As filed with the Securities and Exchange Commission on May 26, 2005
1933 Act File No. 33-1121
1940 Act File No. 811-4443
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 49 [X]
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 52 [X]
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It is proposed that this filing will become effective pursuant to Rule 485
(check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on August 1, 2005 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
LOGO
Eaton Vance California Limited Maturity Municipals Fund Eaton Vance Florida Limited Maturity Municipals Fund Eaton Vance Massachusetts Limited Maturity Municipals Fund Eaton Vance New Jersey Limited Maturity Municipals Fund Eaton Vance New York Limited Maturity Municipals Fund Eaton Vance Ohio Limited Maturity Municipals Fund Eaton Vance Pennsylvania Limited Maturity Municipals Fund
Mutual funds seeking tax-exempt income and limited principal fluctuation
Prospectus Dated
August 1, 2005
The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus contains important information about the Funds and the services available to shareholders.
Please save it for reference.
TABLE OF CONTENTS
Fund Summaries.............................................................. 3
Performance Information................................................... 4
California Fund....................................................... 4
Florida Fund.......................................................... 5
Massachusetts Fund ................................................... 6
New Jersey Fund....................................................... 7
New York Fund......................................................... 8
Ohio Fund............................................................. 9
Pennsylvania Fund.....................................................10
Fund Fees and Expenses....................................................11
Investment Objectives & Principal Policies and Risks........................13
Management and Organization.................................................14
Valuing Shares..............................................................16
Purchasing Shares...........................................................16
Sales Charges...............................................................18
Redeeming Shares............................................................20
Shareholder Account Features................................................20
Tax Information.............................................................22
Financial Highlights........................................................25
California Fund...........................................................25
Florida Fund..............................................................26
Massachusetts Fund........................................................27
New Jersey Fund...........................................................28
New York Fund ............................................................29
Ohio Fund.................................................................30
Pennsylvania Fund.........................................................31
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FUND SUMMARIES
This section summarizes the investment objectives, and principal strategies and risks of investing in an Eaton Vance Limited Maturity Municipals Fund. You will find more specific information about each Fund in the pages that follow.
Investment Objectives and Principal Strategies
The investment objective of each Fund is to provide a high level of current income exempt from regular federal income tax and from particular state or local income or other taxes, and limited principal fluctuation. Under normal market conditions, each Fund will invest at least 80% of its net assets in municipal obligations that are exempt from regular federal income tax and from state taxes which, in accordance with the Fund's investment objective, the Fund seeks to avoid. Each Fund primarily invests in investment grade municipal obligations (those rated BBB or Baa or higher), but may also invest in lower rated obligations. Each Fund invests in obligations to seek to maintain a dollar-weighted average portfolio duration of between three and nine years.
Each Fund may concentrate in certain types of municipal obligations (such as industrial development bonds, housing bonds, hospital bonds or utility bonds), so Fund shares could be affected by events that adversely affect a particular sector. Each Fund may purchase derivative instruments (such as futures contracts and options thereon, and interest rate swaps), bonds that do not make regular payments of interest, bonds issued on a "when issued" basis and municipal leases. A portion of each Fund's distributions generally will be subject to alternative minimum tax.
Each portfolio manager purchases and sells securities to maintain a competitive yield and to enhance return based upon the relative value of the securities in the marketplace. The portfolio managers may also trade securities to minimize taxable capital gains to shareholders. The managers attempt to limit principal fluctuation by investing to limit overall portfolio duration.
Principal Risk Factors
The value of Fund shares may change when interest rates change. When interest rates rise or when the supply of suitable bonds exceeds the market demand, the value of Fund shares typically will decline. Fund yields will also fluctuate over time. Each Fund invests a significant portion of assets in obligations of issuers located in a single state and is sensitive to factors affecting that state, such as changes in the economy, decreases in tax collection or the tax base, legislation which limits taxes and changes in issuer credit ratings. Because obligations rated BBB or Baa and obligations rated below BBB or Baa (so-called "junk bonds") are more sensitive to the financial soundness of their issuers than higher quality obligations, Fund shares may fluctuate more in value than shares of a fund investing solely in higher quality obligations. Obligations rated BBB or Baa have speculative characteristics, while lower rated obligations are predominantly speculative. The credit ratings assigned a state's general obligations (if any) by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings ("Fitch") are described in the Fund-specific summaries that follow this page.
A Fund's use of derivatives may expose the Fund to increased risk of principal loss due to imperfect correlation, failure of the counterparty and unexpected price or interest rate movements. Bonds that do not make regular interest payments may experience greater volatility in response to interest rate changes. When-issued securities are subject to the risk that when delivered to the Fund they will be worth less than the price the Fund agreed to pay for them. Municipal leases often require a legislative appropriation of funds for payment. If the necessary appropriation is not made, the issuer of the lease may not be able to meet its obligations.
As a non-diversified fund, a Fund may invest a larger portion of its assets in the obligations of a limited number of issuers than may a diversified fund. This makes a Fund more susceptible to adverse economic, business or other developments affecting such issuers. A Fund may invest, with respect to 50% of its total assets, more than 5% (but not more than 25%) of its total assets in securities of any one issuer, such limitations do not apply to U.S. Government securities.
No Fund is a complete investment program and you may lose money by investing in a Fund. An investment in a Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Eaton Vance California Limited Maturity Municipals Fund
The California Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and California state personal income taxes, and limited principal fluctuation. California general obligations currently are rated A3, BBB and BBB by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the California Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.86% 2.57% 6.35% 4.55% -4.80% 11.15% 3.13% 7.20% 3.16% ------ ----- ----- ----- ------ ------ ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________, and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax- equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, for Class B shares were ____% and ____%, respectively and for Class C shares were ___% and ___%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable contingent deferred sales charge ("CDSC") for Class B. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the two classes). Class B shares commenced operations on May 29, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance Florida Limited Maturity Municipals Fund
The Florida Fund's investment objective is to provide a high level of current income exempt from regular federal income tax in the form of an investment exempt from Florida intangibles tax, and limited principal fluctuation. Florida general obligations currently are rated Aa2, AA+ and AA by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the Florida Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.69% 1.56% 5.12% 4.59% -3.79% 8.54% 4.22% 7.56% 3.22% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________ and lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, for Class B shares were ____% and ____%, respectively, and for Class C shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B and Class C. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the classes). Class B shares commenced operations on May 29, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance Massachusetts Limited Maturity Municipals Fund
The Massachusetts Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and Massachusetts state personal income taxes, and limited principal fluctuation. Massachusetts general obligations currently are rated Aa2, AA- and AA- by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the Massachusetts Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.46% 2.12% 6.18% 4.43% -4.12% 8.18% 4.03% 7.16% 3.16% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________, and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, for Class B shares were ____% and ____%, respectively, and for Class C shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B and Class C. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the classes). Class B shares commenced operations on June 1, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance New Jersey Limited Maturity Municipals Fund
The New Jersey Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and New Jersey state personal income taxes, and limited principal fluctuation. New Jersey general obligations currently are rated Aa2, AA and AA by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the New Jersey Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.40% 2.31% 5.91% 3.88% -2.92% 8.29% 2.75% 6.93% 3.45% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________ and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, and for Class B shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the two classes). Class B shares commenced operations on June 1, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source of Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance New York Limited Maturity Municipals Fund
The New York Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and New York state and New York City personal income taxes, and limited principal fluctuation. New York's state general obligation bonds currently are rated A2, AA and AA- by Moody's, S&P and Fitch, respectively. New York City's general obligation bonds currently are rated A2, A and A+ by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the New York Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.97% 2.10% 7.30% 4.70% -3.29% 9.84% 2.99% 7.62% 3.73% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________, and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, for Class B shares were ____% and ____%, respectively, and for Class C shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B and Class C. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the classes). Class B shares commenced operations on May 29, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance Ohio Limited Maturity Municipals Fund
The Ohio Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and Ohio state personal income taxes, and limited principal fluctuation. Ohio general obligations currently are rated Aa1, AA+ and AA+ by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the Ohio Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.73% 3.01% 6.16% 4.27% -3.56% 6.69% 3.07% 7.27% 3.06% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________, and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, and for Class B shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
----------------------------------------------------------------------------------------------------------------
Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
|
These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B. The Class A performance shown above for the period prior to October 22, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the two classes). Class B shares commenced operations on April 16, 1993. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Eaton Vance Pennsylvania Limited Maturity Municipals Fund
The Pennsylvania Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and Pennsylvania state and local taxes in the form of an investment exempt from Pennsylvania personal property taxes, and limited principal fluctuation. Pennsylvania general obligations currently are rated Aa2, AA and AA by Moody's, S&P and Fitch, respectively.
