<PAGE>
EV CLASSIC
HIGH YIELD MUNICIPALS FUND
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EV CLASSIC HIGH YIELD MUNICIPALS FUND (THE "FUND") IS A MUTUAL FUND SEEKING TO
PROVIDE HIGH CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX. THE FUND
INVESTS ITS ASSETS IN HIGH YIELD MUNICIPALS PORTFOLIO (THE "PORTFOLIO"), A
NON-DIVERSIFIED OPEN-END INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE
AS THE FUND, RATHER THAN BY DIRECTLY INVESTING IN AND MANAGING ITS OWN PORTFOLIO
OF SECURITIES. THE FUND IS A NON-DIVERSIFIED SERIES OF EATON VANCE MUNICIPALS
TRUST II (THE "TRUST").
THE PORTFOLIO MAY INVEST UP TO 100% OF ITS ASSETS IN BELOW INVESTMENT GRADE
MUNICIPAL BONDS, COMMONLY KNOWN AS "JUNK BONDS", THAT ENTAIL GREATER RISKS,
INCLUDING DEFAULT, THAN THOSE OF HIGHER-RATED SECURITIES. SEE "INVESTMENT
POLICIES AND RISKS".
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank or other insured depository institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. Shares of the Fund involve investment risks,
including fluctuations in value and the possible loss of some or all of the
principal investment.
This Prospectus is designed to provide you with information you should know
before investing. Please retain this document for future reference. A Statement
of Additional Information dated June 11, 1997 for the Fund, as supplemented from
time to time, has been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated herein by reference. The Statement of
Additional Information is available without charge from the Fund's principal
underwriter, Eaton Vance Distributors, Inc. (the "Principal Underwriter"), 24
Federal Street, Boston, MA 02110 (telephone (800) 225-6265). The Portfolio's
investment adviser is Boston Management and Research (the "Investment Adviser"),
a wholly-owned subsidiary of Eaton Vance Management, and Eaton Vance Management
is the administrator (the "Administrator") of the Fund. The offices of the
Investment Adviser and the Administrator are located at 24 Federal Street,
Boston, MA 02110.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Shareholder and Fund Expenses ......................... 2 Reports to Shareholders ........................... 12
The Fund's Investment Objective ....................... 3 The Lifetime Investing Account/Distribution Options 12
Investment Policies and Risks ......................... 3 The Eaton Vance Exchange Privilege ................ 13
Organization of the Fund and the Portfolio ............ 6 Eaton Vance Shareholder Services .................. 13
Management of the Fund and the Portfolio .............. 7 Distributions and Taxes ........................... 14
Distribution Plan ..................................... 8 Performance Information ........................... 15
Valuing Fund Shares ................................... 9 Appendix A ........................................ 16
How to Buy Fund Shares ................................ 10 Appendix B ........................................ 17
How to Redeem Fund Shares ............................. 10
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PROSPECTUS DATED JUNE 11, 1997
<PAGE>
SHAREHOLDER AND FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
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Sales Charges Imposed on Purchases of Shares None
Sales Charges Imposed on Reinvested Distributions None
Fees to Exchange Shares None
Contingent Deferred Sales Charges Imposed on Redemptions
During the First Year (as a percentage of redemption proceeds
exclusive of all reinvestments and capital appreciation
in the account) 1.00%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES (as a percentage of
average daily net assets)
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Investment Adviser Fee 0.60%
Rule 12b-1 Distribution (and Service) Fees 1.00
Other Expenses 0.35
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Total Operating Expenses 1.95%
====
EXAMPLE 1 YEAR 3 YEARS
An investor would pay the following expenses
(including a contingent deferred sales charge in the
case of redemption during the first year after
purchase) on a $1,000 investment, assuming (a) 5%
annual return and (b) redemption at the end
of each period: $30 $61
NOTES:
The table and Example summarize the aggregate expenses of the Fund and the
Portfolio and are designed to help investors understand the costs and expenses
they will bear, directly or indirectly, by investing in the Fund. Information
for the Fund is based on its estimated expenses for the current fiscal year
because the Fund has only recently been organized.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Federal
regulations require the Example to assume a 5% annual return, but actual annual
return will vary. For further information regarding the expenses of both the
Fund and the Portfolio see "Management of the Fund and the Portfolio" and "How
to Redeem Fund Shares". A long-term shareholder in the Fund may pay more than
the economic equivalent of the maximum front-end sales charge permitted by a
rule of the National Association of Securities Dealers, Inc.
See "Distribution Plan".
No contingent deferred sales charge is imposed on (a) shares purchased more than
one year prior to redemption, (b) shares acquired through the reinvestment of
distributions or (c) any appreciation in value of other shares in the account
(see "How to Redeem Fund Shares"), and no such charge is imposed on exchanges of
Fund shares for shares of one or more other funds listed under "The Eaton Vance
Exchange Privilege". In the Example above, expenses would be $10 less in the
first year if there was no redemption.
The Portfolio's monthly advisory fee has two components, a fee based on daily
net assets and a fee based on daily gross income, as set forth in the fee
schedule on page 7.
The Fund invests exclusively in the Portfolio. Other investment companies with
different distribution arrangements are investing in the Portfolio and others
may do so in the future. See "Organization of the Fund and the Portfolio".
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
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THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE HIGH CURRENT INCOME EXEMPT FROM
REGULAR FEDERAL INCOME TAX. The Fund currently seeks to meet its investment
objective by investing its assets in High Yield Municipals Portfolio (the
"Portfolio"), a separate registered investment company which has the same
investment objective and policies as the Fund. The investment objective and
nonfundamental policies of the Fund may be changed by the Trustees without a
vote of shareholders. The Fund may not be appropriate for investors who cannot
assume the greater risk of capital depreciation or loss inherent in seeking
higher tax-exempt yields.
INVESTMENT POLICIES AND RISKS
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THE PORTFOLIO SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING PRINCIPALLY IN HIGH-
YIELDING, BELOW INVESTMENT GRADE MUNICIPAL OBLIGATIONS. Below investment grade
municipal obligations are obligations that are rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), or BB or lower by Standard & Poor's Ratings
Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or that are unrated
but determined by the Investment Adviser to be of comparable quality. For a
description of the ratings assigned by the rating agencies, see Appendix B.
Below investment grade municipal obligations, commonly known as "junk bonds",
generally offer higher current yields than higher rated securities, but are
subject to greater risks. Securities in the lower-rated categories are
considered to be of poor standing and predominantly speculative. The Portfolio
may also invest a portion of its assets in municipal obligations that are not
paying current income in anticipation of possible future income. For more
detailed information about the risks associated with investing in such
securities, see "Additional Risk Considerations" below.
Although the Portfolio may invest in securities of any maturity, it is expected
that the Portfolio will normally invest a substantial portion of its assets in
securities with maturities of ten years or more. Those securities generally
offer higher yields than securities of shorter maturities, but are subject to
greater fluctuations in value in response to changes in interest rates. Since
the Portfolio's objective is to provide high current income, the Portfolio will
invest in municipal obligations with an emphasis on income and not on stability
of the Portfolio's net asset value. The average maturity of the Portfolio's
holdings may vary (generally between 15 and 30 years) depending on anticipated
market conditions.
The Portfolio will normally invest at least 65% of its assets in investment
grade and below investment grade municipal obligations. As a matter of
fundamental policy, the Portfolio will normally invest at least 80% of its
assets in debt obligations issued by or on behalf of states, territories and
possessions of the United States, and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is,
in the opinion of bond counsel, exempt from regular federal income tax. (As a
matter of fundamental policy, the Fund will normally invest either directly, or
indirectly through another investment company, at least 80% of its assets in
such obligations.)
At times, the Portfolio may, for temporary defensive purposes, such as during
abnormal market or economic conditions, invest any portion of its assets in
higher-rated municipal obligations or treasury securities, the interest on which
may not be exempt from regular federal income tax, and may hold any portion of
its assets in cash. It is impossible to predict when, or for how long, the
Portfolio would engage in such strategies.
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 subject to annual
appropriations by a state's legislature. Municipal notes include bond, tax and
revenue anticipation notes, which are short-term obligations that will be
retired with the proceeds of an anticipated bond issue, tax revenue or facility
revenue, respectively.
Interest income from certain types of municipal obligations may be subject to
the federal alternative minimum tax (the "AMT") for individual investors. As at
January 31, 1997, the Portfolio had 40.4% of its net assets invested in such
obligations. Distributions to corporate investors of certain interest income may
also be subject to the AMT. The Fund may not be suitable for investors subject
to the AMT.
CONCENTRATION. The Portfolio may invest 25% or more of its assets in municipal
obligations of issuers located in the same state or in municipal obligations of
the same type, including without limitation the following: general obligations
of states and localities; 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 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 issuers. For example, health-care related issuers are susceptible to
medicaid reimbursement policies, and national and state health care legislation.
In addition, 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. As
the Portfolio's concentration in the securities of a particular category of
issuer increases, so does the potential for fluctuation in the value of the
Fund's shares.
NON-DIVERSIFIED STATUS. As a "non-diversified" investment company, 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 other
adverse development affecting certain issuers.
OTHER INVESTMENT PRACTICES
The Portfolio may engage in the following investment practices, some of which
may be considered to involve "derivative" instruments because they derive their
value from another instrument, security or index. In addition, the Portfolio may
temporarily borrow up to 5% of the value of its total assets to satisfy
redemption requests or settle securities transactions.
WHEN-ISSUED SECURITIES. The Portfolio may purchase securities on a "when-
issued" basis, which means that payment and delivery occur on a future
settlement date. The price and yield of such securities are generally fixed on
the date of commitment to purchase. However, the market value of the securities
may fluctuate prior to delivery and upon delivery the securities may be worth
more or less than the Portfolio agreed to pay for them. The Portfolio may also
purchase instruments that give the Portfolio the option to purchase a municipal
obligation when and if 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
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.
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. Distributions by the Fund of any gains
realized on the Portfolio's transactions in futures and options on futures will
be taxable.
ADDITIONAL RISK CONSIDERATIONS
Investors should carefully consider their ability to assume the risks of owning
shares of a mutual fund that invests in below investment grade municipal
obligations (commonly known as "junk bonds") before making an investment in the
Fund. The lower ratings of certain securities held by the Portfolio reflect a
greater possibility that adverse changes in the financial condition of an
issuer, or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by the Portfolio more volatile and could limit the Portfolio's
ability to sell its securities at prices approximating the values the Portfolio
has placed on such securities. It is possible that legislation may be adopted in
the future limiting the ability of certain financial institutions to purchase
such securities; such legislation may adversely affect the liquidity of such
securities. In the absence of a liquid trading market for securities held by it,
the Portfolio may be unable at times to establish the fair market value of such
securities. The rating assigned to a security by a rating agency does not
reflect an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security. Credit ratings are based largely on
the issuer's historical financial condition and the rating agency's investment
analysis at the timing of rating, and the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition. Credit quality in the high yield, high risk municipal bond market can
change from time to time, and recently issued credit ratings may not fully
reflect the actual risks posed by a particular high yield security.
The net asset value of shares of the Fund 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 already 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 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
an issuer to make payments of principal and interest may also affect the value
of the Portfolio's investments. The Portfolio will not dispose of a security
solely because its rating is reduced below its rating at the time of purchase,
although the Investment Adviser will monitor the investment to determine whether
continued investment in the security will assist in meeting the Portfolio's
investment objective.
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. Interest
and/or principal payments on securities in default could be in arrears when such
securities are acquired, and the issuer may be in bankruptcy or undergoing a
debt restructuring or reorganization. In order to enforce its rights in the
event of a default under such securities, the Portfolio may be required to take
possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. Any income derived from the Portfolio's
ownership or operation of such assets may not be tax-exempt.
The secondary market for many municipal obligations in which the Portfolio may
invest is less liquid than that for many 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
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 which 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,
and the Fund is required to distribute its share of the Portfolio's income for
each taxable year. Thus, the Portfolio may have to sell other investments to
obtain cash needed to make income distributions.
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 obligations.
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 such 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 amount of information about the financial
conditions of an issuer of municipal obligations may not be as extensive as that
which is made available by corporations whose securities are publicly traded.
THE FUND AND THE PORTFOLIO HAVE ADOPTED CERTAIN FUNDAMENTAL INVESTMENT
RESTRICTIONS WHICH ARE ENUMERATED IN DETAIL IN THE STATEMENT OF ADDITIONAL
INFORMATION AND WHICH MAY NOT BE CHANGED UNLESS AUTHORIZED BY A SHAREHOLDER
VOTE AND AN INVESTOR VOTE, RESPECTIVELY. EXCEPT FOR SUCH ENUMERATED
RESTRICTIONS AND AS OTHERWISE INDICATED IN THIS PROSPECTUS, THE INVESTMENT
OBJECTIVE AND POLICIES OF THE FUND AND THE PORTFOLIO ARE NOT FUNDAMENTAL
POLICIES AND ACCORDINGLY MAY BE CHANGED BY THE TRUSTEES OF THE TRUST AND THE
PORTFOLIO WITHOUT OBTAINING THE APPROVAL OF THE FUND'S SHAREHOLDERS OR THE
INVESTORS IN THE PORTFOLIO, AS THE CASE MAY BE.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
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THE FUND IS A NON-DIVERSIFIED SERIES OF EATON VANCE MUNICIPALS TRUST II, A
BUSINESS TRUST ESTABLISHED UNDER MASSACHUSETTS LAW PURSUANT TO A DECLARATION OF
TRUST DATED OCTOBER 25, 1993, AS AMENDED. The Trustees of the Trust are
responsible for the overall management and supervision of its affairs. The Trust
may issue an unlimited number of shares of beneficial interest (no par value per
share) in one or more series (such as the Fund). Each share represents an equal
proportionate beneficial interest in the Fund. When issued and outstanding, the
shares are fully paid and nonassessable by the Trust and redeemable as described
under "How to Redeem Fund Shares". There are no annual meetings of shareholders,
but special meetings may be held as required by law to elect Trustees and
consider certain other matters. Shareholders are entitled to one vote for each
full share held. Fractional shares may be voted proportionately. Shares have no
preemptive or conversion rights and are freely transferable. In the event of the
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders.
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. The
Portfolio, as well as the Trust, intends to comply with all applicable federal
and state securities laws. The Portfolio's Declaration of Trust provides that
the Fund and other entities permitted to invest in the Portfolio (e.g., other
U.S. and foreign investment companies, and common and commingled trust funds)
will each be liable for all obligations of the Portfolio. However, the risk of
the Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Trustees of the Trust
believe that neither the Fund nor its shareholders will be adversely affected by
reason of the Fund investing in the Portfolio.
The Trustees of the Trust have considered the advantages and disadvantages of
investing the assets of the Fund in the Portfolio, as well as the advantages and
disadvantages of the two-tier format. The Trustees believe that the structure
offers opportunities for substantial growth in the assets of the Portfolio,
affords the potential for economies of scale for the Fund (at least when the
assets of the Portfolio exceed $500 million) and may over time result in lower
expenses for the Fund.
In addition to selling an interest to the Fund, the Portfolio may sell interests
to other affiliated and non-affiliated mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, these differences may
result in differences in returns experienced by investors in the various funds
that invest in the Portfolio. Such differences in returns are also present in
other mutual fund structures, including funds that have multiple classes of
shares. Information regarding other pooled investment entities or funds which
invest in the Portfolio may be obtained by contacting the Principal Underwriter,
24 Federal Street, Boston, MA 02110 (617) 482-8260.
Whenever the Fund as an investor in the Portfolio is requested to vote on
matters pertaining to the Portfolio (other than the termination of the
Portfolio's business, which may be determined by the Trustees of the Portfolio
without investor approval), the Fund will hold a meeting of Fund shareholders
and will vote its interest in the Portfolio for or against such matters
proportionately to the instructions to vote for or against such matters received
from Fund shareholders. The Fund shall vote shares for which it receives no
voting instructions in the same proportion as the shares for which it receives
voting instructions. Other investors in the Portfolio may alone or collectively
acquire sufficient voting interests in the Portfolio to control matters relating
to the operation of the Portfolio, which may require the Fund to withdraw its
investment in the Portfolio or take other appropriate action. Any such
withdrawal could result in a distribution "in kind" of portfolio securities (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
shareholder redemption requests, such as borrowing.
