal years ended July 31,
1996 and 1995 Supplementary Data for the fiscal years ended July 31,
1996 and 1995, for the ten months ended July 31, 1994, and for the
period from the start of business, February 1, 1993, to September 30,
1993 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 0000950135-96- 004178).
B-34
<PAGE>
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 Registration Statement for the securities listed.
Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of the Portfolio's
fiscal year end.
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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 recognizes the
differences between short term credit risk and long term risk. Factors affecting
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.
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<PAGE>
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
VMIGI, 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 VMIGI 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 differs from
the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
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<PAGE>
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.
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.
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<PAGE>
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's 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 terms of the
note.
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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.
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<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The financial statements called for by this Item are
incorporated by reference in 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. 3 (filed electronically
with the Commission on November 30, 1995) (Accession No.
0000898432-95-00046)and incorporated herein by reference.
(b) Amendment to the Declaration of Trust dated February
23, 1993 filed as Exhibit 1(b) to Amendment No. 3 and
incorporated herein by reference.
(c) Amendment to the Declaration of Trust dated February
23, 1994 filed as Exhibit 1(c) to Amendment No. 3 and
incorporated herein by reference.
(d) Amendment to the Declaration of Trust dated June 13,
1994 filed as Exhibit No. 1(d) to Amendment No. 3 and
incorporated herein by reference.
(e) Amendment to the Declaration of Trust dated December
1, 1995 filed herewith.
2. By-Laws of the Registrant dated May 1, 1992 filed as
Exhibit No. 2 to Amendment No. 3 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. 3 and incorporated
herein by reference.
6. Placement Agent Agreement with Eaton Vance Distributors,
Inc. dated November 1, 1996 filed herewith.
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).
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<PAGE>
8. (a) Custodian Agreement with Investors Bank & Trust
Company dated January 29, 1993 filed as Exhibit No. 8(a)
to Amendment No. 3 and incorporated herein by reference.
(b) Amendment to the Custodian Agreement dated October
23, 1995 filed as Exhibit No. 8(b) to Amendment No. 3 and
incorporated herein by reference.
13. Investment representation letter of Eaton Vance
Municipals Trust (on behalf of Eaton Vance Pennsylvania
Tax Free Fund) dated January 21, 1993 filed as Exhibit
No. 13 to Amendment No. 3 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)
Number of
Title of Class Record Holders
-------------- --------------
As of November 1, 1996
Interests 3
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. 3 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.
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<PAGE>
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 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment No. 4 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 the 20th
day of November, 1996.
PENNSYLVANIA MUNICIPALS PORTFOLIO
By: /s/ Thomas J. Fetter
Thomas J. Fetter
President
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
1. (e) Amendment to the Declaration of Trust dated December 1, 1995
6. Placement Agent Agreement with Eaton Vance Distributors, Inc. dated
November 1, 1996
c-5
PENNSYLVANIA MUNICIPALS PORTFOLIO
(formerly called Pennsylvania Tax Free Portfolio)
AMENDMENT TO DECLARATION OF TRUST
December 1, 1995
AMENDMENT, made December 1, 1995 to the Declaration of Trust made May
1, 1992, as previously amended (hereinafter called the "Declaration") of
Pennsylvania 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 1, 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:
PENNSYLVANIA 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
Pennsylvania 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 1st day of December, 1995.
/s/ Donald R. Dwight /s/ Norton H. Reamer
- ------------------------------ ------------------------------
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
PLACEMENT AGENT AGREEMENT
November 1, 1996
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, Massachusetts 02110
Gentlemen:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, Pennsylvania Municipals Portfolio (the "Trust"), an
open-end non-diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), organized as a New
York trust, has agreed that Eaton Vance Distributors, Inc. ("EVD"), formerly
named EV Distributors, Inc., shall be the placement agent (the "Placement
Agent") of Interests in the Trust ("Trust Interests").