Performance Information. The following bar chart and table provide information about the Pennsylvania Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. The table contains returns for each Class of shares and a comparison to the performance of a national index of intermediate-maturity municipal obligations. Returns in the table for Class B shares are shown before and after the reduction of taxes. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change.
10.34% 2.31% 7.12% 4.03% -3.54% 7.97% 3.42% 6.96% 4.04% ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 |
During the ten year period ended December 31, 2004, the highest quarterly total return for Class B was ____% for the quarter ended __________, and the lowest quarterly return was ____% for the quarter ended __________. The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was ____%. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a combined state and federal income tax rate of ____%) for Class A shares were ____% and ____%, respectively, for Class B shares were ____% and ____%, respectively, and for Class C shares were ____% and ____%, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
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Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees,
expenses or taxes) % % %
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These returns reflect the maximum sales charge for Class A (2.25%) and any applicable CDSC for Class B and Class C. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the classes). Class B shares commenced operations on June 1, 1992. The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the msot recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Fund Fees and Expenses. These tables describe the fees and expenses that you may pay if you buy and hold shares.
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class C
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Maximum Sales Charge (Load) (as a percentage of offering price) 2.25% None None
Maximum Deferred Sales Charge (Load) (as a percentage of the lower of net asset
value at time of pruchase or time of redemption) None 3.00% 1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None None None
Exchange Fee None None None
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Distribution and Other Total Annual Fund
Fees Service (12b-1) Fees Expenses* Operating Expenses
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California Fund Class A shares % n/a % %
Class B shares % 0.90% % %
Class C shares** % 0.90% % %
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Florida Fund Class A shares % n/a % %
Class B shares % 0.90% % %
Class C shares % 0.90% % %
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Massachusetts Fund Class A shares % n/a % %
Class B shares % 0.90% % %
Class C shares % 0.90% % %
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New Jersey Fund Class A shares % n/a % %
Class B shares % 0.90% % %
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New York Fund Class A shares % n/a % %
Class B shares % 0.90% % %
Class C shares % 0.90% % %
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Ohio Fund Class A shares % n/a % %
Class B shares % 0.90% % %
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Pennsylvania Fund Class A shares % n/a % %
Class B shares % 0.90% % %
Class C shares % 0.90% % %
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* Other Expenses for Class A includes a 0.15% service fee paid pursuant to a Service Plan. ** Other Expenses are estimated.
Examples. These Examples are intended to help you compare the cost of investing in a Fund with the cost of investing in other mutual funds. Each Example assumes that you invest $10,000 in a Fund for the time periods indicated and then redeem all of your shares at the end of those periods. Each Example also assumes that your investment has a 5% return each year and that the operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
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California Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Florida Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Massachusetts Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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New Jersey Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
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New York Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Ohio Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
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Pennsylvania Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
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California Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Florida Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Massachusetts Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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New Jersey Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
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New York Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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Ohio Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
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Pennsylvania Fund Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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* Reflects the expenses of Class A after four years because Class B shares generally convert to Class A after four years.
INVESTMENT OBJECTIVES & PRINCIPAL POLICIES AND RISKS
The investment objective of each Fund is to provide a high level of current income exempt from regular federal income tax and particular state or local income or other taxes, and limited principal fluctuation. Each Fund seeks to achieve its objective by investing primarily (i.e., at least 80% of its net assets during periods of normal market conditions) in municipal obligations, the interest on which is exempt from regular federal income tax and from the state taxes which, in accordance with the Fund's investment objective, the Fund seeks to avoid. This is a fundamental policy of each Fund which only may be changed with shareholder approval. For purposes of this policy, "net assets" includes any borrowings for investment purposes. Each Fund's investment objective and certain other policies may be changed by the Trustees without shareholder approval. There is no present intention to make any such change and shareholders will receive 60 days' notice of any material change in a Fund's investment objective.
At least 75% of net assets will normally be invested in municipal obligations rated at least investment grade at the time of investment (which are those rated Baa or higher by Moody's, or BBB or higher by either S&P or Fitch) or, if unrated, determined by the investment adviser to be of at least investment grade quality. The balance of net assets may be invested in municipal obligations rated below investment grade and in unrated municipal obligations considered to be of comparable quality by the investment adviser. Municipal obligations rated Baa or BBB have speculative characteristics, while lower quality obligations are predominantly speculative. Also, changes in economic conditions or other circumstances are more likely to reduce the capacity of issuers of lower-rated obligations to make principal and interest payments. Lower rated obligations also may be subject to greater price volatility than higher rated obligations. No Fund will invest more than 10% of its net assets in obligations rated below B by Moody's, S&P or Fitch, or in unrated obligations considered to be of comparable quality by the investment adviser.
Municipal obligations include bonds, notes and commercial paper issued by a municipality for a wide variety of both public and private purposes. Municipal obligations also include 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. Certain municipal obligations may be purchased 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.
The investment adviser's process for selecting securities for purchase and sale is research intensive and emphasizes the creditworthiness of the issuer or other person obligated to repay the obligation.
The interest on municipal obligations is (in the opinion of the issuer's counsel) exempt from regular federal income tax. Interest income from certain types of fmunicipal obligations generally will be subject to the federal alternative minimum tax (the "AMT") for individuals. Distributions to corporate investors may also be subject to the AMT. The Funds may not be suitable for investors subject to the AMT.
Although each Fund invests in obligations to maintain a dollar weighted average portfolio duration of between three and nine years, a Fund may invest in individual municipal obligations of any maturity. Duration represents the dollar weighted average maturity of expected cash flows (i.e., interest and principal payments) on one or more municipal obligations, discounted to their present values. Each Fund may use various techniques to shorten or lengthen its dollar weighted average duration, including the acquisition of municipal obligations at a premium or discount, and transactions in futures contracts and options on futures. Many obligations permit the issuer at its option to "call", or redeem, its securities. If an issuer calls securities during a time of declining interest rates, it may not be possible to reinvest the proceeds in securities providing the same investment return as the securities redeemed.
Under normal conditions, each Fund invests at least 65% of its total assets in obligations issued by its respective state or its political subdivisions, agencies, authorities and instrumentalities. Municipal obligations of issuers in a single state may be adversely affected by economic developments (including insolvency of an issuer) and by legislation and other governmental activities in that state. Each Fund may also invest up to 35% of its net assets in municipal obligations issued by the governments of Puerto Rico, the U.S. Virgin Islands and Guam. Moody's currently rates Puerto Rico general obligations Baa1, while S&P rates them A-. S&P currently rates Guam general obligations B. Obligations issued by the U.S. Virgin Islands are not currently rated.
Each Fund may invest 25% or more of its total assets in municipal obligations in the same sector (such as leases, housing finance, public housing, municipal utilities, hospital and health facilities or industrial development). This may make a Fund more susceptible to adverse economic, political or regulatory occurrences or adverse court decisions affecting a particular sector.
The net asset value of a Fund's shares will change in response to changes in prevailing interest rates and changes in the value of securities held by the Fund. The value of securities held will be affected by the credit quality of the issuer of the obligation, and general economic and business conditions that affect the specific economic sector of the issuer. Changes by rating agencies in the rating assigned to an obligation may also affect the value of that obligation.