The Fund may withdraw (completely redeem) all its assets from the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interest of the Fund to do so. In the event the Fund withdraws all of its assets
from the Portfolio, or the Board of Trustees of the Trust determines that the
investment objective of the Portfolio is no longer consistent with the
investment objective of the Fund, the Trustees would consider what action might
be taken, including investing the assets of the Fund in another pooled
investment entity or retaining an investment adviser to manage the Fund's assets
in accordance with its investment objective. The Fund's investment performance
may be affected by a withdrawal of all its assets (or the assets of another
investor in the Portfolio) from the Portfolio.
MANAGEMENT OF THE FUND AND THE PORTFOLIO
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THE PORTFOLIO ENGAGES BOSTON MANAGEMENT AND RESEARCH ("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
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
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1 up to $500 million 0.350% 3.50%
2 $500 million but less than $1 billion 0.325% 3.25%
3 $1 billion but less than $1.5 billion 0.300% 3.00%
4 $1.5 billion but less than $2 billion 0.275% 2.75%
5 $2 billion but less than $3 billion 0.250% 2.50%
6 $3 billion and over 0.225% 2.25%
As at January 31, 1997, the Portfolio had net assets of $180,700,459. For the
fiscal year ended January 31, 1997, absent a fee reduction, the Portfolio would
have paid BMR advisory fees equivalent to 0.60% of the Portfolio's average daily
net assets.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $17 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 Principal Underwriter is a wholly-owned subsidiary of Eaton
Vance.
Thomas M. Metzold has acted as the portfolio manager of the Portfolio since it
commenced operations. He has been a Vice President of Eaton Vance since 1991 and
of BMR since 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 the Fund or of other investment companies
sponsored by BMR or Eaton Vance as a factor in the selection of firms to execute
portfolio transactions. The Fund, 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 Trust has retained the services of Eaton Vance to act as Administrator of
the Fund. The Trust has not retained the services of an investment adviser since
the Trust seeks to achieve the investment objective of the Fund by investing its
assets in the Portfolio. As Administrator, Eaton Vance provides the Fund with
general office facilities and supervises the overall administration of the Fund.
For these services, Eaton Vance currently receives no compensation. The Trustees
of the Trust may determine, in the future, to compensate Eaton Vance for such
services.
The Portfolio and the Fund, as the case may be, will each be responsible for all
of its respective costs and expenses not expressly stated to be payable by BMR
under the investment advisory agreement, by Eaton Vance under the administrative
services agreement, or by the Principal Underwriter under the distribution
agreement. Such costs and expenses to be borne by the Portfolio and the Fund, as
the case may be, include, without limitation: custody and transfer agency fees
and expenses, including those incurred for determining net asset value and
keeping accounting books and records; expenses of pricing and valuation
services; the cost of share certificates; membership dues in investment company
organizations; expenses of acquiring, holding and disposing of securities and
other investments; fees and expenses of registering under the securities laws
and governmental fees; expenses of reporting to shareholders and investors;
proxy statements and other expenses of shareholders' or investors' meetings;
insurance premiums; printing and mailing expenses; interest, taxes and corporate
fees; legal and accounting expenses; compensation and expenses of Trustees not
affiliated with BMR or Eaton Vance; and investment advisory fees and, if any,
administrative services fees. The Portfolio or the Fund, as the case may be,
will also each bear expenses incurred in connection with litigation in which the
Portfolio or the Fund, as the case may be, is a party and any legal obligation
to indemnify its respective officers and Trustees with respect thereto, to the
extent not covered by insurance.
DISTRIBUTION PLAN
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The Fund has adopted a Distribution Plan ("Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940 ("1940 Act"). UNDER THE PLAN, THE FUND MAY
PAY THE PRINCIPAL UNDERWRITER A FEE, ACCRUED DAILY AND PAID MONTHLY, AT AN
ANNUAL RATE NOT EXCEEDING .75% OF ITS AVERAGE DAILY NET ASSETS TO FINANCE THE
DISTRIBUTION OF FUND SHARES. The Plan provides that the Fund may use such fees
to compensate the Principal Underwriter for sales commissions paid by it to
financial services firms ("Authorized Firms") on the sale of Fund shares and for
interest expenses. The Principal Underwriter currently expects to pay to an
Authorized Firm (a) sales commissions (except on exchange transactions and
reinvestments) at the time of sale equal to .75% of the purchase price of the
shares sold by such Firm, and (b) monthly sales commissions approximately
equivalent to 1/12 of .75% of the value of shares sold by such Firm and
remaining outstanding for at least one year. During the first year after a
purchase of Fund shares, the Principal Underwriter will retain the sales
commission as reimbursement for the sales commissions made to Authorized Firms
at the time of sale. Contingent deferred sales charges paid to the Principal
Underwriter will be used to reduce amounts owed to it. Because payments to the
Principal Underwriter by the Fund are limited, uncovered distribution charges
(sales commissions paid by the Principal Underwriter plus interest, less
contingent deferred sales charges received by it) may exist indefinitely. For
more information, see "Distribution Plan" in the Statement of Additional
Information.
THE PLAN ALSO AUTHORIZES THE FUND TO MAKE PAYMENTS OF SERVICE FEES TO THE
PRINCIPAL UNDERWRITER, AUTHORIZED FIRMS AND OTHER PERSONS IN AMOUNTS NOT
EXCEEDING .25% OF THE FUND'S AVERAGE DAILY NET ASSETS FOR PERSONAL SERVICES
AND/OR THE MAINTENANCE OF SHAREHOLDER ACCOUNTS. The Principal Underwriter
currently expects to pay to an Authorized Firm (a) a service fee (except on
exchange transactions and reinvestments) at the time of sale equal to .25% of
the purchase price of the shares sold by such Firm, and (b) monthly service fees
approximately equivalent to 1/12 of .25% of the value of shares sold by such
Firm and remaining outstanding for at least one year. During the first year
after a purchase of Fund shares, the Principal Underwriter will retain the
service fee as reimbursement for the service fee payment made to Authorized
Firms at the time of sale.
The Principal Underwriter may, from time to time, at its own expense, provide
additional incentives to Authorized Firms which employ registered
representatives who sell Fund shares and/or shares of other funds distributed by
the Principal Underwriter. In some instances, such additional incentives may be
offered only to certain Authorized Firms whose representatives sell or are
expected to sell significant amounts of shares. In addition, the Principal
Underwriter may from time to time increase or decrease the sales commissions
payable to Authorized Firms.
The Fund may, in its absolute discretion, suspend, discontinue or limit the
offering of its shares at any time. In determining whether any such action
should be taken, the Fund's management intends to consider all relevant factors,
including (without limitation) the size of the Fund, the investment climate and
market conditions, the volume of sales and redemptions of Fund shares, and the
amount of uncovered distribution charges of the Principal Underwriter. The Plan
may continue in effect and payments may be made under the Plan following any
such suspension, discontinuance or limitation of the offering of Fund shares;
however, the Fund is not contractually obligated to continue the Plan for any
particular period of time. Suspension of the offering of Fund shares would not,
of course, affect a shareholder's ability to redeem shares.
VALUING FUND SHARES
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The Fund values its shares once on each day the New York Stock Exchange (the
"Exchange") is open for trading,as of the close of regular trading on the
Exchange (normally 4:00 p.m. New York time). The Fund's net asset value per
share is determined by its custodian, Investors Bank & Trust Company ("IBT"),
(as agent for the Fund) in the manner authorized by the Trustees of the Trust.
Net asset value is computed by dividing the value of the Fund's total assets,
less its liabilities, by the number of shares outstanding. Because the Fund
invests its assets in an interest in the Portfolio, the Fund's net asset value
will reflect the value of its interest in the Portfolio (which, in turn,
reflects the underlying value of the Portfolio's assets and liabilities).
Authorized Firms must communicate an investor's order to the Principal
Underwriter prior to the close of the Principal Underwriter's business day to
receive that day's net asset value per Fund share. It is the Authorized Firms'
responsibility to transmit orders promptly to the Principal Underwriter.
The Portfolio's net asset value is also determined as of the close of regular
trading on the Exchange by IBT (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
"Determination of Net Asset Value" in the Statement of Additional Information.
SHAREHOLDERS MAY DETERMINE THE VALUE OF THEIR INVESTMENT BY MULTIPLYING THE
NUMBER OF FUND SHARES OWNED BY THE CURRENT NET ASSET VALUE PER SHARE.
HOW TO BUY FUND SHARES
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SHARES OF THE FUND MAY BE PURCHASED FOR CASH OR MAY BE ACQUIRED IN EXCHANGE FOR
SECURITIES. Investors may purchase shares of the Fund through Authorized Firms
at the net asset value per share of the Fund next determined after an order is
effective. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
An initial investment in the Fund must be at least $1,000. Once an account has
been established the investor may send investments of $50 or more at any time
directly to the Fund's transfer agent (the "Transfer Agent") as follows: First
Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123. The
$1,000 minimum initial investment is waived for Bank Automated Investing
accounts, which may be established with an investment of $50 or more. See "Eaton
Vance Shareholder Services".
ACQUIRING FUND SHARES IN EXCHANGE FOR SECURITIES. IBT, as escrow agent, will
receive securities acceptable to Eaton Vance, as Administrator, in exchange for
Fund shares at their net asset value as determined above. The minimum value of
securities (or securities and cash) accepted for deposit is $5,000. Securities
accepted will be sold on the day of their receipt or as soon thereafter as
possible. The number of Fund shares to be issued in exchange for securities will
be the aggregate proceeds from the sale of such securities, divided by the
applicable net asset value per Fund share on the day such proceeds are received.
Eaton Vance will use reasonable efforts to obtain the then current market price
for such securities but does not guarantee the best available price. Eaton Vance
will absorb any transaction costs, such as commissions, on the sale of the
securities.
Securities determined to be acceptable should be transferred via book entry or
physically delivered, in proper form for transfer, through an Authorized Firm,
together with a completed and signed Letter of Transmittal in approved form
(available from Authorized Firms), as follows:
IN THE CASE OF BOOK ENTRY:
Deliver through Depository Trust Co.
Broker #2212
Investors Bank & Trust Company
For A/C EV Classic High Yield Municipals Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Classic High Yield Municipals Fund
Physical Securities Processing Settlement Area
89 South Street
Boston, MA 02111
Investors who are contemplating an exchange of securities for shares of the
Fund, or their representatives, must contact Eaton Vance to determine whether
the securities are acceptable before forwarding such securities. Eaton Vance
reserves the right to reject any securities. Exchanging securities for Fund
shares may create a taxable gain or loss. Each investor should consult his or
her tax adviser with respect to the particular federal, state and local tax
consequences of exchanging securities for Fund shares.
The Trustees of the Trust may consider terminating sales of Fund shares, other
than to the Fund's existing shareholders, when the Portfolio reaches a size that
becomes difficult to manage. If closed, the Board of Trustees may vote to
re-open the Fund for sales to new shareholders at any time.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
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A SHAREHOLDER MAY REDEEM FUND SHARES IN ONE OF THREE WAYS -- BY MAIL, BY
TELEPHONE OR THROUGH AN AUTHORIZED FIRM. The redemption price will be based on
the net asset value per Fund share next computed after a redemption request is
received in the proper form as described below.
REDEMPTION BY MAIL: Shares may be redeemed by delivering to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123,
during its business hours a written request for redemption in good order, plus
any share certificates with executed stock powers. Good order means that all
relevant documents must be endorsed by the record owner(s) exactly as the shares
are registered and the signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program, or certain banks, savings and loan institutions,
credit unions, securities dealers, securities exchanges, clearing agencies and
registered securities associations as required by a Commission regulation and
acceptable to the Transfer Agent. In addition, in some cases, good order may
require the furnishing of additional documents such as where shares are
registered in the name of a corporation, partnership or fiduciary.
REDEMPTION BY TELEPHONE: Shares may be redeemed by telephone provided the
investor has not disclaimed in writing the use of the privilege. Such
redemptions can be effected by calling the Transfer Agent at 800-262-1122,
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). The
proceeds of a telephone redemption may be no greater than the maximum amount
established by the Principal Underwriter (currently $50,000) and may be mailed
only to the account address of record. Shares held by corporations, trusts or
certain other entities, or subject to fiduciary arrangements, may not be
redeemed by telephone. Neither the Fund, the Principal Underwriter nor the
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone, provided that reasonable procedures to
confirm that instructions communicated by telephone are genuine have been
followed. Telephone instructions will be tape recorded. In times of drastic
economic or market changes, a telephone redemption may be difficult to
implement.
REDEMPTION THROUGH AN AUTHORIZED FIRM: To sell shares at their net asset value
through an Authorized Firm (a repurchase), a shareholder can place a repurchase
order with the Authorized Firm, which may charge a fee. The value of those
shares is based upon the net asset value calculated after the Principal
Underwriter, as the Fund's agent, receives the order. It is the Authorized
Firm's responsibility to transmit promptly repurchase orders to the Principal
Underwriter. Throughout this Prospectus, the word "redemption" is generally
meant to include a repurchase.
Within seven days after receipt of a redemption request in good order by the
Transfer Agent, the Fund will make payment in cash for the net asset value of
the shares as of the date determined above, reduced by the amount of any
applicable contingent deferred sales charges (described below) and any federal
income tax required to be withheld. Although the Fund normally expects to make
payment in cash for redeemed shares, the Trust, subject to compliance with
applicable regulations, has reserved the right to pay the redemption price of
shares of the Fund, either totally or partially, by a distribution in kind of
readily marketable securities withdrawn by the Fund from the Portfolio. The
securities so distributed would be valued pursuant to the Portfolio's valuation
procedures. If a shareholder received a distribution in kind, the shareholder
could incur brokerage or other charges in converting the securities to cash.
If shares were recently purchased, the proceeds of a redemption will not be sent
until the check (including a certified or cashier's check) received for the
shares purchased has cleared. Payment for shares tendered for redemption may be
delayed up to 15 days from the purchase date when the purchase check has not yet
cleared. Redemptions may result in a taxable gain or loss.
Due to the high cost of maintaining small accounts, the Fund reserves the right
to redeem accounts with balances of less than $750. Prior to such a redemption,
shareholders will be given 60 days' written notice to make additional purchases.
However, no such redemption would be required by the Fund if the cause of the
low account balance was a reduction in the net asset value of Fund shares. No
contingent deferred sales charge will be imposed with respect to such
involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first year of their
purchase (except shares acquired through the reinvestment of distributions)
generally will be subject to a contingent deferred sales charge ("CDSC") equal
to 1% of the net asset value of the redeemed shares. This CDSC is imposed on any
redemption the amount of which exceeds the aggregate value at the time of
redemption of (a) all shares in the account purchased more than one year prior
to the redemption, (b) all shares in the account acquired through reinvestment
of distributions, and (c) the increase, if any, of value in the other shares in
the account (namely those purchased within the year preceding the redemption)
over the purchase price of such shares. Redemptions are processed in a manner to
maximize the amount of redemption proceeds which will not be subject to a CDSC.
That is, each redemption will be assumed to have been made first from the exempt
amounts referred to in clauses (a), (b) and (c) above, and second through
liquidation of those shares in the account referred to in clause (c) on a
first-in-first out basis. As described under "Distribution Plan", the CDSC will
be paid to the Principal Underwriter or the Fund.
In calculating the CDSC upon the redemption of Fund shares acquired in an
exchange for shares of a fund currently listed under "The Eaton Vance Exchange
Privilege," the purchase of Fund shares acquired in the exchange is deemed to
have occurred at the time of the original purchase of the exchanged shares.
No CDSC will be imposed on Fund shares which have been sold to Eaton Vance or
its affiliates, or to their respective employees or clients. The CDSC will also
be waived for shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton
Vance Shareholder Services"), (2) as part of a distribution from a retirement
plan qualified under Section 401, 403(b) or 457 of the Internal Revenue Code of
1986, as amended (the "Code"), or (3) as part of a minimum required distribution
from other tax-sheltered retirement plans.