1. Services as Placement Agent.
1.1 EVD will act as Placement Agent of the Trust Interests covered by
the Trust's registration statement then in effect under the 1940 Act. In acting
as Placement Agent under this Placement Agent Agreement, neither EVD nor its
employees or any agents thereof shall make any offer or sale of Trust Interests
in a manner which would require the Trust Interests to be registered under the
Securities Act of 1933, as amended (the "1933 Act").
1.2 All activities by EVD and its agents and employees as Placement
Agent of Trust Interests shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations adopted
pursuant to the 1940 Act by the Securities and Exchange Commission (the
"Commission").
1.3 Nothing herein shall be construed to require the Trust to accept
any offer to purchase any Trust Interests, all of which shall be subject to
approval by the Board of Trustees.
1.4 The Portfolio shall furnish from time to time for use in connection
with the sale of Trust Interests such information with respect to the Trust and
Trust Interests as EVD may reasonably request. The Trust shall also furnish EVD
upon request with: (a) unaudited semiannual statements of the Trust's books and
accounts prepared by the Trust, and (b) from time to time such additional
information regarding the Trust's financial or regulatory condition as EVD may
reasonably request.
1.5 The Trust represents to EVD that all registration statements filed
by the Trust with the Commission under the 1940 Act with respect to Trust
Interests have been prepared in conformity with the requirements of such statute
and the rules and regulations of the Commission thereunder. As used in this
Agreement the term "registration statement" shall mean any registration
statement filed with the Commission as modified by any amendments thereto that
at any time shall have been filed with the Commission by or on behalf of the
Trust. The Trust represents and warrants to EVD that any registration statement
will contain all statements required to be stated therein in conformity with
both such statute and the rules and regulations of the Commission; that all
<PAGE>
statements of fact contained in any registration statement will be true and
correct in all material respects at the time of filing of such registration
statement or amendment thereto; and that no registration statement will include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
to a purchaser of Trust Interests. The Trust may but shall not be obligated to
propose from time to time such amendment to any registration statement as in the
light of future developments may, in the opinion of the Trust's counsel, be
necessary or advisable. If the Trust shall not propose such amendment and/or
supplement within fifteen days after receipt by the Trust of a written request
from EVD to do so, EVD may, at its option, terminate this Agreement. The Trust
shall not file any amendment to any registration statement without giving EVD
reasonable notice thereof in advance; provided, however, that nothing contained
in this Agreement shall in any way limit the Trust's right to file at any time
such amendment to any registration statement as the Trust may deem advisable,
such right being in all respects absolute and unconditional.
1.6 The Trust agrees to indemnify, defend and hold EVD, its several
officers and directors, and any person who controls EVD within the meaning of
Section 15 of the 1933 Act or Section 20 of the Securities and Exchange Act of
1934 (the "1934 Act") (for purposes of this paragraph 1.6, collectively,
"Covered Persons") free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which any Covered Person may incur under the 1933 Act, the
1934 Act, common law or otherwise, arising out of or based on any untrue
statement of a material fact contained in any registration statement, private
placement memorandum or other offering material ("Offering Material") or arising
out of or based on any omission to state a material fact required to be stated
in any Offering Material or necessary to make the statements in any Offering
Material not misleading; provided, however, that the Trust's agreement to
indemnify Covered Persons shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any financial and other statements as are
furnished in writing to the Trust by EVD in its capacity as Placement Agent for
use in the answers to any items of any registration statement or in any
statements made in any Offering Material, or arising out of or based on any
omission or alleged omission to state a material fact in connection with the
giving of such information required to be stated in such answers or necessary to
make the answers not misleading; and further provided that the Trust's agreement
to indemnify EVD and the Trust's representations and warranties hereinbefore set
forth in this paragraph 1.6 shall not be deemed to cover any liability to the
Trust or its investors to which a Covered Person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of a Covered Person's reckless disregard of its