Each Fund may purchase derivative instruments, which derive their value from another instrument, security or index. For example, each Fund may purchase and sell various kinds of financial futures contracts and options thereon to hedge against changes in interest rates or as a substitute for the purchase of portfolio securities. Each Fund may also enter interest rate swaps and forward rate contracts, as well as purchase an instrument that has greater or lesser credit risk than the municipal bonds underlying the instrument. The use of derivative instruments for both hedging and investment purposes involves a risk of loss or depreciation due to a variety of factors including counterparty risk, unexpected market, interest rate or securities price movements, and tax and regulatory constraints. The use of derivatives is highly specialized and engaging in derivative transactions for purposes other than hedging is speculative. Derivative hedging transactions may not be effective because of imperfect correlations and other factors.
Each Fund may invest in zero coupon bonds, which do not require the issuer to make periodic interest payments. The values of these bonds are subject to greater fluctuation in response to changes in market interest rates than bonds which pay interest currently. Each Fund accrues income on these investments and is required to distribute that income each year. Each Fund may be required to sell securities to obtain cash needed for income distributions.
The limited liquidity of certain securities in which each Fund may invest (including those eligible for resale under Rule 144A of the Securities Act of 1933) could affect their market prices, thereby adversely affecting net asset value and the ability to pay income. The amount of publicly available information about certain municipal obligations may be limited and the investment performance of a Fund may be more dependent on the portfolio manager's analysis than if this were not the case.
Each Fund may borrow amounts up to one-third of the value of its total assets (including borrowings), but it will not borrow more than 5% of the value of its total assets except to satisfy redemption requests or for other temporary purposes. Such borrowings would result in increased expense to a Fund and, while they are outstanding, would magnify increases or decreases in the value of Fund shares. No Fund will purchase additional investment securities while outstanding borrowings exceed 5% of the value of its total assets.
During unusual market conditions, each Fund may temporarily invest up to 50% of its total assets in cash or cash equivalents, which is not consistent with a Fund's investment objective. While temporarily invested, a Fund may not achieve its objective, and interest income from temporary investments may be taxable. Each Fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or the Statement of Additional Information. While at times a Fund may use alternative investment strategies in an effort to limit its losses, it may choose not to do so.
MANAGEMENT AND ORGANIZATION
Management. Each Fund's investment adviser is Boston Management and Research ("BMR"), a subsidiary of Eaton Vance Management ("Eaton Vance"), with offices at The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. Eaton Vance has been managing assets since 1924 and managing mutual funds since 1931. Eaton Vance and its subsidiaries currently manage over $95 billion on behalf of mutual funds, institutional clients and individuals.
The investment adviser manages the investments of each Fund. Under its investment advisory agreement with each Fund, BMR receives a monthly advisory fee equal to the aggregate of a daily asset based fee and a daily income based fee. The fees are applied on the basis of the following categories.
Annual Daily
Category Daily Net Assets Asset Rate Income Rate
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1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
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Prior to October 8, 2004, each Fund invested its assets in a separate open-end investment company advised by BMR that had the same objective and policies of the Fund. Each Portfolio paid the same advisory fee as the Fund. For the fiscal year ended March 31, 2005, each Portfolio had net assets and paid the advisory fees (as a percentage of average daily net assets) stated below.
Net Assets on Advisory
Portfolio March 31, 2005 Fee
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California $ %
Florida $ %
Massachusetts $ %
New Jersey $ %
New York $ %
Ohio $ %
Pennsylvania $ %
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Each Fund's most recent shareholder report provides information regarding the basis for the Trustees' approval of each Fund's investment advisory agreement.
William H. Ahern is the portfolio manager of the Ohio Fund (since October 1994), the Massachusetts Fund (since May 1997), and the New York Fund (since November 1997). Cynthia J. Clemson is the portfolio manager of the California Portfolio (since May 1997). Craig R. Brandon is the portfolio manager of the Florida Fund and the New Jersey Fund (since September 2004), and the Pennsylvania Fund (since February 2005). Each portfolio manager also manages other Eaton Vance portfolios, and Mr. Ahern and Ms. Clemson have managed Eaton Vance portfolios for more than five years, and are Vice Presidents of Eaton Vance and BMR. Mr. Brandon was appointed portfolio manager of the Florida Fund and the New Jersey Fund in 2004 and the Pennsylvania Fund in 2005, and has been a municipal credit analyst at Eaton Vance for more than five years. He has been a Vice President of Eaton Vance and BMR since Novenber 2001.
The Statement of Additional Information provides additional information about each portfolio manager's compensation, other accounts managed by each portfolio manager, and each portfolio manager's ownership of shares of each Fund with respect to which that portfolio manager has management responsibility.
Eaton Vance serves as the administrator of each Fund, providing each Fund with administrative services and related office facilities. Eaton Vance does not currently receive a fee for serving as administrator.
Eaton Vance also serves as the sub-transfer agent for each Fund. For the sub-transfer agency services it provides, Eaton Vance receives an aggregate fee based upon the actual expenses it incurs in the performance of sub-transfer agency services. This fee is paid to Eaton Vance by a Fund's transfer agent from fees it receives from the Eaton Vance funds.
Organization. Each Fund is a series of Eaton Vance Investment Trust, a Massachusetts business trust. Each Fund offers multiple classes of shares. Each Class represents a pro rata interest in the Fund but is subject to different expenses and rights. The Funds do not hold annual shareholder meetings but may hold special meetings for matters that require shareholder approval (such as electing or removing trustees, approving management or advisory contracts or changing investment policies that may only be changed with shareholder approval).
Prior to October 8, 2004, each Fund invested its assets in another open-end investment company (a "Portfolio"). Each Fund's investment policies include a fundamental investment provision allowing the Fund to invest its assets in one or more open-end investment companies having substantially the same investment objective, policies and restrictions as the Fund. Any such company or companies would be advised by the Fund's investment adviser (or an affiliate) and the Fund would not pay directly any advisory fee with respect to the assets so invested. Each Fund may initiate investments in one or more investment companies at any time without shareholder approval.
Because the Funds use this combined prospectus, a Fund could be held liable for a misstatement or omission made about another Fund. The Trust's Trustees considered this risk in approving the use of a combined prospectus.
VALUING SHARES
Each Fund values its shares once each day only when the New York Stock Exchange is open for trading (typically Monday through Friday), as of the close of regular trading on the Exchange (normally 4:00 p.m. eastern time). The purchase price of Fund shares is their net asset value (plus a sales charge for Class A shares), which is derived from Portfolio holdings. When purchasing or redeeming Fund shares, your investment dealer must communicate your order to the principal underwriter by a specific time each day in order for the purchase price or the redemption price to be based on that day's net asset value per share. It is the investment dealer's responsibility to transmit orders promptly. Each Fund may accept purchase and redemption orders as of the time of their receipt by certain investment dealers (or their designated intermediaries).
The Trustees have adopted procedures for valuing investments and have delegated to the investment adviser the daily valuation of such investments. Municipal obligations owned by the Funds are normally valued on the basis of valuations furnished by a pricing service. The pricing service considers various factors relating to bonds and market transactions to determine value. In certain situations, the investment adviser may use the fair value of a security if market prices are unavailable or deemed unreliable. A security that is fair valued may be valued at a price higher or lower than actual market quotations or the value determined by other funds using their own fair valuation procedures. The investment adviser expects to use fair value pricing for municipal obligations under limited circumstances, such as when an obligation is not priced by the pricing service or is in default. Eaton Vance has established a Valuation Committee that oversees the valuation of investments.
PURCHASING SHARES
How to Purchase Shares. You may purchase shares through your investment dealer or by mailing an account application form to the transfer agent (see back cover for address). You may request an account application by calling 1-800-262-1122. Your initial investment must be at least $1,000. A Fund or your investment dealer must receive your purchase order no later than the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. eastern time) in order for your purchase to be effected at that day's net asset value.
After your initial investment, additional investments of $50 or more may be made at any time by sending a check payable to the order of the Fund or the transfer agent directly to the transfer agent (see back cover for address). Please include your name and account number and the name of the Fund and Class of shares with each investment.