REPORTS TO SHAREHOLDERS
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THE FUND WILL ISSUE TO ITS SHAREHOLDERS SEMI-ANNUAL AND ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS. Financial statements included in annual reports
are audited by the Fund's independent certified public accountants. Shortly
after the end of each calendar year, the Fund will furnish all shareholders with
information necessary for preparing federal and state tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
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AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE TRANSFER AGENT
WILL SET UP A LIFETIME INVESTING ACCOUNT FOR THE INVESTOR ON THE FUND'S RECORDS.
This account is a complete record of all transactions between the investor and
the Fund which at all times shows the balance of shares owned. The Fund will not
issue share certificates except upon request.
At least quarterly, shareholders will receive a statement showing complete
details of any transaction and the current balance in the account. THE LIFETIME
INVESTING ACCOUNT ALSO PERMITS A SHAREHOLDER TO MAKE ADDITIONAL INVESTMENTS IN
SHARES BY SENDING A CHECK FOR $50 OR MORE to the Transfer Agent.
Any questions concerning a shareholder's account or services available may be
directed by telephone to EATON VANCE SHAREHOLDER SERVICES at 800-225-6265,
extension 2, or in writing to the Transfer Agent, First Data Investor Services
Group, P.O. Box 5123, Westborough, MA 01581-5123 (please provide the name of the
shareholder, the Fund and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO ALL LIFETIME INVESTING
ACCOUNTS and may be changed as often as desired by written notice to the Fund's
dividend disbursing agent, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. The currently effective option will appear on each
account statement.
SHARE OPTION -- Dividends and capital gains will be reinvested in additional
shares.
INCOME OPTION -- Dividends will be paid in cash, and capital gains will be
reinvested in additional shares.
CASH OPTION -- Dividends and capital gains will be paid in cash.
The SHARE OPTION will be assigned if no other option is specified.
Distributions, including those reinvested, will be reduced by any withholding
required under federal income tax laws.
If the INCOME OPTION or CASH OPTION has been selected, dividend and/or capital
gains distribution checks which are returned by the United States Postal Service
as not deliverable or which remain uncashed for six months or more will be
reinvested in the account in shares at the then current net asset value.
Furthermore, the distribution option on the account will be automatically
changed to the SHARE OPTION until such time as the shareholder selects a
different option.
DISTRIBUTION INVESTMENT OPTION. In addition to the distribution options set
forth above, dividends and/or capital gains may be invested in additional shares
of another Eaton Vance fund. Before selecting this option, a shareholder should
obtain a prospectus of the other Eaton Vance fund and consider its objectives
and policies carefully.
"STREET NAME" ACCOUNTS. If shares of the Fund are held in a "street name"
account with an Authorized Firm, all recordkeeping, transaction processing and
payments of distributions relating to the beneficial owner's account will be
performed by the Authorized Firm, and not by the Fund and its Transfer Agent.
Since the Fund will have no record of the beneficial owner's transactions, a
beneficial owner should contact the Authorized Firm to purchase, redeem or
exchange shares, to make changes in or give instructions concerning the account,
or to obtain information about the account. The transfer of shares in a "street
name" account to an account with another Authorized Firm or to an account
directly with the Fund involves special procedures and will require the
beneficial owner to obtain historical purchase information about the shares in
the account from the Authorized Firm. Before establishing a "street name"
account with an Authorized Firm, or transferring the account to another
Authorized Firm, an investor wishing to reinvest distributions should determine
whether the Authorized Firm which will hold the shares allows reinvestment of
distributions in "street name" accounts.
THE EATON VANCE EXCHANGE PRIVILEGE
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Shares of the Fund currently may be exchanged for shares of one or more other
funds in the Eaton Vance Classic Group of Funds or Eaton Vance Money Market
Fund, which are distributed subject to a CDSC (or equivalent early withdrawal
charge), on the basis of the net asset value per share of each fund at the time
of the exchange. Exchange offers are available only in states where shares of
the fund being acquired may be legally sold.
Each exchange must involve shares which have a net asset value of at least
$1,000. The exchange privilege may be changed or discontinued without penalty.
Shareholders will be given sixty (60) days' notice prior to any termination or
material amendment of the exchange privilege. The Fund does not permit the
exchange privilege to be used for "Market Timing" and may terminate the exchange
privilege for any shareholder account engaged in Market Timing activity. Any
shareholder account for which more than two round-trip exchanges are made within
any twelve month period will be deemed to be engaged in Market Timing.
Furthermore, a group of unrelated accounts for which exchanges are entered
contemporaneously by a financial intermediary will be considered to be engaged
in Market Timing.
The Transfer Agent makes exchanges at the next determined net asset value after
receiving an exchange request in good order (see "How to Redeem Fund Shares").
Consult the Transfer Agent for additional information concerning the exchange
privilege. Applications and prospectuses of other funds are available from
Authorized Firms or the Principal Underwriter. The prospectus for each fund
describes its investment objectives and policies, and shareholders should obtain
a prospectus and consider these objectives and policies carefully before
requesting an exchange.
No CDSC is imposed on exchanges. For purposes of calculating the CDSC upon
redemption of shares acquired in an exchange, the purchase of shares acquired in
one or more exchanges is deemed to have occurred at the time of the original
purchase of the exchanged shares.
Shares of the other funds in the Eaton Vance Classic Group of Funds (and shares
of Eaton Vance Money Market Fund acquired as the result of an exchange from an
EV Classic fund) may be exchanged for Fund shares on the basis of the net asset
value per share of each fund at the time of the exchange, but subject to any
restrictions or qualifications set forth in the current prospectus of any such
fund.
Telephone exchanges are accepted by the Transfer Agent provided that the
investor has not disclaimed in writing the use of the privilege. To effect such
exchanges, call the Transfer Agent at 800-262-1122, Monday through Friday, 9:00
a.m. to 4:00 p.m. (Eastern Standard Time). Shares acquired by telephone exchange
must be registered in the same name(s) and with the same address as the shares
being exchanged. Neither the Fund, the Principal Underwriter nor the Transfer
Agent will be responsible for the authenticity of exchange instructions received
by telephone, provided that reasonable procedures to confirm that instructions
communicated are genuine have been followed. Telephone instructions will be tape
recorded. In times of drastic economic or market changes, a telephone exchange
may be difficult to implement. An exchange may result in a taxable gain or loss.
EATON VANCE SHAREHOLDER SERVICES
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THE FUND OFFERS THE FOLLOWING SERVICES WHICH ARE VOLUNTARY, INVOLVE NO EXTRA
CHARGE, AND MAY BE CHANGED OR DISCONTINUED WITHOUT PENALTY AT ANY TIME. Full
information on each of the services described below and an application, where
required, are available from Authorized Firms or the Principal Underwriter. The
cost of administering such services for the benefit of shareholders who
participate in them is borne by the Fund as an expense to all shareholders.
INVEST-BY-MAIL -- FOR PERIODIC SHARE ACCUMULATION: Once the $1,000 minimum
investment has been made, checks of $50 or more payable to the order of EV
Classic High Yield Municipals Fund may be mailed directly to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123 at
any time -- whether or not distributions are reinvested. The name of the
shareholder, the Fund and the account number should accompany each investment.
BANK AUTOMATED INVESTING -- FOR REGULAR SHARE ACCUMULATION: Cash investments of
$50 or more may be made automatically each month or quarter from the
shareholder's bank account. The $1,000 minimum initial investment and small
account redemption policy are waived for these accounts.
WITHDRAWAL PLAN: A shareholder may draw on shareholdings systematically with
monthly or quarterly checks in an aggregate amount that does not exceed
annually 12% of the account balance at the time the plan is established. Such
amount will not be subject to a CDSC. See "How to Redeem Fund Shares". A
minimum deposit of $5,000 in shares is required.
REINVESTMENT PRIVILEGE: A shareholder who has redeemed shares may reinvest, with
credit for any CDSC paid on the redeemed shares, any portion or all of the
redemption proceeds (plus that amount necessary to acquire a fractional share to
round off the purchase to the nearest full share) in shares of the Fund,
provided that the reinvestment is effected within 60 days after such redemption
and the privilege has not been used more than once in the prior 12 months.
Shares are sold to a reinvesting shareholder at the next determined net asset
value following timely receipt of a written purchase order by the Principal
Underwriter or by the Fund (or by the Fund's Transfer Agent). To the extent that
any shares of the Fund are sold at a loss and the proceeds are reinvested in
shares of the Fund (or other shares of the Fund are acquired) within the period
beginning 30 days before and ending 30 days after the date of redemption, some
or all of the loss generally will not be allowed as a tax deduction.
Shareholders should consult their tax advisers concerning the tax consequences
of reinvestments.
DISTRIBUTIONS AND TAXES
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THE FUND DECLARES DIVIDENDS DAILY AND ORDINARILY DISTRIBUTES DIVIDENDS MONTHLY
(ON THE TWENTY-SECOND OR NEXT SUBSEQUENT BUSINESS DAY) FROM ITS NET INVESTMENT
INCOME. The Fund's net investment income consists of net investment income
allocated to the Fund by the Portfolio (less the Fund's direct and allocated
expenses). The Fund will distribute at least annually (usually in December) all
net realized capital gains allocated to the Fund by the Portfolio, if any, after
taking into account any capital loss carryovers. Daily distributions will begin
on the business day after collected funds for the purchase of shares are
available to the Transfer Agent.
The Fund will distribute substantially all of its tax-exempt income, ordinary
income and capital gain net income (if any) on a current basis. Distributions
designated by the Fund as "exempt interest dividends" may be excluded from
shareholders' gross income for federal income tax purposes. However, exempt
interest dividends may affect the taxability of social security or railroad
retirement benefits for shareholders who receive such benefits. In addition,
exempt interest dividends may result in liability under the federal AMT
provisions and may be taxable for state and local tax purposes. Shareholders
should consult their tax advisers to determine the effect of exempt interest
dividends on their particular tax situation, including liability for state and
local taxes.
Distributions of interest on certain municipal obligations constitute a tax
preference item under the AMT provisions applicable to individuals and
corporations. Distributions of taxable income (including a portion of any
original issue discount with respect to certain stripped municipal obligations
and stripped coupons and accretion of certain market discount) and net
short-term capital gains will be taxable to shareholders as ordinary income.
Distributions of long-term capital gains included therein are taxable to
shareholders as such for federal income tax purposes, regardless of the length
of time Fund shares have been owned by the shareholder. If shares are purchased
shortly before the record date of such a distribution, the shareholder will pay
the full price for the shares and then receive some portion of the price back as
a taxable distribution. Distributions are taxed in the manner described above
whether paid in cash or reinvested in additional shares of the Fund. Tax-exempt
distributions received from the Fund are includable in the tax base for
determining the taxability of social security and railroad retirement benefits.
The Fund intends to qualify as a regulated investment company under the Code and
to satisfy all requirements necessary to be relieved of federal taxes on income
and gains it distributes to shareholders. In satisfying these requirements, the
Fund will treat itself as owning its proportionate share of each of the
Portfolio's assets and as entitled to the income of the Portfolio properly
attributable to such share.
Early in each year, the Fund will notify its shareholders of the tax status of
the Fund's distributions for the preceding year. Shareholders should consult
their tax advisers about the effect of Fund distributions on their particular
tax situation and any state, local or foreign taxes that may apply.
As a regulated investment company under the Code, the Fund does not pay federal
income or excise taxes to the extent that it distributes to shareholders its net
investment income and net realized capital gains in accordance with the timing
requirements imposed by the Code. As a partnership under the Code, the Portfolio
does not pay federal income or excise taxes.
Shareholders should consult with their tax advisers concerning the applicability
of state, local and other taxes to an investment in the Fund.
PERFORMANCE INFORMATION
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FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's current yield is calculated by dividing the net investment
income per share earned during a recent 30-day period by the maximum offering
price per share (net asset value) of the Fund on the last day of the period and
annualizing the resulting figure. A taxable-equivalent yield is computed by
using the tax-exempt yield figure and dividing by one minus the tax rate. The
Fund's average annual total return is determined by computing the average annual
percentage change in value of $1,000 invested at the maximum public offering
price (net asset value) for specified periods, assuming reinvestment of all
distributions. The average annual total return calculation assumes a complete
redemption of the investment and the deduction of any applicable CDSC at the end
of the period. The Fund may publish annual and cumulative total return figures
from time to time. The Fund may also quote total return for the period prior to
commencement of operations which would reflect the total return of another fund
that invests in the Portfolio adjusted to reflect any applicable Fund sales
charge.
The Fund may also publish total return figures which do not take into account
any CDSC which may be imposed upon redemptions at the end of the specified
period. Any performance figure which does not take into account the CDSC would
be reduced to the extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield or total return for
any prior period should not be considered a representation of what an investment
may earn or what the Fund's yield or total return may be in any future period.
If the expenses related to the Fund or the Portfolio are allocated to Eaton
Vance, the Fund's performance will be higher.
<PAGE>
APPENDIX A
HIGH YIELD MUNICIPALS PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
RATINGS OF RATINGS OF
MUNICIPAL BONDS MUNICIPAL BONDS
BY MOODY'S BY S&P
PERCENT OF PERCENT OF
NET ASSETS NET ASSETS
---------- ----------
Aaa .......................... 3.91% AAA .......................... 4.51%
Aa2 .......................... 2.25 A+ ........................... 1.56
A1 ........................... 0.92 A ............................ 1.78
Baa1 ......................... 3.60 A- ........................... 0.62
Baa2 ......................... 6.97 BBB+ ......................... 1.76
Baa3 ......................... 3.83 BBB .......................... 8.69
Ba1 .......................... 2.82 BBB- ......................... 6.96
Ba2 .......................... 3.27 BB+ .......................... 1.80
B1 ........................... 2.14 BB ........................... 2.58
Unrated ...................... 70.29 BB- .......................... 3.61
------ B ............................ 2.14
100.00% Unrated ...................... 63.99
------
100.00%
The chart above indicates the weighted average composition of the securities
held by the Portfolio for the fiscal year ended January 31, 1997, with the debt
securities rated by Moody's and S&P separated into the indicated categories. The
above was calulated on a dollar weighted basis and was computed as at the end of
each month during the fiscal year. The chart does not necessarily indicate what
the composition of the securities held by the Portfolio will be in the current
and subsequent fiscal years. Securities that are rated by one rating agency may
be "unrated" by the other.
For a description of Moody's and S&P's securities ratings, see Appendix B to
this Prospectus.
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS+
MOODY'S INVESTORS SERVICE, INC.
MUNICIPAL BONDS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
- ----------------
+The ratings indicated herein are believed to be the most recent ratings
available at the date of this Prospectus 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.
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
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.
* * * * * * * *
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.
<PAGE>
[LOGO]
EATON VANCE
- -------------------
Mutual Funds
EV CLASSIC
HIGH YIELD MUNICIPALS FUND
- --------------------------------------------------------------------------------
PROSPECTUS
JUNE 11, 1997
EV CLASSIC
HIGH YIELD MUNICIPALS FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH YIELD MUNICIPALS PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC HIGH YIELD MUNICIPALS FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-HYMP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
June 11, 1997
EV CLASSIC HIGH YIELD MUNICIPALS FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Classic High Yield Municipals Fund (the "Fund"),
High Yield Municipals Portfolio (the "Portfolio") and certain other series of
Eaton Vance Municipals Trust II (the "Trust"). Part II provides information
solely about the Fund and the Portfolio. Where appropriate, Part I includes
cross-references to the relevant sections of Part II that provide additional
Fund-specific information. This Statement of Additional Information is sometimes
referred to herein as the "SAI".