obligations and duties under this Agreement. The Trust should be notified of any
action brought against a Covered Person, such notification to be given by a
writing addressed to the Trust, 24 Federal Street Boston, Massachusetts 02110,
with a copy to the Adviser of the Portfolio, Boston Management and Research, at
the same address, promptly after the summons or other first legal process shall
have been duly and completely served upon such Covered Person. The failure to so
notify the Trust of any such action shall not relieve the Trust from any
liability except to the extent the Trust shall have been prejudiced by such
failure, or from any liability that the Trust may have to the Covered Person
against whom such action is brought by reason of any such untrue statement or
omission, otherwise than on account of the Trust's indemnity agreement contained
in this paragraph. The Trust will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but in such case such
defense shall be conducted by counsel of good standing chosen by the Trust and
approved by EVD, which approval shall not be unreasonably withheld. In the event
the Trust elects to assume the defense of any such suit and retain counsel of
good standing approved by EVD, the defendant or defendants in such suit shall
<PAGE>
bear the fees and expenses of any additional counsel retained by any of them;
but in case the Trust does not elect to assume the defense of any such suit or
in case EVD reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse the Covered Person named as defendant in such suit, for the
fees and expenses of any counsel retained by EVD or it. The Trust's
indemnification agreement contained in this paragraph and the Trust's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
Covered Persons, and shall survive the delivery of any Trust Interests. This
agreement of indemnity will inure exclusively to Covered Persons and their
successors. The Trust agrees to notify EVD promptly of the commencement of any
litigation or proceedings against the Trust or any of its officers or Trustees
in connection with the issue and sale of any Trust Interests.
1.7 EVD agrees to indemnify, defend and hold the Trust, its several
officers and trustees, and any person who controls the Trust within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act (for purposes of
this paragraph 1.7, collectively, "Covered Persons") free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigating or defending such claims, demands, liabilities and any
counsel fees incurred in connection therewith) that Covered Persons may incur
under the 1933 Act, the 1934 Act or common law or otherwise, but only to the
extent that such liability or expense incurred by a Covered Person resulting
from such claims or demands shall arise out of or be based on any untrue
statement of a material fact contained in information furnished in writing by
EVD in its capacity as Placement Agent to the Trust for use in the answers to
any of the items of any registration statement or in any statements in any other
Offering Material or shall arise out of or be based on any omission to state a
material fact in connection with such information furnished in writing by EVD to
the Trust required to be stated in such answers or necessary to make such
information not misleading. EVD shall be notified of any action brought against
a Covered Person, such notification to be given by a writing addressed to EVD at
24 Federal Street, Boston, Massachusetts 02110, promptly after the summons or
other first legal process shall have been duly and completely served upon such
Covered Person. EVD shall have the right of first control of the defense of the
action with counsel of its own choosing satisfactory to the Trust if such action
is based solely on such alleged misstatement or omission on EVD's part, and in
any other event each Covered Person shall have the right to participate in the
defense or preparation of the defense of any such action. The failure to so
notify EVD of any such action shall not relieve EVD from any liability except to
the extent the Trust shall have been prejudiced by such failure, or from any
liability that EVD may have to Covered Persons by reason of any such untrue or
alleged untrue statement, or omission or alleged omission, otherwise than on
account of EVD's indemnity agreement contained in this paragraph.
1.8 No Trust Interests shall be offered by either EVD or the Trust
under any of the provisions of this Agreement and no orders for the purchase or
sale of Trust Interests hereunder shall be accepted by the Trust if and so long
as the effectiveness of the registration statement or any necessary amendments
thereto shall be suspended under any of the provisions of the 1933 Act or the
1940 Act; provided, however, that nothing contained in this paragraph shall in
any way restrict or have an application to or bearing on the Trust's obligation
to redeem Trust Interests from any investor in accordance with the provisions of
the Trust's registration statement or Declaration of Trust, as amended from time
to time.