You may make automatic investments of $50 or more each month or each quarter from your bank account. You can establish bank automated investing on the account application or by calling 1-800-262-1122. The minimum initial investment amount and Fund policy of redeeming accounts with low account balances are waived for bank automated investing accounts, certain group purchase plans and for persons affiliated with Eaton Vance and its service providers.
If you purchase shares through an investment dealer (which includes brokers, dealers and other financial institutions), that dealer may charge you a fee for executing the purchase for you. Each Fund may suspend the sale of its shares at any time and any purchase order may be refused.
Restrictions on Excessive Trading and Market Timing. The Funds are not intended for excessive trading or market timing. Market timers seek to profit by rapidly switching money into a fund when they expect the share price of the fund to rise and taking money out of the fund when they expect those prices to fall. By realizing profits through short-term trading, shareholders that engage in rapid purchases and sales or exchanges of a fund's shares may dilute the value of shares held by long-term shareholders. Volatility resulting from excessive purchases and sales or exchanges of fund shares, especially involving large dollar amounts, may disrupt efficient portfolio management. In particular, excessive purchases and sales or exchanges of a fund's shares may cause a fund to have difficulty implementing its investment strategies, may force the fund to sell portfolio securities at inopportune times to raise cash or may cause increased expenses (such as increased brokerage costs, realization of taxable capital gains without attaining any investment advantage or increased administrative costs).
A fund that invests in securities that are, among other things, thinly traded, traded infrequently or relatively illiquid (including certain municipal obligations) is susceptible to the risk that the current market price for such securities may not accurately reflect current market values. A shareholder may seek to engage in short-term trading to take advantage of these pricing differences (commonly referred to as "price arbitrage"). Each Fund has procedures authorizing the investment adviser to use the fair value of a security if market prices are unavailable or deemed unreliable (see "Valuing Shares"). The use of fair value pricing and the restrictions on excessive trading and market timing described below are intended to reduce a shareholder's ability to engage in price arbitrage to the detriment of the Funds.
The Boards of Trustees of the Eaton Vance funds have adopted policies to discourage short-term trading and market timing and to seek to minimize their potentially detrimental effects. Pursuant to these policies, if an investor (through one or more accounts) makes more than two round-trip exchanges (exchanging from one fund to another fund and back again) within 12 months, it will be deemed to constitute market timing or excessive trading. Under the policies, each Fund or its principal underwriter will reject or cancel a purchase order, suspend or terminate the exchange privilege or terminate the ability of an investor to invest in the Eaton Vance funds if the Fund or the principal underwriter determines that a proposed transaction involves market timing or excessive trading that it believes is likely to be detrimental to the Fund. Each Fund and its principal underwriter cannot ensure that they will be able to identify all cases of market timing and excessive trading, although they believe they have adequate procedures in place to attempt to do so. Each Fund or its principal underwriter may also reject or cancel any purchase order (including an exchange) from an investor or group of investors for any other reason. Decisions to reject or cancel purchase orders (including exchanges) in each Fund are inherently subjective and will be made in a manner believed to be in the best interest of a Fund's shareholders. No Eaton Vance fund has any arrangement to permit market timing.
The Funds and the principal underwriter have provided guidance to financial intermediaries (such as banks, broker-dealers, insurance companies and retirement administrators) concerning the application of the Eaton Vance funds' market timing and excessive trading policies to Fund shares held in omnibus accounts maintained and administered by such intermediaries, including guidance concerning situations where market timing or excessive trading is considered to be detrimental to a Fund. Each Fund and the principal underwriter cannot ensure that these financial intermediaries will in all cases apply the policies of the Funds to accounts under their control.
Choosing a Share Class. Each Fund offers different classes of shares. The different classes of shares represent investments in the same portfolio of securities, but the classes are subject to different sales charges and expenses and will likely have different share prices due to differences in class expenses. In choosing the class of shares that suits your investment needs, you should consider:
* how long you expect to own your shares;
* how much you intend to invest;
* the sales charge and total operating expenses associated with owning each
class; and
* whether you qualify for a reduction or waiver of any applicable sales charges (see "Reducing or Eliminating Class A Sales Charges" under "Sales Charges" below).
Each investor's considerations are different. You should speak with your investment dealer to help you decide which class of shares is best for you. Set forth below is a brief description of each class of shares offered by the Funds.
Class A shares are offered at net asset value plus a front-end sales charge of up to 2.25%. This charge is deducted from the amount you invest. The Class A sales charge is reduced for purchases of $100,000 or more. The sales charge applicable to your purchase may be reduced under the right of accumulation or a statement of intention, which are described in "Reducing or Eliminating Class A Sales Charges" under "Sales Charges" below. Some investors may be eligible to purchase Class A shares at net asset value under certain circumstances, which are also described below. Class A shares pay service fees equal to 0.15% annually of average daily net assets. Returns on Class A shares are generally higher than returns on Class B and Class C shares because Class A has lower annual expenses than those classes.
Class B shares are offered at net asset value with no front-end sales charge. If you sell your Class B shares within four years of purchase, you generally will be subject to a contingent deferred sales charge or "CDSC". The amount of the CDSC applicable to a redemption of Class B shares decreases over four years, as described in the CDSC schedule in "Contingent Deferred Sales Charge" under "Sales Charges" below. The CDSC is deducted from your redemption proceeds. Under certain circumstances, the Class B CDSC may be waived (such as in the case of the death of the shareholder). See "CDSC Waivers" under "Sales Charges" below. Class B shares pay distribution fees and service fees equal to 0.90% annually of average daily net assets. Returns on Class B shares are generally lower than returns on Class A shares because Class B has higher annual expenses than Class A. Class B shares will automatically convert to Class A shares after the longer of four years or the time when the CDSC applicable to the Class B shares expires. Because the sales charge applicable to Class A shares is reduced for larger purchases and Class A has lower operating expenses, purchasing Class B shares may not be appropriate if you are investing a large amount.
Orders for Class B shares of one or more Eaton Vance funds will be refused when the total value of the purchase (including the aggregate value of all Class B shares held within the purchasing shareholder's account) is $100,000 or more. Investors considering cumulative purchases of $100,000 or
more, or who, after a purchase of Class B shares, would own shares of Eaton Vance funds with a current market value of $100,000 or more, should consider whether Class A shares would be more advantageous and consult their investment dealer.
Class C shares are offered at net asset value with no front-end sales charge. If you sell your Class C shares within one year of purchase, you generally will be subject to a CDSC. The CDSC is deducted from your redemption proceeds. Under certain circumstances, the Class C CDSC may be waived (such as certain redemptions from tax-deferred retirement plan accounts). See "CDSC Waivers" under "Sales Charges" below. Class C shares pay distribution fees and service fees equal to 0.90% annually of average daily net assets. Returns on Class C shares are generally lower than returns on Class A shares because Class C has higher annual expenses than Class A.
Orders for Class C shares of one or more Eaton Vance funds will be refused when the total value of the purchase (including the aggregate value of all Class C shares held within the purchasing shareholder's account) is $1,000,000 or more. Investors considering cumulative purchases of $1,000,000 or more, or who, after a purchase of Class C shares, would own shares of Eaton Vance funds with a current market value of $1,000,000 or more, should consider whether Class A shares would be more advantageous and consult their investment dealer.
Payments to Investment Dealers. In connection with sales of Fund shares, an investment dealer may receive sales charges and Fund distribution and/or service fees as described below. In addition, the principal underwriter, out of its own resources, may make cash payments to certain investment dealers who provide marketing support, transaction processing and/or administrative services and, in some cases, include some or all Eaton Vance funds in preferred or specialized selling programs. Payments made by the principal underwriter to an investment dealer may be significant and are typically in the form of fees based on Fund sales, assets, transactions processed and/or accounts attributable to that investment dealer. Investment dealers also may receive amounts from the principal underwriter in connection with educational or due diligence meetings that include information concerning Eaton Vance funds. The principal underwriter may pay or allow other promotional incentives or payments to investment dealers to the extent permitted by applicable laws and regulations.