TABLE OF CONTENTS
Page
PART I
Additional Information about Investment Policies ................... 1
Investment Restrictions ............................................ 7
Trustees and Officers .............................................. 9
Investment Adviser and Administrator ............................... 10
Custodian .......................................................... 13
Service for Withdrawal ............................................. 13
Determination of Net Asset Value ................................... 14
Investment Performance ............................................. 14
Taxes .............................................................. 16
Portfolio Security Transactions .................................... 18
Other Information .................................................. 20
Independent Certified Public Accountants ........................... 21
Appendix ........................................................... 22
PART II
Fees and Expenses .................................................. a-1
Additional Officer Information ..................................... a-2
Principal Underwriter .............................................. a-2
Distribution Plan .................................................. a-2
Performance Information ............................................ a-4
Control Persons and Principal Holders of Securities ................ a-4
Financial Statements ............................................... a-5
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JUNE 11, 1997, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING EATON VANCE
DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE BACK COVER FOR ADDRESS AND
PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
This Part I provides information about the Fund, certain other series of the
Trust and the Portfolio. Capitalized terms used in this SAI and not otherwise
defined have the meanings given them in the Fund's Prospectus. The Fund is
subject to the same investment policies as those of the Portfolio. The Fund
currently seeks to achieve its objective by investing in the Portfolio.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
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
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 (including a
distribution by the Fund derived from such interest) is treated as a tax
preference item which could subject the recipient to or increase the recipient's
liability for the AMT. For corporate shareholders, the Fund's distributions
derived from interest on all municipal obligations (whenever issued) is included
in "adjusted current earnings" for purposes of the AMT as applied to
corporations (to the extent not already included in alternative minimum taxable
income as income attributable to private activity bonds).
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
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.
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 municipal obligations will normally fluctuate with
changes in interest rates, and therefore the net asset value of the Portfolio
will be affected by such changes.
RISKS OF CONCENTRATION
Municipal Obligations of a Particular State. Where applicable, see "Risks of
Concentration" in the Fund's Part II for a discussion of the risks associated
with the Portfolio's policy of concentrating its investments in particular state
issuers of municipal obligations.
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.
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,
since 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.
Obligations of Puerto Rico, the U.S. Virgin Islands and Guam. Subject to the
investment policies set forth in the Prospectus, the Portfolio may invest in the
obligations 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 37.5%, 11% and 41.8%, respectively, of
the gross domestic product. The service sector is the fastest growing, followed
by manufacturing which has begun to show signs of expansion. 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 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 limited the credit against such
income to 40% of the credit allowable under then current law, with a five year
phase-in period starting at 60% of the allowable credit. The second option was a
wage and depreciation based credit. Additional amendments to Section 936 in 1996
imposed caps on these credits, beginning in 1998 for the first option and
beginning in 2002 for the second option. More importantly, the 1996 amendments
eliminated both options for taxable years beginning in 2006. The eventual
elimination of tax benefits to those U.S. companies with operations in Puerto
Rico may lead to slower growth in the future. There can be no assurance that
this 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 in the
long-term. Short-term affects are minimal.
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. Puerto Ricans voted to retain Commonwealth
status, leaving 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.
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. The economy is heavily reliant on the tourism industry, with roughly 43%
of non-agricultural employment in tourist-related trade and services. In 1996,
unemployment stood at 13.8%. The tourism industry is economically sensitive
and would likely be adversely affected by a recession in either the United
States or Europe.
An important component of the USVI revenue base is the federal excise tax on
rum exports. Tax revenues rebated by the federal government to the USVI provide
the primary security of many outstanding USVI bonds. 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.
Several hurricanes have caused extensive damage, which has had a negative impact
on revenue collections. There is currently no rated, unenhanced Virgin Islands
debt outstanding (although there is unrated debt outstanding).
Guam, an unincorporated U.S. territory, is located 1,500 miles southeast of
Tokyo. 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.
MUNICIPAL LEASES
The Portfolio may invest in municipal leases and participations therein,
which arrangements frequently involve special risks. Municipal leases are
obligations in the form of a lease or installment purchase arrangement which is
issued by state or local governments to acquire equipment and facilities.
Interest income from such obligations is generally exempt from local and state
taxes in the state of issuance. "Participations" in such leases are undivided
interests in a portion of the total obligation. Participations entitle their
holders to receive a pro rata share of all payments under the lease. 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 government issuer) have
evolved as a means of government issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. State debt-issuance limitations are deemed to be inapplicable to these
arrangements because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Such arrangements are, therefore, subject to the risk that
the governmental issuer will not appropriate funds for lease payments.
Certain municipal lease obligations owned by the Portfolio may be deemed
illiquid for the purpose of the Portfolio's 15% limitation on investments in
illiquid securities, unless determined by the Investment Adviser, pursuant to
guidelines adopted by the Trustees of the Portfolio, to be liquid securities for
the purpose of such limitation. In determining the liquidity of municipal lease
obligations, the Investment Adviser will consider a variety of factors
including: (1) the willingness of dealers to bid for the security; (2) the
number of dealers willing to purchase or sell the obligation and the number of
other potential buyers; (3) the frequency of trades and quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
Investment Adviser will consider factors unique to particular lease obligations
affecting the marketability thereof. These include the general creditworthiness
of the municipality, the importance of the property covered by the lease to the
municipality, and the likelihood that the marketability of the obligation will
be maintained throughout the time the obligation is held by the Portfolio. In
the event the Portfolio acquires an unrated municipal lease obligation, the
Investment Adviser will be responsible for determining the credit quality of
such obligation on an on-going basis, including an assessment of the likelihood
that the lease may or may not be cancelled.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations which do not require the periodic
payment of interest and are issued at a significant discount from face value.
The discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. 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 non-payment of interest or
principal when due with respect to an insured obligation, the insurer is not
required to make such payment until a specified time has lapsed (which may be 30
days or more after notice).
CREDIT QUALITY
The Portfolio is dependent on the Investment Adviser's judgment, analysis
and experience in evaluating the quality of municipal obligations. In evaluating
the credit quality of a particular issue, whether rated or unrated, the
Investment Adviser will normally take into consideration, among other things,
the financial resources of the issuer (or, as appropriate, of the underlying
source of funds for debt service), its sensitivity to economic conditions and
trends, any operating history of and the community support for the facility
financed by the issue, the ability of the issuer's management and regulatory
matters. The Investment Adviser will attempt to reduce the risks of investing in
the lowest investment grade, below investment grade and comparable unrated
obligations through active portfolio management, credit analysis and attention
to current developments and trends in the economy and the financial markets.
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 cannot
accurately predict its portfolio turnover rate, but it is anticipated that the
annual portfolio turnover rate will generally not exceed 100% (excluding
turnover of securities having a maturity of one year or less). A 100% annual
turnover rate 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. For the portfolio turnover rate of the Portfolio in prior fiscal
years, see "Supplementary Data" in "Financial Statements".
WHEN-ISSUED SECURITIES
New issues of municipal obligations are sometimes offered on a "when-
issued" basis, that is, delivery and payment for the securities normally take
place within a specified number of days after the date of the Portfolio's
commitment and are subject to certain conditions such as the issuance of
satisfactory legal opinions. The Portfolio may also purchase securities on a
when-issued basis pursuant to refunding contracts in connection with the
refinancing of an issuer's outstanding indebtedness. Refunding contracts
generally require the issuer to sell and the Portfolio to buy such securities on
a settlement date that could be several months or several years in the future.
The Portfolio will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but may sell such
securities before the settlement date if it is deemed advisable as a matter of
investment strategy. The payment obligation and the interest rate that will be
received on the securities are fixed at the time the Portfolio enters into the
purchase commitment. 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 term
bonds (protecting to some degree against a rise in interest rates) while
providing greater opportunity than comparable intermediate term bonds, because
the Portfolio may retain the bond if interest rates decline. By acquiring these
kinds of obligations the Portfolio obtains the contractual right to require the
issuer of the security or some other person (other than a broker or dealer) to
purchase the security at an agreed upon price, which right is contained in the
obligation itself rather than in a separate agreement with the seller or some
other person. Because this right is assignable with the security, which is
readily marketable and valued in the customary manner, the Portfolio will not
assign any separate value to such right.
LIQUIDITY AND PROTECTIVE PUT OPTIONS
The Portfolio may also enter into a separate agreement with the seller of
the security or some other person granting the Portfolio the right to put the
security to the seller thereof or the other person at an agreed upon price. The
Portfolio intends to limit this type of transaction to institutions (such as
banks or securities dealers) which the Investment 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 of the Portfolio after consideration of all relevant factors,
including its expiration date, the price volatility of the associated security,
the difference between the market price of the associated security and the
exercise price of the put, the creditworthiness of the issuer of the put and the
market prices of comparable put options. Interest income generated by certain
bonds having put or demand features may 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
consideration which can be earned from securities loans of this type, net of
administrative expenses and any finder's fees, justifies the attendant risk.
Distributions by the Fund of any income realized by the Portfolio from
securities loans will be taxable. If the management of the Portfolio decides to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the Portfolio's total assets. 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. 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 qualification of the Fund as a
regulated investment company for federal income tax purposes (see "Taxes").
ASSET COVERAGE REQUIREMENTS
Transactions involving when-issued securities, the lending of securities or
futures contracts and options (other than options that the Portfolio has
purchased) expose the Portfolio to an obligation to another party. The Portfolio
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts, or (2) cash or liquid securities (such as readily marketable
obligations and money market instruments) with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. The
Portfolio will comply with Commission guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash or liquid
securities in a segregated account maintained by its custodian in the prescribed
amount. The securities in the segregated account will be marked to market daily.
Assets used as cover or held in a segregated account maintained by the
custodian cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Portfolio's assets to segregated
accounts or to cover could impede portfolio management or the Portfolio's
ability to meet redemption requests or other current obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the shares
are present or represented at the meeting or (b) more than 50% of the shares of
the Fund. Accordingly, the Fund may not:
(1) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(2) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The deposit or payment by the Fund of initial or maintenance margin
in connection with futures contracts or related options transactions is not
considered the purchase of a security on margin;
(3) Underwrite or participate in the marketing of securities of others,
except insofar as it may technically be deemed to be an underwriter in selling a
portfolio security under circumstances which may require the registration of the
same under the Securities Act of 1933;
(4) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies which
invest or deal in real estate;
(5) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities; or
(6) Make loans to any person except by (a) the acquisition of debt
instruments and making portfolio investments, (b) entering into repurchase
agreements and (c) lending portfolio securities.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest all of its investable assets in an open-end management
investment company with substantially the same investment objective, policies
and restrictions as the Fund.
The Portfolio has adopted substantially the same fundamental investment
restrictions as the foregoing investment restrictions adopted by the Fund; such
restrictions cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Portfolio.
The Fund and the Portfolio have adopted the following investment policies
which may be changed with respect to the Fund by the Trustees of the Trust
without approval by the Fund's shareholders or with respect to the Portfolio by
the Trustees of the Portfolio without the approval by the Fund or its other
investors. As a matter of nonfundamental policy, the Fund and the Portfolio will
not: (a) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short and unless not more than 25% of the Fund's
net assets (taken at current value) is held as collateral for such sales at any
one time. (The Fund and the Portfolio will make such sales only for the purpose
of deferring realization of gain or loss for federal income tax purposes); (b)
invest more than 15% of its net assets in investments which are not readily
marketable, including restricted securities and repurchase agreements maturing
in more than seven days. Restricted securities for the purposes of this
limitation do not include securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 and commercial paper issued pursuant to Section
4(2) of said Act that the Board of Trustees of the Trust or the Portfolio, or
its delegate, determines to be liquid; or (c) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or the
Portfolio or is a member, officer, director or trustee of any investment adviser
of the Trust or the Portfolio, if after the purchase of the securities of such
issuer by the Fund or the Portfolio one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities or both (all taken
at market value) of such issuer and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities or both (all taken at market value).
For purposes of the Portfolio's investment restrictions, the determination
of the "issuer" of a municipal obligation which is not a general obligation bond
will be made by the Investment Adviser on the basis of the characteristics of
the obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligations.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's or the Portfolio's acquisition
of such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, or any subsequent rating
change below investment grade made by a rating service, will not compel the Fund
or the Portfolio, as the case may be, to dispose of such security or other
asset. Where applicable and notwithstanding the foregoing, under normal market
conditions the Fund and the Portfolio must take actions necessary to comply with
the policy of investing at least 65% of total assets in a particular state.
Moreover, the Fund and Portfolio must always be in compliance with the borrowing
policies set forth above.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and the Portfolio are listed below.
Except as indicated, each individual has held the office shown or other offices
in the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is 24 Federal Street, Boston,
Massachusetts 02110, which is also the address of the Investment Adviser, BMR, a
wholly-owned subsidiary of 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 Trust or the Portfolio, as defined in the 1940
Act, by virtue of their affiliation with BMR, Eaton Vance, EVC or EV, are
indicated by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
DONALD R. DWIGHT (66), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company); Chairman of the Board of Newspapers of New England, Inc. 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, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
SAMUEL L. HAYES, III (62), 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 02163
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
Formerly Director of 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 (67), 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 TRUST AND 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 Trust on December 13, 1993.
ROBERT B. MACINTOSH (40), Vice President of the Trust
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 Trust on March 22, 1993.
JAMES L. O'CONNOR (52), 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 (34), 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
Trust 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. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Woodbury was elected Assistant
Secretary on June 19, 1995.
For any additional officers of the Portfolio, see "Additional Officer
Information" in the Fund's Part II.
Messrs. Hayes (Chairman), Reamer and Thorndike are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund and the Portfolio, including
investment advisory (Portfolio only), administrative, transfer agency, custodial
and fund accounting and distribution services, and (ii) all other matters in
which Eaton Vance or its affiliates has any actual or potential conflict of
interest with the Fund, the Portfolio or investors therein.
The Nominating Committee of the Board of Trustees of the Trust and the
Portfolio is comprised of four Trustees who are not "interested persons" as that
term is defined under the 1940 Act ("noninterested Trustees"). The Committee has
four-year staggered terms, with one member rotating off the Committee to be
replaced by another noninterested Trustee. The purpose of the Committee is to
recommend to the Board nominees for the position of noninterested Trustee and to
assure that at least a majority of the Board of Trustees is independent of Eaton
Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent certified public accountants, and reviewing matters relative
to trading and brokerage policies and practices, accounting and auditing
practices and procedures, accounting records, internal accounting controls, and
the functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust and of the Portfolio.
Trustees of the Portfolio who are not affiliated with the Investment Adviser
may elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of a Trustees Deferred Compensation Plan (the
"Trustees" Plan"). Under the Trustees' Plan, an eligible Trustee may elect to
have his deferred fees invested by the Portfolio in the shares of one or more
funds in the Eaton Vance Family of Funds, and the amount paid to the Trustees
under the Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' Plan
will have a negligible effect on the Portfolio's assets, liabilities, and net
income per share, and will not obligate the Portfolio to retain the services of
any Trustee or obligate the Portfolio to pay any particular level of
compensation to the Trustee. Neither the Portfolio nor the Trust has a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Trust and the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. For the compensation received by the noninterested
Trustees, see "Fees and Expenses" in the Fund's Part II.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement. BMR or Eaton Vance acts as investment adviser to investment
companies and various individual and institutional clients with combined assets
under management of over $17 billion.
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and managing investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment- grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds and
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, tax-free
municipal bonds, and U.S. government and corporate bonds. Lloyd George
Management has advised Eaton Vance's international equity funds since 1992.
Founded in 1991, Lloyd George is headquartered in Hong Kong with offices in
London and Mumbai, India. It has established itself as a leader in investment
management in Asian equities and other global markets. Lloyd George features an
experienced team of investment professionals that began working together in the
mid-1980s. Lloyd George analysts cover East Asia, the India subcontinent, Russia
and Eastern Europe, Latin America, Australia and New Zealand from offices in
Hong Kong, London and Mumbai. Together Eaton Vance and Lloyd George manage over
$18 billion in assets. Eaton Vance mutual funds are distributed by the Principal
Underwriter both within the United States and offshore.
The Principal Underwriter believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short- and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can help you decide when to buy, sell or persevere
with your investments. A professional investment representative can provide you
with tailored financial advice.