<PAGE>
1.9 The Trust agrees to advise EVD as soon as reasonably practical by a
notice in writing delivered to EVD or its counsel:
(a) of any request by the Commission for amendments to the registration
statement then in effect or for additional information;
(b) in the event of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement then in effect or the
initiation by service of process on the Trust of any proceeding for that
purpose;
(c) of the happening of any event that makes untrue any statement of a
material fact made in the registration statement then in effect or that requires
the making of a change in such registration statement in order to make the
statements therein not misleading; and
(d) of all action of the Commission with respect to any amendment to
any registration statement that may from time to time be filed with the
Commission.
For purposes of this paragraph 1.9, informal requests by or acts of the
Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.10 EVD agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records and other
information not otherwise publicly available relative to the Trust and its
prior, present or potential investors and not to use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Trust, which approval shall not be unreasonably withheld and may not be
withheld where EVD may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
2. Duration and Termination of this Agreement.
This Agreement shall become effective upon the date of its execution,
and, unless terminated as herein provided, shall remain in full force and effect
through and including February 28, 1997 and shall continue in full force and
effect indefinitely thereafter, but only so long as such continuance after
February 28, 1997 is specifically approved at least annually (i) by the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Trust and (ii) by the vote of a majority of those Trustees of
the Trust who are not interested persons of EVD or the Trust cast in person at a
meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written
notice to the other, terminate this agreement without the payment of any
penalty, by action of Trustees of the Trust or the Directors of EVD, as the case
may be, and the Trust may, at any time upon such written notice to EVD,
terminate this Agreement by vote of a majority of the outstanding voting
securities of the Trust. This Agreement shall terminate automatically in the
event of its assignment.
3. Representations and Warranties.
EVD and the Trust each hereby represents and warrants to the other that
it has all requisite authority to enter into, execute, deliver and perform its
obligations under this Agreement and that, with respect to it, this Agreement is
legal, valid and binding, and enforceable in accordance with its terms.
<PAGE>
4. Limitation of Liability.
EVD expressly acknowledges the provision in the Declaration of Trust of
the Trust (Sections 5.2 and 5.6) limiting the personal liability of the Trustees
and officers of the Trust, and EVD hereby agrees that it shall have recourse to
the Trust for payment of claims or obligations as between the Trust and EVD
arising out of this Agreement and shall not seek satisfaction from any Trustee
or officer of the Trust.
5. Certain Definitions.
The terms "assignment" and "interested persons" when used herein shall
have the respective meanings specified in the Investment Company Act of
1940 as now in effect or as hereafter amended subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. The term "vote of a majority of the outstanding
voting securities" shall mean the vote, at a meeting of Holders, of the lesser
of (a) 67 per centum or more of the Interests in the Trust present or
represented by proxy at the meeting if the Holders of more than 50 per centum of
the outstanding Interests in the Trust are present or represented by proxy at
the meeting, or (b) more than 50 per centum of the outstanding Interests in the
Trust. The terms "Holders" and "Interests" when used herein shall have the
respective meanings specified in the Declaration of Trust of the Trust.
6. Concerning Applicable Provisions of Law, etc.
This Agreement shall be subject to all applicable provisions of law,
including the applicable provisions of the 1940 Act and to the extent that any
provisions herein contained conflict with any such applicable provisions of law,
the latter shall control.
The laws of the Commonwealth of Massachusetts shall, except to the
extent that any applicable provisions of federal law shall be controlling,
govern the construction, validity and effect of this Agreement, without
reference to principles of conflicts of law.
If the contract set forth herein is acceptable to you, please so
indicate by executing the enclosed copy of this Agreement and returning the same
to the undersigned, whereupon this Agreement shall constitute a binding contract
between the parties hereto effective at the closing of business on the date
hereof.
Yours very truly,
PENNSYLVANIA MUNICIPALS PORTFOLIO
By: /s/ Thomas J. Fetter
--------------------------------
President
Accepted:
EATON VANCE DISTRIBUTORS, INC.
By: /s/ Wharton P. Whitaker
- -------------------------------------
President
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