Certain investment dealers that maintain "street name" or omnibus accounts provide sub-accounting, recordkeeping and/ or administrative services to the Eaton Vance funds and are compensated for such services by the funds. As used in this prospectus, the term "investment dealer" includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, their designated intermediaries and any other firm having a selling, administration or similar agreement with the principal underwriter or its affiliates.
SALES CHARGES
Class A Front-End Sales Charge. Class A shares are offered at net asset value per share plus a sales charge that is determined by the amount of your investment. The current sales charge schedule is:
Sales Charge* Sales Charge* Dealer Commission
as Percentage of as Percentage of Net as a Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
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Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.50% 1.52% 1.25%
$500,000 but less than $1,000,000 1.00% 1.01% 1.00%
$1,000,000 or more 0.00** 0.00** 1.00%
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* Because the offering price per share is rounded to two decimal places, the actual sales charge you pay on a purchase of Class A shares may be more or less than your total purchase amount multiplied by the applicable sales charge percentage. ** No sales charge is payable at the time of purchase on investments of $1 million or more. A CDSC of 1.00% will be imposed on such investments (as described below) in the event of redemptions within 18 months of purchase.
The principal underwriter will pay an upfront commission of 1.00% to investment dealers on sales of $1 million or more. For Class A share purchases in a single fund in a single transaction totaling $5 million or more, the principal underwriter will pay investment dealers this 1.00% commission monthly in arrears. The rate will be applied to the amount originally invested minus any redemptions (as calculated at month end) and will be paid ratably over the first 18 months after the investment is made.
The principal underwriter may pay additional compensation from its own resources to investment dealers in connection with sales promotions sponsored by the principal underwriter or sales programs sponsored by investment dealers.
Reducing or Eliminating Class A Sales Charges. Front-end sales charges on purchases of Class A shares may be reduced under the right of accumulation or under a statement of intention. To receive a reduced sales charge, you must inform your investment dealer or a Fund at the time you purchase shares that you qualify for such a reduction. If you do not let your investment dealer or the Fund know you are eligible for a reduced sales charge, you may not receive the discount to which you are otherwise entitled.
Under the right of accumulation, the sales charge you pay is reduced if the current market value of your holdings in a Fund or any other Eaton Vance fund (based on the current maximum public offering price) plus your new purchase total $100,000 or more. Class A, Advisers Class, Class B, Class C, Class I and/or Class R shares of a Fund or other Eaton Vance funds, as well as shares of Eaton Vance Money Market Fund, owned by you may be included for this purpose. Shares of Eaton Vance Cash Management Fund and Eaton Vance Tax Free Reserves cannot be included under the right of accumulation. Shares owned by you, your spouse and children under age twenty-one may be combined for purposes of the right of accumulation, including shares held for the benefit of any of you in trust or fiduciary accounts (including retirement accounts) or omnibus or "street name" accounts. You may be required to provide documentation to establish your ownership of shares included under the right of accumulation (such as account statements for you, your spouse and children or marriage certificates, birth certificates and/or trust or other fiduciary-related documents).
Under a statement of intention, purchases of $100,000 or more made over a 13-month period are eligible for reduced sales charges. Shares eligible under the right of accumulation may be included to satisfy the amount to be purchased under a statement of intention. Under a statement of intention, the principal underwriter may hold 5% of the dollar amount to be purchased in escrow in the form of shares registered in your name until you satisfy the statement or the 13-month period expires. A statement of intention does not obligate you to purchase (or a Fund to sell) the full amount indicated in the statement.
Class A shares are offered at net asset value (without a sales charge) to clients of financial intermediaries who charge a fee for their services; accounts affiliated with those financial intermediaries, investment and institutional clients of Eaton Vance; certain persons affiliated with Eaton Vance; and certain Eaton Vance and fund service providers. Class A shares may also be purchased at net asset value pursuant to the reinvestment privilege and exchange privilege and when distributions are reinvested. See "Shareholder Account Features" for details.
Contingent Deferred Sales Charge. Each Class of shares is subject to a CDSC on certain redemptions. Class A shares purchased at net asset value in amounts of $1 million or more (other than shares purchased in a single transaction of $5 million or more) are subject to a 1.00% CDSC if redeemed within 18 months of purchase. Investors who purchase Class A shares of a single fund in a single transaction at net asset value in amounts of $5 million or more will not be subject to any CDSC for such investment or any subsequent investment in the same fund. Class C shares are subject to a 1.00% CDSC if redeemed within 12 months of purchase. Class B shares are subject to the following CDSC schedule:
Year of Redemption After Purchase CDSC ------------------------------------------------- First 3.0% Second 2.5% Third 2.0% Fourth 1.0% Fifth or following 0% |
The CDSC is based on the lower of the net asset value at the time of purchase or at the time of redemption. Shares acquired through the reinvestment of distributions are exempt from the CDSC. Redemptions are made first from shares that are not subject to a CDSC.
The sales commission payable to investment dealers in connection with sales of Class B and Class C shares is described under "Distribution and Service Fees" below.
CDSC Waivers. CDSCs are waived for certain redemptions pursuant to a Withdrawal Plan (see "Shareholder Account Features"). The Class B CDSC is also waived following the death of a beneficial owner of shares (a death certificate and other applicable documents may be required).
Class B Conversion Feature. After the longer of four years or the time when the CDSC applicable to your Class B shares expires, Class B shares automatically convert to Class A shares. Class B shares acquired through the reinvestment of distributions convert in proportion to shares not so acquired.
Distribution and Service Fees. Class B shares of the New Jersey and Ohio Funds and Class B and Class C shares of the other Funds have in effect plans under Rule 12b-1 that allow each Fund to pay distribution fees for the sale and distribution of shares (so-called "12b-1 fees"). Class B and Class C shares pay
distribution fees to the principal underwriter of 0.75% of average daily net assets annually. Because these fees are paid from Fund assets on an ongoing basis, they will increase your cost over time and may cost you more than paying other types of sales charges. The principal underwriter compensates investment dealers on sales of Class B and Class C shares (except exchange transactions and reinvestments) in an amount equal to 3.0% and 1.00%, respectively, of the purchase price of the shares. After the first year, investment dealers also receive 0.75% of the value of Class C shares in annual distribution fees.
All Classes pay service fees for personal and/or account services equal to 0.15% of average daily net assets annually. Although there is no present intention to do so, the Funds could pay service fees of up to 0.25% annually upon Trustee approval. After the sale of shares, the principal underwriter typically receives the service fees for one year and thereafter investment dealers generally receive them based on the value of shares sold by such dealers. Distribution and service fees are subject to the limitations contained in the sales charge rule of the National Association of Securities Dealers, Inc.
More information about sales charges is available free of charge on the Eaton Vance website at www.eatonvance.com and in the Statement of Additional Information. Please consult the Eaton Vance website for any updates to sales charge information before making a purchase of Fund shares.
REDEEMING SHARES
You can redeem shares in any of the following ways:
By Mail Send your request to the transfer agent along with any
certificates and stock powers. The request must be signed exactly
as your account is registered and signature guaranteed. You can
obtain a signature guarantee at certain banks, savings and loan
institutions, credit unions, securities dealers, securities
exchanges, clearing agencies and registered securities
associations. You may be asked to provide additional documents if
your shares are registered in the name of a corporation,
partnership or fiduciary.
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By Telephone You can redeem up to $100,000 per account (which may include shares of one or more Eaton Vance funds) by calling the transfer agent at 1-800-262-1122 on Monday through Friday, 9:00 a.m. to
4:00 p.m. (eastern time). Proceeds of a telephone redemption can
be mailed only to the account address. Shares held by
corporations, trusts or certain other entities and shares that
are subject to fiduciary arrangements cannot be redeemed by
telephone.
Through an Your investment dealer is responsible for transmitting the order
Investment promptly. An investment dealer may charge a fee for this service.
Dealer
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If you redeem shares, your redemption price will be based on the net asset value per share next computed after the redemption request is received. Your redemption proceeds will be paid in cash within seven days, reduced by the amount of any applicable CDSC and any federal income tax required to be withheld. Payments will be sent by mail unless you complete the Bank Wire Redemptions section of the account application.