Eaton Vance offers single-state tax-free portfolios in more states than any
other sponsor of mutual funds. There are 32 long-term state portfolios, 5
national portfolios and 9 limited maturity portfolios, which serve as investment
vehicles for over 100 mutual funds with varying pricing options. A staff of 29
(including 7 portfolio managers and 9 credit specialists) is responsible for the
day-to-day management of over 3,500 issues in 46 mutual fund portfolios. Assets
managed by the municipal investment group are currently over $7.6 billion. The
investment philosophy of the municipal investment group is to: seek value by
avoiding unnecessary credit risk; build portfolios one security at a time; and
take a long-term approach to managing market risk. Over the long-term, the group
seeks to maximize tax-free income by keeping portfolios fully invested (rather
than trying to "time the market" for short-term results) and reduce potential
capital losses due to poor credit quality. Diligent and continuing research and
analysis are a critical component of the municipal investment group's investment
philosophy and long-term strategy.
The following persons manage one or more of the Eaton Vance municipal
portfolios. For the identity of the Portfolio's portfolio manager, see the
Fund's current Prospectus.
Nicole Anderes is a Vice President of Eaton Vance and BMR. Ms. Anderes
graduated from Brown University with a B.A. in Women's Studies/Economics. She
has been an active member of MAGNY/National Federation of Municipal Analysts,
the Public Securities Association and the Municipal Forum, and served as the
General Secretary of MAGNY from 1992 to 1993.
Timothy T. Browse is a Vice President of Eaton Vance and BMR. Mr. Browse
graduated from St. Lawrence University in 1981 and received his M.B.A. degree
from Boston University in 1990.
Cynthia J. Clemson is a Vice President of Eaton Vance and BMR. Ms. Clemson
graduated from Mount Holyoke College with a B.A. in 1985 and received her
M.B.A., cum laude, from Boston University in 1990. She is a member of the
Boston Municipal Analysts Forum, the Boston Securities Analyst Society and the
Financial Analysts Federation.
Thomas J. Fetter is a Vice President of Eaton Vance and BMR, and Director
of Municipal Investments. Mr. Fetter graduated with a degree in Business
Administration from Kent State University. He is a Chartered Financial Analyst
and member of the Boston Security Analysts Society. He is also a member of the
Boston Municipal Analysts Forum.
Robert B. MacIntosh is a Vice President of Eaton Vance and BMR and the
portfolio manager of single-state, tax-exempt funds in six states: Hawaii,
Louisiana, Massachusetts, Minnesota, New Jersey and North Carolina. He also
serves as economic spokesman for the Eaton Vance organization.
Thomas M. Metzold is a Vice President of Eaton Vance and BMR. He is a
Chartered Financial Analyst and a member of the Boston Security Analysts
Society, the Association for Investment Management & Research, the Boston
Municipal Analysts Forum, and the National Federation of Municipal Analysts.
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 of 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 BMR's organization, and (xviii) such non-recurring 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 the Fund's current Prospectus. For additional
information about the Investment Advisory Agreement, including the net assets of
the Portfolio and the investment advisory fees that the Portfolio paid BMR under
the Investment Advisory Agreement, see "Fees and Expenses" in the Fund's Part
II.
The Investment Advisory Agreement with BMR continues in effect from year to
year so long as such continuance is approved at least annually (i) by the vote
of a majority of the noninterested Trustees of the Portfolio cast in person at a
meeting specifically called for the purpose of voting on such approval and (ii)
by the Board of Trustees of the Portfolio or by vote of a majority of the
outstanding voting securities of the Portfolio. The Agreement may be terminated
at any time without penalty on sixty (60) days' written notice by the Board of
Trustees of either party, or by vote of the majority of the outstanding voting
securities of the Portfolio, and the Agreement will terminate automatically in
the event of its assignment. The Agreement provides that BMR may render services
to others. The Agreement also provides that BMR shall not be liable for any loss
incurred in connection with the performance of its duties, or action taken or
omitted under that Agreement, in the absence of willful misfeasance, bad faith,
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties thereunder, or for any losses sustained
in the acquisition, holding or disposition of any security or other investment.
As indicated in the Prospectus, Eaton Vance serves as Administrator of the
Fund, but currently receives no compensation for providing administrative
services to the Fund. Under its agreement with the Fund, Eaton Vance has been
engaged to administer the Fund's affairs, subject to the supervision of the
Trustees of the Trust, and shall furnish for the use of the Fund office space
and all necessary office facilities, equipment and personnel for administering
the affairs of the Fund.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) its pro rata
share of the Trust's registration under the 1940 Act, (iii) commissions, fees
and other expenses connected with the purchase or sale of securities and other
investments, (iv) auditing, accounting and legal expenses, (v) taxes and
interest, (vi) governmental fees, (vii) expenses of issue, sale, repurchase and
redemption of shares, (viii) expenses of registering and qualifying the Fund and
its shares under federal and state securities laws and of preparing and printing
prospectuses for such purposes and for distributing the same to shareholders and
investors, and fees and expenses of registering and maintaining registrations of
the Fund and of the Fund's principal underwriter, if any, as broker-dealer or
agent under state securities laws, (ix) expenses of reports and notices to
shareholders and of meetings of shareholders 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 Fund
(including without limitation safekeeping of funds, securities and other
investments, keeping of books and accounts and determination of net asset
values), (xiv) fees, expenses and disbursements of transfer agents, dividend
disbursing agents, shareholder servicing agents and registrars for all services
to the Fund, (xv) expenses for servicing shareholder accounts, (xvi) any direct
charges to shareholders approved by the Trustees of the Trust, (xvii)
compensation and expenses of Trustees of the Trust who are not members of the
Eaton Vance organization, and (xviii) such non-recurring items as may arise,
including expenses incurred in connection with any litigation, proceedings and
claims and any legal obligation of the Trust to indemnify its Trustees and
officers with respect thereto, to the extent not covered by insurance.
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, 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, Mr. Gardner is
vice 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, 1997, the
Voting Trustees of which are Messrs. Clay, Gardner, Hawkes and Rowland and
Thomas E. Faust, Jr. The Voting Trustees have unrestricted voting rights for
the election of Directors of EVC. All of the outstanding voting trust receipts
issued under said Voting Trust are owned by certain of the officers of BMR and
Eaton Vance who are also officers or officers and Directors of EVC and EV. As
of May 31, 1997, Messrs. Clay, Gardner and Hawkes each owned 24% of such
voting trust receipts, and Messrs. Rowland and Faust owned 15% and 13%,
respectively, of such voting trust receipts. Messrs. Hawkes and Otis are
officers or Trustees of the Trust and the Portfolio and are members of the
EVC, BMR, Eaton Vance and EV organizations. Messrs. Fetter, MacIntosh, Murphy,
O'Connor and Woodbury and Ms. Sanders are officers of the Trust and/or the
Portfolio and are also members of the BMR, Eaton Vance and EV organizations.
EVC owns all of the stock of Energex Energy Corporation, which is engaged in
oil and gas exploration and development. In addition, Eaton Vance owns all of
the stock of Northeast Properties, Inc., which is engaged in real estate
investment. EVC 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 22% 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.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund and
the Portfolio, IBT. It is Eaton Vance's opinion that the terms and conditions of
such transactions were not and will not be influenced by existing or potential
custodial or other relationships between the Fund or the Portfolio and such
banks.
CUSTODIAN
IBT acts as custodian for the Fund and the Portfolio. IBT has the custody of
all cash and securities representing the Fund's interest in the Portfolio, has
custody of all the Portfolio's assets, maintains the general ledger of the
Portfolio and the Fund, and computes the daily net asset value of interests in
the Portfolio and the net asset value of shares of the Fund. In such capacity it
attends to details in connection with the sale, exchange, substitution, transfer
or other dealings with the Portfolio's investments, receives and disburses all
funds and performs various other ministerial duties upon receipt of proper
instructions from the Fund and 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 Fund and
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 particular investment company at the custodian
equal to 75% of the 91-day, U.S. Treasury Bill auction rate applied to the
particular investment company's average daily collected balances for the week.
Landon T. Clay, a Director of EVC and an officer, Trustee or Director of other
entities in the Eaton Vance organization, owns approximately 13% of the voting
stock of Investors Financial Services Corp., the holding company parent of IBT.
Management believes that such ownership does not create an affiliated person
relationship between the Fund or the Portfolio and IBT under the 1940 Act.
IBT also provides services in connection with the preparation of shareholder
reports and the electronic filing of such reports with the Commission, for which
it receives a separate fee.
SERVICE FOR WITHDRAWAL
The Transfer Agent will send to the shareholder regular monthly or quarterly
payments of any permitted amount designated by the shareholder (see "Eaton Vance
Shareholder Services -- Withdrawal Plan" in the Fund's current Prospectus) based
upon the value of the shares held. The checks will be drawn from share
redemptions and hence, although they are a return of principal, may require the
recognition of taxable gain or loss. Income dividends and capital gains
distributions in connection with withdrawal plan accounts will be credited at
net asset value as of the record date for each distribution. Continued
withdrawals in excess of current income will eventually use up principal,
particularly in a period of declining market prices. A shareholder may not have
a withdrawal plan in effect at the same time he or she has authorized Bank
Automated Investing or is otherwise making regular purchases of Fund shares. The
shareholder, the Transfer Agent or the Principal Underwriter will be able to
terminate the withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Portfolio is also computed by IBT (as agent and
custodian for the Portfolio) by subtracting the liabilities of the Portfolio
from the value of its total assets. Inasmuch as the market for municipal
obligations is a dealer market with no central trading location or continuous
quotation system, it is not feasible to obtain last 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 services uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities, various relationships between securities,
and yield to maturity in determining value. Taxable obligations for which price
quotations are readily available normally will be valued at the mean between the
latest available bid and asked prices. Open futures positions on debt securities
are valued at the most recent settlement prices, unless such price does not
reflect the fair value of the contract, in which case the positions will be
valued by or at the direction of the Trustees of the Portfolio. Other assets are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees of the Portfolio. The Fund and the Portfolio will be
closed for business and will not price their respective shares or interests on
the following business holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the Exchange is open for trading
("Portfolio Business Day") as of the close of regular trading on the Exchange
(the "Portfolio Valuation Time"). The value of each investor's interest in the
Portfolio will be determined by multiplying the net asset value of the Portfolio
by the percentage, determined on the prior Portfolio Business Day, which
represented that investor's share of the aggregate interest in the Portfolio on
such prior day. Any additions or withdrawals for the current Portfolio Business
Day will then be recorded. Each investor's percentage of the aggregate interest
in the Portfolio will then be recomputed as a percentage equal to a fraction (i)
the numerator of which is the value of such investor's investment in the
Portfolio as of the Portfolio Valuation Time on the prior Portfolio Business Day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Portfolio on the current Portfolio
Business Day and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the Portfolio Valuation Time on the prior Portfolio
Business Day plus or minus, as the case may be, the amount of the net additions
to or withdrawals from the aggregate investment in the Portfolio on the current
Portfolio Business Day by all investors in the Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in the Portfolio for the current Portfolio Business Day.
INVESTMENT PERFORMANCE
Average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and distributions paid and
reinvested) for the stated period and annualizing the result. The calculation
assumes that all distributions are reinvested at net asset value on the
reinvestment dates during the period, and either (i) the deduction of the
maximum sales charge from the initial $1,000 purchase order or (ii) a complete
redemption of the investment and, if applicable, the deduction of the CDSC at
the end of the period. For further information concerning the total return of
the Fund, see "Performance Information" in the Fund's Part II.
Yield is computed pursuant to a standardized formula by dividing the net
investment income per share earned during a recent thirty-day period by the
maximum offering price (including, if applicable, the maximum sales charge) per
share on the last day of the period and annualizing the resulting figure. Net
investment income per share is calculated from the yields to maturity of all
debt obligations held by the Portfolio based on prescribed methods, reduced by
accrued Fund expenses for the period with the resulting number being divided by
the average daily number of Fund shares outstanding and entitled to receive
distributions during the period. The yield figure does not reflect the deduction
of any CDSC which (if applicable) are imposed on certain redemptions at the rate
set forth under "How to Redeem Fund Shares" in the Fund's current Prospectus.
Yield calculations assume the current maximum sales charge (if applicable) set
forth under "How to Buy Fund Shares" in the Fund's current Prospectus. (Actual
yield may be affected by variations in sales charges on investments.) A
taxable-equivalent yield is computed by dividing the tax-exempt yield by 1 minus
a stated rate. For the yield and taxable-equivalent yield of the Fund, see
"Performance Information" in the Fund's Part II.
The Principal Underwriter may publish to Authorized Firms the Fund's
distribution rate and/or the effective distribution rate. The Fund's
distribution rate is computed by dividing the most recent monthly distribution
per share annualized, by the current net asset value per share or, where
applicable, the maximum public offering price per share (which includes the
maximum initial sales charge). The Fund's effective distribution rate is
computed by dividing the distribution rate by the ratio (the days in a year
divided by the accrual days of the monthly period) used to annualize the most
recent monthly distribution and reinvesting the resulting amount for a full year
on the basis of such ratio. The effective distribution rate will be higher than
the distribution rate because of the compounding effect of the assumed
reinvestment. Investor's should note that the Fund's yield is calculated using a
standardized formula, the income component of which is computed from the yields
to maturity of all debt obligations held by the Portfolio based on prescribed
methods (with all purchases and sales of securities during such period included
in the income calculation on a settlement date basis), whereas the distribution
rate is based on the Fund's last monthly distribution which tends to be
relatively stable and may be more or less than the amount of net investment
income and short-term capital gain actually earned by the Fund during the month.
The Fund's total return may be compared to relevant indices, such as the
Consumer Price Index, the Bond Buyer 25 Revenue Bond Index and the Lehman
Brothers Municipal Bond Index, which may be used in advertisements and in
information furnished to present or prospective shareholders. The Fund's
performance may differ from that of other investors in the Portfolio, including
other investment companies.
The Fund may provide investors with information on municipal bond investing,
which may include comparative performance information, evaluations of Fund
performance, charts and/or illustrations prepared by independent sources (such
as Lipper Analytical Services Inc., CDA/Wiesenberger, Morningstar, Inc., The
Bond Buyer, the Federal Reserve Board or The Wall Street Journal). The Fund may
also refer in investor publications to Tax Freedom Day, as computed by the Tax
Foundation, Washington, DC 20005, to help illustrate the value of tax free
investing, as well as other tax-related information. Information, charts and
illustrations showing the effects of inflation and taxes (including their
effects on the dollar and the return on various investments) and compounding
earnings may also be included in advertisements and materials furnished to
present and prospective investors.
Information about portfolio allocation and holdings of the Portfolio at a
particular date (including ratings assigned by independent ratings services such
as Moody's, S&P and Fitch) may be included in advertisements and other material
furnished to present and prospective shareholders. Such information may be
stated as a percentage of the Portfolio's bond holdings on such date.
Comparative information about the yield or distribution rate of the Fund and
about average rates of return on certificates of deposit, bank money market
deposit accounts, money market mutual funds and other short-term investments may
also be included in advertisements, supplemental sales literature or
communications of the Fund. Such information may also compare the taxable
equivalent yield (or value) of the Fund to the after-tax yield (or value) of
such other investment vehicles. Such information may be in the form of
hypothetical illustrations. A bank certificate of deposit, unlike the Fund's
shares, pays a fixed rate of interest and entitles the depositor to receive the
face amount of the certificate of deposit at maturity. A bank money market
deposit account is a form of savings account which pays a variable rate of
interest. Unlike the Fund's shares, bank certificates of deposit and bank money
market deposit accounts are insured by the Federal Deposit Insurance
Corporation. A money market mutual fund is designed to maintain a constant value
of $1.00 per share and, thus, a money market fund's shares are subject to less
price fluctuation than the Fund's shares.
The average rates of return of money market mutual funds, certificates of
deposit and bank money market deposit accounts referred to in advertisements,
supplemental sales literature or communications of the Fund will be based on
rates published by the Federal Reserve Bank, Donoghues Money Fund Averages,
RateGram or The Wall Street Journal.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such Information may address:
- cost associated with aging parents;
- funding a college education (inclusing its actual and estimated cost);
- health care expenses (including actual and projected expenses);
- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in municipal bond
funds. Such information may describe: The following advantages of investing in a
municipal bond mutual fund versus individual municipal bonds: regular monthly
income; free reinvestment of distributions; potential for increased income; bond
diversification; liquidity; low-cost easy access; and active management and in
depth credit analysis by investment professionals. In addition, by investing in
a municipal bond fund instead of individual bonds, an investor can avoid dealing
with the complexities of the municipal bond market, while benefitting from the
market access and lower transactions costs enjoyed by municipal bond funds.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionsals by such investors.
TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected or will elect to be treated and intends to
qualify each year, as a regulated investment company ("RIC") under the Code.
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets. For purposes of
applying the requirements of the Code regarding qualification as a RIC, the Fund
will be deemed (i) to own its proportionate share of each of the assets of the
Portfolio and (ii) to be entitled to the gross income of the Portfolio
attributable to such share. The Portfolio therefore intends to satisfy the
source of income and diversification requirements applicable to RICs in order
for the Fund to satisfy them.
In addition, the Portfolio will allocate at least annually among its
investors, including the Fund, 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 order to qualify for the special tax
treatment accorded RICs and their shareholders, the Fund intends to distribute
the investment income (including tax-exempt income and the excess, if any, of
net short-term capital gains over net long-term capital losses) allocated to the
Fund by the Portfolio, in accordance with certain timing and percentage
requirements imposed by the Code. If these requirements are met, the Fund will
not be subject to any federal income tax on income or gain paid to shareholders
in the form of dividends (including capital gain dividends).
If the Fund failed to qualify as a RIC accorded special tax treatment in any
taxable year, the Fund would be subject to tax on its taxable income at
corporate rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, would be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying as a RIC that is accorded
special tax treatment.
If the Fund fails to distribute (or to be deemed to have distributed) in
each calendar year at least 98% of its ordinary income (not including tax-exempt
income) for such year, at least 98% of the excess of its realized capital gains
over its realized capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) after reduction by any
available capital loss carryforwards, and 100% of any undistributed income (on
which the Fund paid no federal income tax) from the prior year, the Fund will be
subject to a 4% excise tax on the undistributed amounts. A dividend paid to
shareholders by the Fund in January of a year generally is deemed to have been
paid by the Fund on December 31 of the preceding year, if the dividend was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.
Under current law, provided that the Fund qualifies as a RIC for federal
income tax purposes and the Portfolio is treated as a partnership for
Massachusetts and federal tax purposes, neither the Fund nor the Portfolio is
liable for any income, corporate excise or franchise tax in the Commonwealth of
Massachusetts.
The Portfolio's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. In order to generate sufficient cash to enable the Fund to
distribute its proportionate share of this income, the Portfolio may be required
to liquidate portfolio securities that it might otherwise have continued to
hold.
The Portfolio's transactions in options and futures contracts will be
subject to special tax rules that may affect the amount, timing and character of
Fund distributions to shareholders. For example, certain positions held by the
Portfolio on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out on such day), and any resulting gain or loss
will generally be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by the Portfolio that substantially diminish the
Portfolio's risk of loss with respect to other positions in its portfolio may
constitute "straddles," which are subject to tax rules that may cause deferral
of Portfolio losses, adjustments in the holding periods of Portfolio securities
and conversion of short-term into long-term capital losses. The Portfolio may
have to limit its engagement in such activities in order to enable the Fund to
maintain its qualification as a RIC for federal income tax purposes.
Distributions designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Code. In order for the Fund to be entitled to pay exempt-interest dividends
to its shareholders, at least 50% of the value of its total assets at the close
of each quarter of its taxable year must consist of obligations the interest on
which is exempt from regular federal income tax under Code Section 103(a).
Because the Fund will be deemed to own its proportionate share of each of the
assets of the Portfolio, the Portfolio currently intends to invest its assets in
a manner such that the Fund can meet this 50% requirement.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Fund paying exempt-interest
dividends is not deductible. The portion of interest that is not deductible is
equal to the total interest paid or accrued on the indebtedness, multiplied by
the percentage of the Fund's total distributions (not including distributions
from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
The Fund will inform investors of the percentage of its income distributions
designated as tax-exempt. The percentage is applied uniformly to all
distributions made during the year. The percentage of income designated as
tax-exempt for any particular distribution may be substantially different from
the percentage of the Fund's income that was tax-exempt during the period
covered by the distribution.
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. Any distributions by the Fund
of its share of such capital gains (after reduction by any capital loss
carryforwards) or taxable income would be taxable to shareholders of the Fund.
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. However, it is expected
that such amounts, if any, would normally be insubstantial in relation to the
tax-exempt interest earned by the Portfolio and allocated to the Fund.
The sale, exchange or redemption of Fund shares may give rise to a gain or
loss. In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gain or loss if the shares have been held
for more than 12 months, and otherwise as short-term capital gain or loss.
However, if a shareholder sells shares at a loss within six months of purchase,
any loss will be disallowed for federal income tax purposes to the extent of any
exempt-interest dividends received on such shares. In addition, any loss (not
already disallowed as provided in the preceding sentence) realized upon a
taxable disposition of shares held for six months or less will be treated as
long-term, rather than short-term, to the extent of any long-term capital gain
distributions received by the shareholder with respect to the shares. All or a
portion of any loss realized upon a taxable disposition of Fund shares will be
disallowed if other Fund shares are purchased within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
If the Fund makes a distribution to shareholders in excess of its current
and accumulated "earnings and profits" in any taxable year, the excess
distribution will be treated as a return of capital to each shareholder to the
extent of that shareholder's tax basis in the shares, and thereafter as capital
gains. A return of capital is not taxable, but it reduces the tax basis in the
shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition of such shares.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number and
certain certifications required by the Internal Revenue Service (the "IRS"), as
well as shareholders with respect to whom the Fund has received notification
from the IRS or a broker, may be subject to "backup" withholding of federal
income tax from the Fund's taxable dividends and distributions and the proceeds
of redemptions (including repurchases and exchanges), at a rate of 31%. An
individual's taxpayer identification number is generally his or her social
security number.
Non-resident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% on the Fund's distributions from its ordinary income and the excess of
its net short-term capital gain over its net long-term capital loss, unless the
tax is reduced or eliminated by an applicable tax treaty. Distributions from the
excess of the Fund's net long-term capital gain over its net short-term capital
loss received by such shareholders and any gain from the sale or other
disposition of shares of the Fund generally will not be subject to U.S. federal
income taxation, provided that non-resident alien status has been certified by
the shareholder. Different U.S. tax consequences may result if the shareholder
is engaged in a trade or business in the United States, is present in the United
States for a sufficient period of time during a taxable year to be treated as a
U.S. resident, or fails to provide any required certifications regarding status
as a non-resident alien investor. Foreign shareholders should consult their tax
advisers regarding the U.S. and foreign tax consequences of an investment in the
Fund.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, insurance
companies and financial institutions. Shareholders should consult their own tax
advisers with respect to special tax rules that may apply in their particular
situations, as well as the state, local or foreign tax consequences of investing
in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of the Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to the Portfolio and at reasonably competitive spreads or (when
a disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, BMR will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any. Municipal obligations,
including State obligations, purchased and sold by the Portfolio are generally
traded in the over-the-counter market on a net basis (i.e., without commission)
through broker-dealers and banks acting for their own account rather than as
brokers, or otherwise involve transactions directly with the issuer of such
obligations. Such firms attempt to profit from such transactions by buying at
the bid price and selling at the higher asked price of the market for such
obligations, and the difference between the bid and asked price is customarily
referred to as the spread. The Portfolio may also purchase municipal obligations
from underwriters, 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 compensation was reasonable in relation to
the value of the brokerage and research services provided. This determination
may be made either on the basis of that particular transaction or on the basis
of overall responsibilities which BMR and its affiliates have for accounts over
which they exercise investment discretion. In making any such determination, BMR
will not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include advice as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and the "Research
Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, BMR receives Research Services from many broker-dealer firms
with which BMR places the Portfolio transactions and from third parties with
which these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and transactions and
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by BMR in connection with
client accounts other than those accounts 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 the Fund or
of other investment companies sponsored by BMR or Eaton Vance. This policy is
not inconsistent with a rule of the National Association of Securities Dealers,
Inc., (the "NASD") which rule provides that no firm which is a member of the
NASD shall favor or disfavor the distribution of shares of any particular
investment company or group of investment companies on the basis of brokerage
commissions received or expected by such firm from any source.
Municipal obligations considered as investments for the Portfolio may also
be appropriate for other investment accounts managed by BMR or its affiliates.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Portfolio will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
BMR reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. For
brokerage commissions paid by the Portfolio on portfolio transactions, see "Fees
and Expenses" in the Fund's Part II.
OTHER INFORMATION
Eaton Vance, pursuant to its agreement with the Trust, controls the use of
the words "Eaton Vance" and "EV" in the Fund's name and may use the words "Eaton
Vance" or "EV" in other connections and for other purposes.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event, the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's by-laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
The Trust's by-laws provide that no person shall serve as a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Trust's custodian or
by votes cast at a meeting called for that purpose. The by-laws further provide
that under certain circumstances the shareholders may call a meeting to remove a
Trustee and that the Trust is required to provide assistance in communication
with shareholders about such a meeting.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust, the financial interests of which are affected by the amendment. The
Trustees may also amend the Declaration of Trust without the vote or consent of
shareholders to change the name of the Trust or any series or to make such other
changes as do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable federal or
state laws or regulations. The Trust or any series or class thereof may be
terminated by: (1) the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote at any meeting of
shareholders of the Trust or the appropriate series or class thereof, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of two-thirds of the shares of the Trust or a series or class thereof,
provided, however, that, if such termination is recommended by the Trustees, the
vote of a majority of the outstanding voting securities of the Trust or a series
or class thereof entitled to vote thereon shall be sufficient authorization; or
(2) by means of an instrument in writing signed by a majority of the Trustees,
to be followed by a written notice to shareholders stating that a majority of
the Trustees has determined that the continuation of the Trust or a series or a
class thereof is not in the best interest of the Trust, such series or class or
of their respective shareholders.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the Trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Fund shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Fund
shareholders. Moreover, the Trust's By-laws also provide for indemnification out
of the property of the Fund of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising
from such liability. The assets of the Fund are readily marketable and will
ordinarily substantially exceed its liabilities. In light of the nature of the
Fund's business and the nature of its assets, management believes that the
possibility of the Fund's liability exceeding its assets, and therefore the
shareholder's risk of personal liability, is extremely remote.
In accordance with the Declaration of Trust of the Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of the
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interest
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
The Portfolio's Declaration of Trust provides that the Portfolio will
terminate 120 days after the complete withdrawal of the Fund or any other
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
treatment of the Portfolio as a partnership for federal income tax purposes.
The right to redeem shares of the Fund can be suspended and the payment of
the redemption price deferred when the Exchange is closed (other than for
customary weekend and holiday closings), during periods when trading on the
Exchange is restricted as determined by the Commission, or during any emergency
as determined by the Commission which makes it impracticable for the Portfolio
to dispose of its securities or value its assets, or during any other period
permitted by order of the Commission for the protection of investors.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the Commission.
<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.
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.
- ----------------------
+The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI 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.
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 to B. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
MUNICIPAL SHORT-TERM OBLIGATIONS
RATINGS: Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such rating recognizes the
differences between short term credit risk and long term risk. Factors effecting
the liquidity of the borrower and short term cyclical elements are critical in
short term ratings, while other factors of major importance in bond risk, long
term secular trends for example, may be less important over the short run.
A short term rating may also be assigned on an issue having a demand feature,
variable rate demand obligation (VRDO). Such ratings will be designated as
VMIG1, SG or if the demand feature is not rated, NR. A short term rating on
issues with demand features are differentiated by the use of the VMIG1 symbol to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MUNICIPAL NOTES
S&P note ratings reflect the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus(+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
AAA: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified that could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Stong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
NOTES: Debt which is unrated exposes 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 debt.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
<PAGE>
DESCRIPTION OF THE INSURANCE CLAIMS-PAYING
ABILITY RATINGS OF
STANDARD & POOR'S CORPORATION AND
MOODY'S INVESTORS SERVICE, INC.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability of AAA has the highest rating assigned by S&P. Capacity to
honor insurance contracts is adjudged by S&P to be extremely strong and highly
likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P's or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take in account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are fully or
partially supported by insurance policies, contracts, or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination of such debt issues.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV CLASSIC HIGH YIELD MUNICIPALS
FUND. The Fund became a series of the Trust on March 24, 1997.
FEES AND EXPENSES
INVESTMENT ADVISER
As of January 31, 1997, the Portfolio had net assets of $180,700,459. For
the fiscal year ended January 31, 1997, absent a fee reduction, the Portfolio
would have paid BMR advisory fees of $772,713 (equivalent to 0.60% of the
Portfolio's average daily net assets for such year). To enhance the net income
of the Portfolio, BMR made a reduction of its fee in the amount of $478,420. For
the period from the start of business, August 7, 1995, to January 31, 1996,
absent a fee reduction, the Portfolio would have paid BMR advisory fees of
$100,763 (equivalent to 0.59% (annualized) of the Portfolio's average daily net
assets for such period). To enhance the net income of the Portfolio, BMR made a
reduction in the full amount of its advisory fee, and BMR was allocated expenses
related to the operation of the Portfolio in the amount of $10,465. The
Portfolio's Investment Advisory Agreement with BMR is dated August 1, 1995 and
may be continued as described under "Investment Adviser and Administrator" in
Part I.
ADMINISTRATOR
No fees paid to date.
DISTRIBUTION PLAN
No fees paid to date.
PRINCIPAL UNDERWRITER
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $2.50 for each repurchase transaction handled
by the Principal Underwriter. The Principal Underwriter estimates that the
expenses incurred by it in acting as repurchase agent for the Fund will exceed
the amounts paid therefor by the Fund. There have been no fees paid to date.
BROKERAGE
For the fiscal year ended January 31, 1997, the Portfolio paid brokerage
commissions of $5,861 on portfolio security transactions aggregating $94,993,525
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 period
from the start of business, August 7, 1995, to January 31, 1996, the Portfolio
paid no brokerage commissions on portfolio transactions.
TRUSTEES
The fees and expenses of the noninterested Trustees of the Trust and of the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. (The Trustees of the Trust and the Portfolio who are
members of the Eaton Vance organization receive no compensation from the Fund or
the Portfolio.) For the fiscal year ending January 31, 1998, it is estimated
that the noninterested Trustees of the Trust will receive the following
compensation in their capacities as Trustees from the Fund. During the fiscal
year ended January 31, 1997 and for the year ended December 31, 1996, the
noninterested Trustees earned the following compensation in their capacities as
Trustees of the Portfolio and the funds in the Eaton Vance fund complex(1),
respectively:
<PAGE>
ESTIMATED
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- ------------------
Donald R. Dwight ...... $24 $1,351(2) $145,000(5)
Samuel L. Hayes, III .. 24 1,597(3) 157,500(6)
Norton H. Reamer ...... 24 1,515 145,000
John L. Thorndike ..... 24 1,633(4) 150,000(7)
Jack L. Treynor ....... 24 1,576 150,000
(1) The Eaton Vance fund complex consists of 212 registered investment companies
or series thereof.
(2) Includes $556 of deferred compensation.
(3) Includes $282 of deferred compensation.
(4) Includes $467 of deferred compensation.
(5) Includes $35,000 of deferred compensation.
(6) Includes $33,750 of deferred compensation.
(7) Includes $28,125 of deferred compensation.
ADDITIONAL OFFICER INFORMATION
In addition to the officers of the Portfolio listed under "Officers of the
Trust and the Portfolio" in Part I, Thomas M. Metzold (36), is a Vice President
of the Portfolio, as well as a Vice President of BMR, Eaton Vance and EV. Mr.
Metzold is also an officer of various investment companies managed by Eaton
Vance and BMR.