If you recently purchased shares, the proceeds of a redemption will not be sent until the purchase check (including a certified or cashier's check) has cleared. If the purchase check has not cleared, redemption proceeds may be delayed up to 15 days from the purchase date. If your account value falls below $750 (other than due to market decline), you may be asked either to add to your account or redeem it within 60 days. If you take no action, your account will be redeemed and the proceeds sent to you.
While redemption proceeds are normally paid in cash, redemptions may be paid by distributing marketable securities. If you receive securities, you could incur brokerage or other charges in converting the securities to cash.
SHAREHOLDER ACCOUNT FEATURES
Once you purchase shares, the transfer agent establishes a Lifetime Investing Account(R) for you. Share certificates are issued only on request.
Distributions. You may have your Fund distributions paid in one of the following ways:
.Full Reinvest Dividends and capital gains are reinvested in additional
Option shares. This option will be assigned if you do not specify
an option.
.Partial Reinvest Dividends are paid in cash and capital gains are reinvested
Option in additional shares.
.Cash Option Dividends and capital gains are paid in cash.
.Exchange Option Dividends and/or capital gains are reinvested in additional
shares of any class of another Eaton Vance fund chosen by
you, subject to the terms of that fund's prospectus. Before
selecting this option, you must obtain a prospectus of the
other fund and consider its objectives, risks, and charges
and expenses carefully.
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Information about the Funds. From time to time, you may be mailed the following:
* Semiannual and annual reports containing a list of portfolio holdings as of the end of the second and fourth fiscal quarters, respectively, performance information and financial statements.
* Periodic account statements, showing recent activity and total share
balance.
* Form 1099 and tax information needed to prepare your income tax returns.
* Proxy materials, in the event a shareholder vote is required.
* Special notices about significant events affecting your Fund.
Each Fund will file with the Securities and Exchange Commission ("SEC") a list of its portfolio holdings as of the end of the first and third fiscal quarters on Form N-Q. Each Fund's annual and semiannual reports (as filed on Form N-CSR) and each Form N-Q may be viewed on the SEC's website (www.sec.gov). The most recent fiscal quarter end holdings may also be viewed on the Eaton Vance website (www.eatonvance.com). Portfolio holdings information is filed with the SEC or posted on the Eaton Vance website approximately 60 days after the end of the quarter to which it relates. Each Fund also posts information about certain portfolio characteristics (such as top ten holdings and asset allocation) as of each calendar quarter end on the Eaton Vance website approximately ten business days after quarter end.
The Eaton Vance funds have established policies and procedures with respect to the disclosure of portfolio holdings and other information concerning Fund characteristics. A description of these policies and procedures is provided in the Statement of Additional Information. Such policies and procedures regarding disclosure of portfolio holdings are designed to prevent the misuse of material, non-public information about the funds.
Withdrawal Plan. You may redeem shares on a regular monthly or quarterly basis by establishing a systematic withdrawal plan. Withdrawals will not be subject to any applicable CDSC if they are, in the aggregate, less than or equal to 12% annually of the greater of either the initial account balance or the current account balance. A minimum account size of $5,000 is required to establish a systematic withdrawal plan. Because purchases of Class A shares are generally subject to an initial sales charge, Class A shareholders should not make withdrawals from their accounts while also making purchases.
Exchange Privilege. You may exchange your Fund shares for shares of the same Class of another Eaton Vance fund or, in the case of Class B and Class C shares, Eaton Vance Money Market Fund. Exchanges are made at net asset value. If your shares are subject to a CDSC, the CDSC will continue to apply to your new shares at the same CDSC rate. For purposes of the CDSC, your shares will continue to age from the date of your original purchase of Fund shares.
Before exchanging, you should read the prospectus of the new fund carefully. If you wish to exchange shares, write to the transfer agent (see back cover for address) or call 1-800-262-1122. Periodic automatic exchanges are also available. The exchange privilege may be changed or discontinued at any time. You will receive 60 days' notice of any material change to the privilege. This privilege may not be used for "market timing". If an account (or group of accounts) makes more than two round-trip exchanges (exchanged from one fund to another and back again) within 12 months, it will be deemed to be market timing. As described under "Purchasing Shares", the exchange privilege may be terminated for market timing accounts or for other reasons.
Reinvestment Privilege. If you redeem shares, you may reinvest at net asset value all or any portion of the redemption proceeds in the same class of shares of the Fund you redeem from (or, for Class A shares, in Class A shares of any other Eaton Vance fund), provided that the reinvestment occurs within 60 days of the redemption, and the privilege has not been used more than once in the prior 12 months. Under these circumstances your account will be credited with any CDSC paid in connection with the redemption. Any CDSC period applicable to the shares you acquire upon reinvestment will run from the date of your original share purchase. Reinvestment requests must be in writing. If you reinvest, you will be sold shares at the next determined net asset value following receipt of your request.
Telephone and Electronic Transactions. You can redeem or exchange shares by telephone as described in this prospectus. In addition, certain transactions may be conducted through the Internet. The transfer agent and the principal underwriter have procedures in place to authenticate telephone and electronic instructions (such as using security codes or verifying personal account information). As long as the transfer agent and principal underwriter follow reasonable procedures, they will not be responsible for unauthorized telephone or electronic transactions and you bear the risk of possible loss resulting from these transactions. You may decline the telephone redemption option on the account application. Telephone instructions are tape recorded.
"Street Name" Accounts. If your shares are held in a "street name" account at an investment dealer, that dealer (and not the Fund or its transfer agent) will perform all recordkeeping, transaction processing and distribution payments. Because the Fund will have no record of your transactions, you should contact your investment dealer to purchase, redeem or exchange shares, to make changes in your account, or to obtain account information. You will not be able to utilize a number of shareholder features, such as telephone transactions, directly with the Fund. The transfer of shares in a "street name" account to an account with another investment dealer or to an account directly with the Fund involves special procedures and you will be required to obtain historical information about your shares prior to the transfer. Before establishing a "street name" account with an investment dealer, you should determine whether that dealer allows reinvestment of distributions in "street name" accounts.
Procedures for Opening New Accounts. To help the government fight the funding of terrorism and money laundering activities, federal law requires each Fund to obtain, verify and record information that identifies each person who opens a Fund account. When you open an account, the transfer agent or your investment dealer will ask you for your name, address, date of birth and other identifying information. You also may be asked to produce a copy of your driver's license and other identifying documents. If a person fails to provide the information requested, any application by that person to open a new account will be rejected. Moreover, if the transfer agent or the investment dealer is unable to verify the identity of a person based on information provided by that person, it may take additional steps including, but not limited to, requesting additional information from the person, closing the person's account or reporting the matter to the appropriate federal authorities. If your account is closed for this reason, your shares may be automatically redeemed. If the Fund's net asset value has decreased since your purchase, you will lose money as a result of this redemption.
Account Questions. If you have any questions about your account or the services available, please call Eaton Vance Shareholder Services at 1-800-262-1122, or write to the transfer agent (see back cover for address).
TAX INFORMATION
Each Fund declares dividends daily and ordinarily pays distributions monthly. Different Classes of a Fund will distribute different dividend amounts. Your account will be credited with dividends beginning on the business day after the day when the funds used to purchase your Fund shares are collected by the transfer agent. For tax purposes, the entire monthly distribution of the Fund's daily dividends ordinarily will constitute tax-exempt income to you. Distributions of any net realized gains will be made once each year (usually in December). A Fund may invest a portion of its assets in securities that generate income that is not exempt from federal income tax. In addition, the exemption of "exempt-interest dividend" income from regular federal income taxation does not necessarily result in similar exemptions from such income under the state or local tax laws. Distributions of any taxable income and net short-term capital gains will be taxable as ordinary income. Distributions of any long-term capital gains are taxable as long-term capital gains. Distributions of interest on certain municipal obligations are a tax preference item under the AMT provisions applicable to individuals and corporations, and all tax-exempt distributions may affect a corporation's AMT liability. Each Fund's distributions will be treated as described above for federal income tax purposes whether they are paid in cash or reinvested in additional shares. A redemption of Fund shares, including an exchange for shares of another fund, is a taxable transaction.
Shareholders, particularly corporations, recipients of social security or railroad retirement benefits and those subject to alternative minimum tax, should consult with their advisers concerning the applicability of state, local and other taxes to an investment. Additional information about state taxes is provided below.
California. Under California law, dividends paid by the California Fund and designated by it as tax-exempt are exempt from California personal income tax on individuals who reside in California to the extent such dividends are derived from interest payments on municipal obligations exempt from California state personal income taxes and provided that at least 50% of the assets of the California Portfolio at the close of each quarter of its taxable year are invested in obligations the interest on which is exempt under either federal or California law from taxation by the state of California. Distributions of short-term capital gains are treated as ordinary income, and distributions of long-term capital gains are treated as long-term capital gains taxable at ordinary income rates under the California personal income tax.
Florida. The Florida Statutes provide that shares of a Florida fund owned by a Florida resident will be exempt from the Florida intangible personal property tax as long as at least ninety percent (90%) of the net asset value of the portfolio is invested in assets that are exempt from the Florida intangible personal property tax. The Florida Portfolio will normally invest in tax-exempt obligations of Florida, the United States, the U.S. Territories or political subdivisions of the United States or Florida so Florida Fund shares should, under normal circumstances, be exempt from the Florida intangibles tax.
Massachusetts. Based on a letter ruling from the Department of Revenue of The Commonwealth of Massachusetts received by the Massachusetts Portfolio, the Massachusetts Fund's interest distributions attributable to Massachusetts obligations (debt obligations issued by The Commonwealth of Massachusetts or its political subdivisions, including agencies or instrumentalities thereof), Possessions obligations (the Governments of Puerto Rico, Guam, or the United States Virgin Islands) or United States obligations can be excluded from Massachusetts gross income for Massachusetts personal income tax purposes. Distributions properly designated as capital gain dividends and attributable to gains realized on the sale of certain Massachusetts tax-exempt obligations issued pursuant to statutes that specifically exempt such gains from Massachusetts taxation will also be exempt from Massachusetts personal income tax. Other distributions from the Massachusetts Fund that are included in a shareholder's federal gross income, including distributions of net long-term capital gains not described in the preceding sentence and net short-term capital gains, are generally not exempt from Massachusetts personal income tax. However, distributions of net long-term capital gains attributable to the sale of these investments may qualify for taxation at lower Massachusetts personal income tax rates.
Distributions from the Massachusetts Fund and the value of the shares of the Massachusetts Fund may be subject to the Massachusetts excise tax on corporations.
New Jersey. The New Jersey Fund intends to satisfy New Jersey's statutory requirements for treatment as a "Qualified Investment Fund" under the provisions of the New Jersey Gross Income Tax Act (N.J.S.A. Sections 54A: 5-1 et seq.), as amended and any regulations promulgated thereunder. The Fund has obtained an opinion of special tax counsel to the New Jersey Fund that, provided the New Jersey Fund limits its investments to those described in this prospectus and otherwise satisfies such statutory requirements, shareholders of the New Jersey Fund which are individuals, estates or trusts will not be required to include in their New Jersey gross income distributions from the New Jersey Fund that are attributable to interest or gain realized by the New Jersey Fund from obligations the interest on which is exempt from regular federal income tax and is exempt from New Jersey State personal income tax or other obligations statutorily free from New Jersey taxation. However, with regard to corporate shareholders, such counsel is also of the opinion that distributions from the New Jersey Fund will not be excluded from net income and shares of the New Jersey Fund will not be excluded from investment capital in determining New Jersey corporation business (franchise) and corporation income taxes for corporate shareholders.
New York. In the opinion of special tax counsel to the New York Fund, under New York law, dividends paid by the New York Fund are exempt from the New York State and New York City personal income tax applicable to individuals who reside in New York State and/or City to the extent such dividends are excluded from gross income for federal income tax purposes and are derived from interest payments on tax-exempt obligations issued by or on behalf of New York State and its political subdivisions and agencies, or the governments of Puerto Rico, the U.S. Virgin Islands and Guam. Other distributions from the New York Fund, including distributions derived from taxable ordinary income and net short-term and long-term capital gains, are generally not exempt from New York State or City personal income tax.
Ohio. In the opinion of special tax counsel to the Ohio Fund, under Ohio law individuals who are otherwise subject to the Ohio personal income tax will not be subject to such tax on dividends paid by the Ohio Fund to the extent such dividends are properly attributable to interest on obligations issued by or on behalf of the State of Ohio or its political subdivisions, or the agencies or instrumentalities thereof ("Ohio obligations"). Dividends paid by the Ohio Fund also will be excluded from the net income base of the Ohio corporation franchise tax to the extent such dividends are excluded from gross income for federal income tax purposes or are properly attributable to interest on Ohio obligations. However, the Ohio Fund's shares will be included in the tax base for purposes of computing the Ohio corporation franchise tax on the net worth basis. These conclusions regarding Ohio taxation are based on the assumption that the Ohio Fund will continue to qualify as a regulated investment company under the Internal Revenue Code and that at all times at least 50% of the value of the total assets of the Ohio Fund will consist of Ohio obligations or similar obligations of other states or their subdivisions determined, to the extent the Ohio Fund invests in the Ohio Portfolio, by treating the Ohio Fund as owning its proportionate share of the assets owned by the Ohio Portfolio.
Pennsylvania. Interest derived by the Pennsylvania Fund from obligations which are statutorily free from state taxation in Pennsylvania ("Exempt Obligations") are not taxable on pass through to shareholders for purposes of the Pennsylvania personal income tax. The term "Exempt Obligations" includes (i) those obligations issued by the Commonwealth of Pennsylvania and its political subdivisions, agencies and instrumentalities, the interest from which is statutorily free from state taxation in the Commonwealth of Pennsylvania, and
(ii) certain qualifying obligations of U.S. territories and possessions, or U.S. Government obligations. Distributions attributable to most other sources, including capital gains, will not be exempt from Pennsylvania personal income tax.
Corporate shareholders that are subject to the Pennsylvania corporate net income tax will not be subject to corporate net income tax on distributions made by the Pennsylvania Fund, provided such distributions are derived from interest on Exempt Obligations. Distributions of capital gain attributable to Exempt Obligations are subject to the Pennsylvania corporate net income tax. Shares of the Pennsylvania Fund which are held by individual shareholders who are Pennsylvania residents and subject to the Pennsylvania county personal property tax will be exempt from such tax to the extent that the obligations held by the Pennsylvania Portfolio consist of Exempt Obligations on the annual assessment date. Corporations are not subject to Pennsylvania personal property taxes.
For individual shareholders who are residents of the City of Philadelphia, distributions of interest derived from Exempt Obligations will not be taxable for purposes of the Philadelphia School District Investment Net Income Tax ("Philadelphia School District Tax"), provided that the Pennsylvania Fund reports to its investors the percentage of Exempt Obligations held by the Pennsylvania Portfolio for the year. The Pennsylvania Fund will report such percentage to its investors.
FINANCIAL HIGHLIGHTS
The financial highlights are intended to help you understand a Fund's financial performance for the past five years. Certain information in the tables reflect the financial results for a single Fund share. The total returns in the tables represent the rate an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all distributions and not taking into account a sales charge). This information has been audited by _____________________, an independent registered public acounting firm. The report of _______________________ and each Fund's financial statements are incorporated herein by reference and included in the annual report, which is available on request.