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as principal
in selling shares of the Fund. The expenses of printing copies of prospectuses
used to offer shares to Authorized Firms or investors and other selling
literature and of advertising is borne by the Principal Underwriter. The fees
and expenses of qualifying and registering and maintaining qualifications and
registrations of the Fund and its shares under federal and state securities laws
are borne by the Fund. In addition, the Fund makes payments to the Principal
Underwriter pursuant to its Distribution Plan as described in the Fund's current
Prospectus; the provisions of the Plan relating to such payments are included in
the Distribution Agreement. The Distribution Agreement is renewable annually by
the Trust's Board of Trustees (including a majority of the noninterested
Trustees who have no direct or indirect financial interest in the operation of
the Fund's Distribution Plan or the Distribution Agreement), may be terminated
on sixty days' notice either by such Trustees or by vote of a majority of the
outstanding voting securities of the Fund or on six months' notice by the
Principal Underwriter and is automatically terminated upon assignment. The
Principal Underwriter distributes Fund shares on a "best efforts" basis under
which it is required to take and pay for only such shares as may be sold.
DISTRIBUTION PLAN
The Plan is designed to meet the requirements of Rule 12b-1 under the 1940
Act and the sales charge rule of the NASD. The purpose of the Plan is to
compensate the Principal Underwriter for its distribution services and
facilities provided to the Fund.
The Plan provides that the Fund will pay sales commissions and distribution
fees to the Principal Underwriter only after and as a result of the sale of
shares of the Fund. On each sale of Fund shares (excluding reinvestment of
distributions) the Fund will pay the Principal Underwriter amounts representing
(i) sales commissions equal to 6.25% of the amount received by the Fund for each
share sold and (ii) distribution fees calculated by applying the rate of 1% over
the prime rate then reported in The Wall Street Journal to the outstanding
balance of uncovered distribution charges (as described below) of the Principal
Underwriter.
The amount payable by the Fund to the Principal Underwriter pursuant to the
Plan as sales commissions and distribution fees with respect to each day will be
accrued on such day as a liability of the Fund and will accordingly reduce the
Fund's net assets upon such accrual, all in accordance with generally accepted
accounting principles. The amount payable on each day by the Fund is limited to
1/365 of .75% of the Fund's net assets on such day. The level of the Fund's net
assets changes each day and depends upon the amount of sales and redemptions of
Fund shares, the changes in the value of the investments held by the Portfolio,
the expenses of the Fund and the Portfolio accrued and allocated to the Fund on
such day, income on portfolio investments of the Portfolio accrued and allocated
to the Fund on such day, and any dividends and distributions declared on Fund
shares. The Fund does not accrue possible future payments as a liability of the
Fund or reduce the Fund's current net assets in respect of unknown amounts which
may become payable under the Plan in the future because the standards for
accrual of such a liability under accounting principles have not been satisfied.
The Plan provides that the Fund will receive all CDSCs and will make no
payments to the Principal Underwriter in respect of any day on which there are
no outstanding uncovered distribution charges of the Principal Underwriter.
CDSCs and accrued amounts will be paid by the Fund to the Principal Underwriter
whenever there exist uncovered distribution charges.
In calculating daily the amount of uncovered distribution charges,
distribution charges will include the aggregate amount of sales commissions and
distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled to
be paid under the Plan since its inception. Payments theretofore paid or payable
under the Plan by the Fund to the Principal Underwriter and CDSCs theretofore
paid or payable to the Principal Underwriter will be subtracted from such
distribution charges; if the result of such subtraction is positive, a
distribution fee (computed at 1% over the prime rate then reported in The Wall
Street Journal) will be computed on such amount and added thereto, with the
resulting sum constituting the amount of outstanding uncovered distribution
charges with respect to such day. The amount of outstanding uncovered
distribution charges of the Principal Underwriter calculated on any day does not
constitute a liability recorded on the financial statements of the Fund.
The amount of uncovered distribution charges of the Principal Underwriter at
any particular time depends upon various changing factors, including the level
and timing of sales of Fund shares, the nature of such sales (i.e., whether they
result from exchange transactions, reinvestments or from cash sales through
Authorized Firms), the level and timing of redemptions of Fund shares upon which
a CDSC will be imposed, the level and timing of redemptions of Fund shares upon
which no CDSC will be imposed (including redemptions of Fund shares pursuant to
the exchange privilege which result in a reduction of uncovered distribution
charges), changes in the level of the net assets of the Fund, and changes in the
interest rate used in the calculation of the distribution fee under the Plan.
Periods with a high level of sales of Fund shares accompanied by a low level of
early redemptions of Fund shares resulting in the imposition of CDSCs will tend
to increase the time during which there will exist uncovered distribution
charges of the Principal Underwriter.
Currently payments of sales commissions and distribution fees and of service
fees may equal 1% of the Fund's average daily net assets per annum. For actual
payments made by the Fund and the outstanding uncovered distribution charges of
the Principal Underwriter, see "Fees and Expenses -- Distribution Plan" in this
Part II. The Fund believes that the combined rate of all these payments may be
higher than the rate of payments made under distribution plans adopted by other
investment companies pursuant to Rule 12b-1. Although the Principal Underwriter
will use its own funds (which may be borrowed from banks) to pay sales
commissions and service fees at the time of sale, it is anticipated that the
Eaton Vance organization will profit by reason of the operation of the Plan
through an increase in the Fund's assets (thereby increasing the advisory fee
payable to BMR by the Portfolio) resulting from sale of Fund shares and through
the amounts paid to the Principal Underwriter, including CDSCs, pursuant to the
Plan. The Eaton Vance organization may be considered to have realized a profit
under the Plan if at any point in time the aggregate amounts theretofore
received by the Principal Underwriter under the Plan and from CDSCs have
exceeded the total expenses theretofore incurred by such organization in
distributing shares of the Fund. Total expenses for this purpose will include an
allocable portion of the overhead costs of such organization and its branch
offices, which costs will include without limitation leasing expense,
depreciation of building and equipment, utilities, communication and postage
expense, compensation and benefits of personnel, travel and promotional expense,
stationery and supplies, literature and sales aids, interest expense, data
processing fees, consulting and temporary help costs, insurance, taxes other
than income taxes, legal and auditing expense and other miscellaneous overhead
items. Overhead is calculated and allocated for such purpose by the Eaton Vance
organization in a manner deemed equitable to the Fund.
The Plan continues in effect from year to year so long as such continuance
is approved at least annually by the vote of both a majority of (i) the
noninterested Trustees of the Trust who have no direct or indirect financial
interest in the operation of the Plan or any agreements related to the Plan (the
"Rule 12b-1 Trustees") and (ii) all of the Trustees then in office, and the
Distribution Agreement contains a similar provision. The Plan and Distribution
Agreement may be terminated at any time by vote of a majority of the Rule 12b-1
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund. The Plan requires quarterly Trustee review of a written report of the
amount expended under the Plan and the purposes for which such expenditures were
made. The Plan may not be amended to increase materially the payments described
therein without approval of the shareholders of the Fund and the Trustees. So
long as the Plan is in effect, the selection and nomination of the noninterested
Trustees shall be committed to the discretion of such Trustees.
The Trustees of the Trust believe that the Plan will be a significant factor
in the expected growth of the Fund's assets, and will result in increased
investment flexibility and advantages which will benefit the Fund and its
shareholders. Payments for sales commissions and distribution fees made to the
Principal Underwriter under the Plan will compensate the Principal Underwriter
for its services and expenses in distributing shares of the Fund. Service fee
payments made to the Principal Underwriter and Authorized Firms under the Plan
provide incentives to provide continuing personal services to investors and the
maintenance of shareholder accounts. By providing incentives to the Principal
Underwriter and Authorized Firms, the Plan is expected to result in the
maintenance of, and possible future growth in, the assets of the Fund. Based on
the foregoing and other relevant factors, the Trustees have determined that in
their judgment there is a reasonable likelihood that the Plan will benefit the
Fund and its shareholders.
PERFORMANCE INFORMATION
The table below indicates the cumulative and average total return on a
hypothetical investment of $1,000 in the Fund covering the life of the Fund from
August 7, 1995 through January 31, 1997 and the one-year period ended January
31, 1997. The total return for the period prior to the Fund's commencement of
operations reflects the total return of another fund that invests in the
Portfolio adjusted to reflect any applicable Fund CDSC. Total return for this
time period has not been adjusted to reflect the Fund's distribution and/or
service fees and certain other expenses. If such an adjustment were made, the
performance would have been lower.
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INVEST- INVEST-
MENT BEFORE MENT AFTER TOTAL RETURN BEFORE TOTAL RETURN AFTER
DEDUCTING THE DEDUCTING THE DEDUCTING THE CDSC DEDUCTING THE CDSC*
INVESTMENT INVESTMENT AMOUNT OF CDSC ON CDSC* ON -------------------------- --------------------------
PERIOD DATE INVESTMENT 1/31/97 1/31/97 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- --------------- ------------ ----------- --------------- --------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of the
Fund** 8/7/95 $1,000 $1,158.50 $1,158.50 15.85% 10.38% 15.85% 10.38%
1 Year
Ended
1/31/97** 1/31/96* $1,000 $1,059.29 $1,049.29 5.93% 5.93% 4.93% 4.93%
</TABLE>
- ------------
* No CDSC is imposed on certain redemptions. See the Fund's current
Prospectus.
** If a portion of the Portfolio's expenses had not been subsidized, the Fund
would have had lower returns.
An investment in the Fund offers shareholders the opportunity to: receive
high monthly tax-free income; retain more of their earnings; gain investment
advantages over purchasing individual bonds (such as professional management,
monthly income and portfolio diversification); and enlist a research-based
investment strategy to find municipal bonds with potential for high current
income and improving fundamentals.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 10, 1997, Eaton Vance owned one share of the Fund, being the only
share of the Fund outstanding on such date. Eaton Vance is a Massachusetts
business trust and a wholly-owned subsidiary of EVC.
<PAGE>
High Yield Municipals Portfolio
Portfolio of Investments
January 31, 1997
<TABLE>
<CAPTION>
Tax-Exempt Investment -- 100%
- -----------------------------------------------------------------------------------------------------------------
Principal
Amount
(000
Omitted) Security VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assisted Living -- 11.5%
$2,500 Arizona Health Facilities Authority, Care Institute-Mesa Project,
7.625%, 1/01/26 $2,359,950
2,000 Chester County, Pennsylvania, IDA, Senior LifeChoice of Paoli, (AMT)
8.05%, 1/01/24 2,039,120
1,000 Chester County, Pennsylvania, IDA, Senior LifeChoice of Kimberton
(AMT), 8.50%, 9/01/25 1,054,670
1,600 Delaware County, Pennsylvania, Industrial Development Authority, Senior
Quarters at Glen Riddle Project (AMT), 8.625%, 9/01/25 1,685,936
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/13 231,760
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/13 221,350
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/14 211,420
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/14 201,930
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/15 192,860
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/15 184,200
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/16 175,930
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/16 168,040
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/17 160,490
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/17 153,290
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/18 146,410
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 7/01/18 139,840
1,000 Glen Cove Industrial Development Agency, New York,
The Regency at Glen Cove, 0%, 1/01/19 133,560
1,000 Glen Cove Industrial Development Agency, New York,
The Regency of Glen Cove, 0%, 7/01/19 127,560
3,740 Illinois Development Finance Authority, Care Institute, 7.80%, 6/01/25 3,666,659
3,545 Louisiana Housing Finance Agency, HCC Assisted Living Group I (AMT),
9.00%, 3/01/25 3,749,263
3,500 New Jersey Economic Development Authority, The Chelsea
at East Brunswick Project (AMT), 8.25%, 10/01/26 3,491,635
------------
$20,495,875
------------
Cogeneration Facilities -- 7.3%
$3,500 Maryland Energy Cogeneration, AES Warrior Run Project
(AMT), 7.40%, 9/01/19(2) $3,687,950
3,500 Palm Beach County, Florida, Okeelanta Power Limited Partnership
Project (AMT), 6.85%, 2/15/21 3,100,055
2,000 Palm Beach County, Florida, Osceola Power Project (AMT), 6.95%, 1/01/22 1,790,220
3,500 Pennsylvania Economic Development Financing Authority, Northampton
Generating Project (AMT), 6.60%, 1/01/19 3,473,715
1,000 Pennsylvania Economic Development Financing Authority, Northampton
Generating Project-Subordinated (AMT), 6.875%, 1/01/11 983,000
------------
$13,034,940
------------
Colleges & Universities -- 1.2%
$2,000 New Hampshire Higher Educational and Health Facilities Authority,
Colby-Sawyer College, 7.50%, 6/01/26 $2,043,320
------------
Escrowed -- 7.0%
$2,600 Colorado Health Facilities Authority, Liberty Heights Project, 0%, 7/15/20 $532,012
17,000 Colorado Health Facilities Authority, Liberty Heights Project, 0%, 7/15/24 2,661,010
13,445 Colorado Health Facilities Authority, Liberty Heights Project, 0%, 7/15/22 2,408,941
1,500 Cuyahoga County, Ohio, Judson Retirement Community, 8.875%, 11/15/19 1,715,895
10,000 Dawson Ridge Metropolitan District #1, Douglas County, Colorado, 0%,
10/1/22 1,847,000
3,500 Dawson Ridge Metropolitan District #1, Douglas County, Colorado, 0%,
10/1/22 646,450
3,295 Illinois Development Finance Authority, Regency Park Project, 0%, 7/15/25 482,058
1,000 Montgomery County, Pennsylvania, United Hospitals, 8.375%, 11/01/11 1,124,460
1,000 Montgomery County, Pennsylvania, United Hospitals, 7.50%, 11/01/15 1,085,180
------------
$12,503,006
------------
Hospitals -- 12.1%
$2,500 Hidalgo County, Texas, Health Services Corp., Mission Hospital, Inc.,
6.875%, 8/15/26 $2,525,875
3,000 Louisiana Public Finance Authority, General Health Systems Project,
6.80%, 11/01/16 3,040,260
2,250 Massachusetts Health and Education Facilities Authority, Sisters of Providence
Hospital, 6.625%, 11/15/22 2,247,210
3,000 Massachusetts Health and Education Facilities Authority,
Milford-Whitinsville Hospital, 7.75%, 7/15/17 3,155,100
2,205 Philadelphia, Pennsylvania, Graduate Health System, 6.625%, 7/01/21 2,176,754
2,650 Prince George's, Maryland, Greater Southeast Health, 6.375%, 1/01/23 2,609,534
1,000 San Bernadino, California, San Bernadino Community Hospital,
7.875%, 12/01/08 1,038,110
1,325 San Bernadino, California, San Bernadino Community Hospital,
7.875%, 12/01/19 1,375,496
1,500 Scranton-Lackawanna, Pennsylvania, Moses Taylor Hospital,
8.50%, 7/01/20 1,622,730
1,500 Wells County, Indiana, Caylor-Nickel Medical Center, 8.75%, 4/15/12 1,706,580
------------
$21,497,649
------------
Housing -- 8.8%
$4,850 Colorado Housing Finance Authority, Single Family Mortgage Revenue
(AMT), 7.65%, 12/01/25 $5,373,315
2,450 Cuyahoga County, Ohio, Rolling Hills Apartment Project (AMT),
8.00%, 1/01/28 2,397,643
2,500 Lucas County, Ohio, EDA, County Creek Project (AMT), 8.00%, 7/01/26 2,407,000
2,500 Maricopa County, Arizona, Industrial Development Authority,
Place Five and The Greenery Apartment Projects, 6.625%, 1/01/27 2,507,975
1,725 Maricopa County, Arizona, Industrial Development Authority,
Place Five and The Greenery Apartment Projects, 8.625%, 1/01/11 1,728,847
1,150 Texas Department of Housing and Community Affairs, NHP
Foundation-Asmara Project, 6.40%, 1/01/27 1,156,590
------------
$15,571,370
------------
Industrial Development Revenue -- 19.6%
$2,815 ABIA Development Corporation, Austin Cargoport Development,
L.L.C. Project (AMT), 9.25%, 10/01/21 $2,838,787
2,000 Camden County, New Jersey, Holt Hauling and Warehousing System, Inc.
Project (AMT), 9.875%, 1/01/21 2,186,840
1,895 Florence County, Kentucky, IDR, Stone Container Co., 7.375%, 2/01/07 1,987,703
2,700 Hancock County, Kentucky, Southwire Co. Project (AMT), 7.75%, 7/01/25 2,783,079
2,500 Kansas City, Missouri, IDA, AFCO Cargo MCI (AMT), 8.50%, 1/01/17 2,729,700
3,000 Kimball, Nebraska, Clean Harbors, Inc. Series-96 (AMT), 10.75%, 9/01/26 3,033,810
1,000 Michigan Strategic, PCR, Roseville K-Mart Co., 6.25%,10/01/06 968,310
3,500 Michigan Strategic, PCR, S.D. Warren Series-87C (AMT), 7.375%, 1/15/22 3,605,420
1,000 Mobile, Alabama, IDA, Mobile Energy Project, 6.95%, 1/01/20 1,060,950
1,135 New Albany, Indiana, IDA, K-Mart Co., 7.40%, 6/01/06 1,173,726
2,750 New Hampshire Business Finance Authority, Crown Paper Co. (AMT),
7.875%, 7/01/26 2,862,365
1,500 New Jersey EDA, Holt Hauling and Warehousing System, Inc. (AMT),
9.75%, 12/15/16 1,589,190
500 New Jersey EDA, 777 Pattison Ave., Inc. (AMT), 8.95%, 12/15/18 535,230
3,500 State of Ohio Solid Waste, Republic Engineered Steel, Inc. Project (AMT),
9.00%, 6/01/21 3,601,920
500 Philadelphia, Pennsylvania, IDA, Refrigerated Enterprises (AMT),
9.05%, 12/01/19 530,175
3,345 Riverdale Village, Illinois, IDA, ACME Metals, Inc. Project (AMT),
7.95%, 4/01/25 3,354,968
------------
$34,842,173
------------
Insured Water and Sewer -- 1.6%
$3,000 Detroit, Michigan, Sewer Revenue, (FGIC), Variable Rate, 7/01/23 (1) $2,801,250
------------
Lease/Certificates of Participation -- 1.2%
$9,190 Los Angeles, California, COP, Disney Parking Project, 0%, 9/01/19 $2,092,930
------------
Life Care -- 2.0%
$3,500 Delaware County, Pennsylvania, White Horse Village, 7.30%, 7/01/14 $3,581,305
------------
Miscellaneous -- 5.1%
$2,300 Atlanta, Georgia, Downtown Development Authority,
Central Atlanta Hospitality Childcare, Inc., 8.00%, 1/01/26 $2,240,729
3,300 Santa Fe, New Mexico, Crow Hobbs No. 1, 8.50%, 9/01/16 3,372,237
3,449 Santa Fe, New Mexico, First Interstate Plaza Associates Project,
8.00%, 7/01/13 3,450,713
------------
$9,063,679
------------
Miscellaneous Healthcare -- 2.5%
$2,000 Osceola County, Florida, IDA, Community Pooled Loan-93, 7.75%, 7/01/17 $2,051,380
2,382 Tax Exempt Securities Trust, Mezzanine Certificates Series-96, 8.50%, 12/01/36 2,382,000
------------
$4,433,380
------------
Multi-Purpose Utilities -- 4.0%
$2,500 Intermountain Power Agency, Utah, Variable Rate, 7/01/11, (1) $2,396,875
2,500 New York State Energy, Research and Development Authority,
Long Island Lighting Co. (AMT), 7.15%, 9/01/19 2,674,975
2,000 Southern California Public Power Authority, Variable Rate, 7/01/12 (1) 2,097,500
------------
$7,169,350
------------
Nursing Homes -- 8.2%
$1,220 Greene County, Ohio, IDA, Fairview Extended Care-91, 10.125%, 1/01/11 $1,379,430
1,790 Massachusetts Health & Education Facilities Authority, Fairview Extended Care,
10.125%, 1/01/11 2,023,917
2,500 Massachusetts Industrial Finance Authority, AGE Institute of Massachusetts,
8.05%, 11/01/25 2,531,150
1,200 Mississippi Business Finance Corp., Magnolia Health Care-95A,
7.99%, 7/01/25 1,195,332
2,175 Missouri Economic Development Authority, Beverly Enterprises, Inc.,
8.00%, 12/01/02 2,280,553
3,500 Westmoreland County, PA, Highland Health Systems, 9.25%, 6/01/22 3,761,065
1,250 Wilkins Area, Pennsylvania, IDA, Fairview Extended Care, 10.25%, 1/01/21 1,418,625
------------
$14,590,072
------------
Solid Waste -- 3.6%
$10,090 Mercer County, New Jersey, Solid Waste Improvement Bonds (AMT),
0%, 4/01/15 $2,685,857
3,500 Robbins, Cook County, Illinois, Resource Recovery-94B (AMT),
8.375%, 10/15/16 3,641,330
------------
$6,327,187
------------
Special Tax General -- 2.1%
$3,800 Cottonwood Water and Sanitation District, General Obligation
(Limited Tax Through 2000), 7.75%, 12/01/20 $3,808,132
------------
Transportation -- 2.2%
$500 Eagle County, Colorado, Airport Terminal Project, 7.50%, 5/01/21 $516,145
10,000 San Joaquin Hills, California, Toll Roads, 0%, 1/01/25 1,746,200
10,000 San Joaquin Hills, California, Toll Roads, 0%, 1/01/26 1,640,400
------------
$3,902,745
------------
Total Tax-Exempt Investments (identified cost, $172,859,583) $177,758,361
============
(1) Security has been issued as an inverse floater bond.
(2) The security has been segregated to cover margin requirements for open financial futures contracts.
AMT -- Interest earned from these securities may be considered a tax preference item for purpose of the Federal
Alternative Minimum Tax.
At January 31, 1997, the concentration of the Portfolio's investments in various states determined as a
percentage of total investments is as follows:
Pennsylvania 13.8%
Colorado 10.0%
Others, representing less than 10% individually 76.2%
See notes to financial statements
</TABLE>
<PAGE>
High Yield Muinicipals Portfolio
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
January 31, 1997
<S> <C> <C>
Assets:
Investments, at value (Note 1A) (identified cost, $172,859,583) $177,758,361
Cash 1,649,611
Receivable for investments sold 145,510
Interest receivable 2,407,062
Deferred organization expenses (Note 1D) 9,252
------------
Total assets $181,969,796
Liabilities:
Payable for investments purchased $1,037,250
Payable for daily variation margin on open
financial futures contracts (Note 1E) 218,750
Payable to affiliate --
Trustees' fees 750
Accrued expenses 12,587
----------
Total liabilities 1,269,337
------------
Net Assets applicable to investors' interest in Portfolio $180,700,459
============
Sources of Net Assets:
Net proceeds from capital contributions and withdrawals $176,144,425
Unrealized appreciation of investments and financial futures contracts
(computed on the basis of identified cost) 4,556,034
------------
Total $180,700,459
============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended January 31, 1997
<S> <C> <C>
Investment Income (Note 1B):
Interest income $ 9,301,713
Expenses --
Investment adviser fee (Note 2) $ 772,713
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,411
Custodian fee (Note 1H) 55,405
Legal and accounting services 21,966
Bond pricing 11,895
Amortization of organization expenses (Note 1D) 10,756
Miscellaneous 29,553
-----------
Total expenses $ 910,699
-----------
Deduct --
Reduction of investment advisor fee (Note 2) $ 478,420
Reduction of custodian fee (Note 1H) 49,391
-----------
Total $ 527,811
-----------
Net expenses 382,888
-----------
Net investment income $ 8,918,825
Realized and Unrealized Gain (Loss) on Investments:
Net realized loss --
Investment transactions (identified cost basis) $ (231,719)
Financial futures contracts (1,027,871)
-----------
Net realized loss $(1,259,590)
-----------
Change in net unrealized appreciation (depreciation) --
Investments $ 3,247,169
Financial futures contracts (342,744)
-----------
Net unrealized appreciation $ 2,904,425
-----------
Net realized and unrealized gain 1,644,835
-----------
Net increase in net assets resulting from operations $10,563,660
===========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Year Ended January 31,
------------------------------------
1997 1996*
------------ -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 8,918,825 $ 1,186,284
Net realized gain (loss) on investments (1,259,590) 9,767
Change in unrealized appreciation of investments 2,904,425 1,651,609
------------ -----------
Net increase in net assets resulting from operations $ 10,563,660 $ 2,847,660
------------ -----------
Capital transactions --
Contributions $118,977,124 $71,481,492
Withdrawals (20,917,792) (2,351,685)
------------ -----------
Increase in net assets resulting from capital transactions $ 98,059,332 $69,129,807
------------ -----------
Total increase in net assets $108,622,992 $71,977,467
Net Assets:
At beginning of year 72,077,467 100,000
------------ -----------
At end of year $180,700,459 $72,077,467
============ ===========
* For the period from the start of business, August 7, 1995 to January 31, 1996.
<CAPTION>
Supplementary Data
Year Ended January 31,
------------------------------------
1997 1996*
------------ -----------
Ratios (as a percentage of net assets)**:
Expenses 0.34% 0.06%+
Expenses after custodian fee reduction 0.30% 0.06%+
Net investment income 6.96% 6.95%+
Portfolio Turnover 41% 32%
** The operating expenses of the Portfolio reflect a reduction of the investment advisor fee. Had such
action not been taken, net investment income per share and the ratios would have been as follows:
Ratios (as a percentage of average daily net assets):
Expenses 0.71% 0.71%+
Expenses after custodian fee reduction 0.67% 0.71%+
Net investment income 6.59% 6.30%+
+ Annualized.
* For the period from the start of business, August 7, 1995, to January 31, 1996.
See notes to financial statements
</TABLE>
<PAGE>
Notes to Financial Statements
(1) Significant Accounting Policies
High Yield Municipals Portfolio (the Portfolio) is registered under
the Investment Company Act of 1940 as a non-diversified open-end
management investment company. The Portfolio, which was organized as
a trust under the laws of the State of New York on May 1, 1995, seeks
to provide high current income exempt from regular federal income
tax. The Declaration of Trust permits the Trustees to issue interests
in the Portfolio. The following is a summary of significant
accounting policies of the Portfolio. The policies are in conformity
with generally accepted accounting principles.
A. Investment Valuations -- Municipal bonds are normally valued on
the basis of valuations furnished by a pricing service. Taxable
obligations, if any, for which price quotations are readily available
are normally valued at the mean between the latest bid and asked
prices. Futures contracts listed on commodity exchanges are valued at
closing settlement prices. Short-term obligations, maturing in sixty
days or less, are valued at amortized cost, which approximates value.
Investments for which valuations or market quotations are unavailable
are valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
B. Income -- Interest income is determined on the basis of interest
accrued, adjusted for amortization of premium or discount when
required for federal income tax purposes.
C. Income Taxes -- The Portfolio is treated as a partnership for
Federal tax purposes. No provision is made by the Portfolio for
federal or state taxes on any taxable income of the Portfolio because
each investor in the Portfolio is ultimately responsible for the
payment of any taxes. Since some of the Portfolio's investors are
regulated investment companies that invest all or substantially all
of their assets in the Portfolio, the Portfolio normally must satisfy
the applicable source of the income and diversification requirements
(under the Internal Revenue Code) in order for its investors to
satisfy them. 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. Interest income received by the Portfolio on investments
in municipal bonds, which is excludable from gross income under the
Internal Revenue Code, will retain its status as income exempt from
Federal income tax when allocated to the Portfolio's investors. The
portion of such interest, if any, earned on private activity bonds
issued after August 7, 1986 may be considered a tax preference item
for investors.
D. Deferred Organization Expenses -- Costs incurred by the Portfolio
in connection with its organization are being amortized on the
straight-line basis over five years.
E. Financial Futures Contracts -- Upon the entering of a financial
futures contract, the Portfolio is required to deposit ("initial
margin") either in cash or securities an amount equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("margin maintenance") each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by the Portfolio. The
Portfolio's investment in financial futures contracts is designed
only to hedge against anticipated future changes in interest rates.
Should interest rates move unexpectedly, the Portfolio may not
achieve the anticipated benefits of the financial futures contracts
and may realize a loss.
F. Legal Fees -- Legal fees and other related expenses incurred as
part of negotiations of the terms and requirements of capital
infusions, or that are expected to result in the restructuring of or
a plan of reorganization for an investment are recorded as realized
losses. Ongoing expenditures to protect or enhance an investment are
treated as operating expenses.
G. When-issued and Delayed Delivery Transactions -- The Portfolio may
engage in when-issued and delayed delivery transactions. The
Portfolio records when-issued securities on trade date and maintains
security positions such that sufficient liquid assets will be
available to make payments for the securities purchased. Securities
purchased on when-issued or delayed delivery basis are marked to
market daily and begin accruing interest on settlement date.
H. Expense Reduction -- Investors Bank & Trust Company (IBT) serves
as custodian of the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credits which are determined based on
the average daily cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reported as a reduction of expenses in the statement of
operations.
I. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
J. Other --Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
income (i.e. income other than gains from the sale of securities).
For the year ended January 31, 1997, the fee was equivalent to 0.60%
(annualized) of the Portfolio's average net assets for such period
and amounted to $772,713. To enhance the net income of the Portfolio,
BMR made a reduction of its fee in the amount of $478,420. Except as
to Trustees of the Portfolio who are not members of EVM's or BMR's
organization, officers and Trustees receive remuneration for their
services to the Portfolio out of such investment adviser fee. Certain
of the officers and Trustees of the Portfolio are officers and
directors/trustees of the above organizations. Trustees of the
Portfolio that are not affiliated with the Investment Adviser may
elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of the Trustees Deferred Compensation Plan.
For the year ended January 31, 1997, no significant amounts have been
deferred.
(3) Investments
Purchases and sales of investments, other than U.S. Government
securities and short term obligations, aggregated $154,349,851 and
$51,977,848, respectively, for the year ended January 31, 1997.
(4) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at January 31, 1997, as computed on a federal
income tax basis, were as follows:
Aggregate cost $172,859,583
============
Gross unrealized appreciation $ 5,065,286
Gross unrealized depreciation 166,508
------------
Net unrealized appreciation $ 4,898,778
============
(5) Line of Credit
The Fund participates with other portfolios and funds managed by EVM
and affiliates in a $120 million unsecured line of credit with a
bank. Borrowings will be made by the Portfolio or Fund solely to
facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each participating
portfolio or fund based on its borrowings at the bank's base rate or
at an amount above either the bank's adjusted certificate of deposit
rate, a Eurodollar rate, or a federal funds effective rate. In
addition, a fee computed at an annual rate of 0.15% on the daily
unused portion facility is allocated among the participating funds
and portfolios at the end of each quarter. The Fund did not have any
significant borrowings or allocated fees during the year ended
January 31, 1997.
(6) Financial Instruments
The Portfolio regularly trades in financial instruments with off-
balance sheet risk in the normal course of its investing activities
to assist in managing exposure to various market risks. These
financial instruments include futures contracts and may involve, to a
varying degree, elements of risk in excess of the amounts recognized
for financial statement purposes. The notional or contractual amounts
of these instruments represent the investment the Portfolio has in
particular classes of financial instruments and do not necessarily
represent the amounts potentially subject to risk. The measurement of
the risks associated with these instruments is meaningful only when
all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at January 31, 1997 is
as follows:
Futures
Contracts Net Unrealized
Expiration Date Contracts Position Depreciation
- --------------- --------- ----------- --------------
3/97 250 U.S. Treasury Bond Short $342,744
<PAGE>
Independent Auditors' Report
To the Trustees and Investors of
High Yield Municipals Portfolio:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of High Yield Municipals
Portfolio as of January 31, 1997, the related statement of operations
for the year then ended, and the statements of changes in net assets
and the supplementary data for the year ended January 31, 1997 and
the period from the start of business, August 7, 1995, to January 31,
1996. These financial statements and supplementary data are the
responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and supplementary
data based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at January
31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and supplementary data
present fairly, in all material respects, the financial position of
the High Yield Municipals Portfolio at January 31, 1997, and the
results of its operations, the changes in its net assets, and its
supplementary data for the respective stated periods, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 7, 1997
<PAGE>
[LOGO]
EATON VANCE
- -------------------
Mutual Funds
EV CLASSIC
HIGH YIELD MUNICIPALS FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JUNE 11, 1997
EV CLASSIC
HIGH YIELD MUNICIPALS FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH YIELD MUNICIPALS PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC HIGH YIELD MUNICIPALS FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-HYMSAI