CALIFORNIA FUND
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YEAR ENDED MARCH 31,
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2005 2004(1) 2003(1) 2002(1)(2) 2001(1)
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CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
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Net asset value -
Beginning of year $ $ $ $10.540 $10.500 $10.100 $10.070 $10.260 $10.260 $ 9.700 $ 9.700
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations
Net investment income $ $ $ $ 0.394 $ 0.313 $ 0.414 $ 0.333 $ 0.430 $ 0.353 $ 0.440 $ 0.365
Net realized and
unrealized gain (loss) 0.016 0.017 0.436 0.432 (0.160) (0.185) 0.559 0.564
------- ------- ------- ------- ------- ------- ------- -------
Total income (loss)
from operations $ $ $ $ 0.410 $ 0.330 $ 0.850 $ 0.765 $ 0.270 $ 0.168 $ 0.999 $ 0.929
------- ------- ------- ------- ------- ------- ------- -------
Less distributions
From net investment
income $ $ $ $(0.390) $(0.310) $(0.410) $(0.335) $(0.430) $(0.358) $(0.439) $(0.369)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions $ $ $ $(0.390) $(0.310) $(0.410) $(0.335) $(0.430) $(0.358) $(0.439) $(0.369)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value -
End of year $ $ $ $10.560 $10.520 $10.540 $10.500 $10.100 $10.070 $10.260 $10.260
======= ======= ======= ======= ======= ======= ======= =======
Total Return(3) % % % 3.92% 3.16% 8.56% 7.71% 2.65% 1.64% 10.54% 9.77%
Ratios/Supplemental
Data
Net assets, end of
year (000's omitted) $ $ $ $29,957 $ 5,844 $26,750 $ 5,107 $20,747 $ 1,723 $19,578 $ 1,890
Ratios (as a
percentage of average
daily net assets):
Expenses(4) % % % 0.88% 1.63% 0.96% 1.71% 1.02% 1.77% 1.03% 1.78%
Expenses after
custodian fee
reduction(4) % % % 0.88% 1.63% 0.94% 1.69% 1.00% 1.75% 1.00% 1.75%
Net investment
icome % % % 3.73% 2.97% 3.97% 3.19% 4.19% 3.44% 4.42% 3.68%
Portfolio Turnover
of the Portfolio(5) % % % 27% 27% 7% 7% 9% 9% 8% 8%
(See footnotes on last page.)
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Financial Highlights (continued)
FLORIDA FUND
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YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------
2005 2004(1) 2003(1)
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CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $ $ $ $10.480 $10.480 $ 9.890 $10.050 $10.050 $ 9.490
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ $ 0.396 $ 0.316 $ 0.298 $ 0.420 $ 0.340 $ 0.319
Net realized and unrealized gain (loss) 0.018 0.018 0.021 0.425 0.433 0.404
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ $ $ $ 0.414 $ 0.334 $ 0.319 $ 0.845 $ 0.773 $ 0.723
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $ $ $ $(0.394) $(0.314) $(0.299) $(0.415) $(0.343) $(0.323)
------- ------- ------- ------- ------- -------
Total distributions $ $ $ $(0.394) $(0.314) $(0.299) $(0.415) $(0.343) $(0.323)
------- ------- ------- ------- ------- -------
Net asset value - End of year $ $ $ $10.500 $10.500 $ 9.910 $10.480 $10.480 $ 9.890
======= ======= ======= ======= ======= =======
Total Return(3) % % % 3.99% 3.22% 3.24% 8.59% 7.84% 7.76%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $ $ $ $45,088 $ 8,944 $19,226 $47,033 $ 8,217 $12,883
Ratios (as a percentage of average daily
net assets):
Expenses(4) % % % 0.82% 1.57% 1.57% 0.84% 1.59% 1.59%
Expenses after custodian fee
reduction(4) % % % 0.82% 1.57% 1.57% 0.81% 1.56% 1.56%
Net investment income % % % 3.76% 3.01% 3.00% 4.07% 3.28% 3.26%
Portfolio Turnover of the
Portfolio(5) % % % 13% 13% 13% 23% 23% 23%
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FLORIDA FUND
--------------------------------------------------------------
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2002(1)(2) 2001(1)
--------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $10.130 $10.130 $ 9.570 $ 9.670 $ 9.670 $ 9.140
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ 0.449 $ 0.377 $ 0.348 $ 0.449 $ 0.369 $ 0.356
Net realized and unrealized gain (loss) (0.077) (0.077) (0.068) 0.455 0.460 0.423
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ 0.372 $ 0.300 $ 0.280 $ 0.904 $ 0.829 $ 0.779
Less distributions
From net investment income $(0.452) $(0.380) $(0.360) $(0.444) $(0.369) $(0.349)
------- ------- ------- ------- ------- -------
Total distributions $(0.452) $(0.380) $(0.360) $(0.444) $(0.369) $(0.349)
------- ------- ------- ------- ------- -------
Net asset value - End of year $10.050 $10.050 $ 9.490 $10.130 $10.130 $ 9.570
======= ======= ======= ======= ======= =======
Total Return(3) 3.71% 2.98% 2.93% 9.59% 8.76% 8.70%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $33,611 $ 2,621 $ 4,322 $31,754 $ 4,905 $ 2,609
Ratios (as a percentage of average daily
net assets):
Expenses(4) 0.94% 1.69% 1.69% 0.95% 1.70% 1.69%
Expenses after custodian fee reduction(4) 0.91% 1.66% 1.66% 0.93% 1.68% 1.67%
Net investment income 4.42% 3.72% 3.63% 4.57% 3.81% 3.84%
Portfolio Turnover of the Portfolio 15% 15% 15% 7% 7% 7%
(See footnotes on last page.)
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Financial Highlights (continued)
MASSACHUSETTS FUND
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YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
2005 2004(1) 2003(1)
------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $ $ $ $10.450 $10.430 $10.010 $ 9.980 $ 9.970 $ 9.560
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ $ 0.384 $ 0.304 $ 0.289 $ 0.413 $ 0.331 $ 0.316
Net realized and unrealized gain (loss) 0.013 0.022 0.017 0.483 0.475 0.465
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ $ $ $ 0.397 $ 0.326 $ 0.306 $ 0.896 $ 0.806 $ 0.781
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $ $ $ $(0.387) $(0.306) $(0.296) $(0.426) $(0.346) $(0.331)
------- ------- ------- ------- ------- -------
Total distributions $ $ $ $(0.387) $(0.306) $(0.296) $(0.426) $(0.346) $(0.331)
------- ------- ------- ------- ------- -------
Net asset value - End of year $ $ $ $10.460 $10.450 $10.020 $10.450 $10.430 $10.010
======= ======= ======= ======= ======= =======
Total Return(3) % % % 3.84% 3.16% 3.09% 9.17% 8.23% 8.32%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $ $ $ $47,567 $10,818 $28,195 $47,321 $ 9,127 $15,231
Ratios (as a percentage of average daily
net assets):
Expenses(4) % % % 0.80% 1.55% 1.55% 0.85% 1.60% 1.60%
Expenses after custodian fee
reduction(4) % % % 0.80% 1.55% 1.55% 0.83% 1.58% 1.58%
Net investment income % % % 3.66% 2.91% 2.88% 4.01% 3.22% 3.20%
Portfolio Turnover of the Portfolio(5) % % % 12% 12% 12% 22% 22% 22%
|
MASSACHUSETTS FUND
----------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------------------
2002(1)(2) 2001(1)
----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $10.110 $10.110 $ 9.680 $ 9.680 $ 9.680 $ 9.260
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ 0.443 $ 0.364 $ 0.348 $ 0.462 $ 0.387 $ 0.375
Net realized and unrealized gain (loss) (0.124) (0.135) (0.114) 0.413 0.410 0.395
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ 0.319 $ 0.229 $ 0.234 $ 0.875 $ 0.797 $ 0.770
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $(0.449) $(0.369) $(0.354) $(0.445) $(0.367) $(0.350)
------- ------- ------- ------- ------- -------
Total distributions $(0.449) $(0.369) $(0.354) $(0.445) $(0.367) $(0.350)
------- ------- ------- ------- ------- -------
Net asset value - End of year $ 9.980 $ 9.970 $ 9.560 $10.110 $10.110 $ 9.680
======= ======= ======= ======= ======= =======
Total Return(3) 3.17% 2.27% 2.40% 9.26% 8.41% 8.49%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $33,848 $ 3,969 $ 5,632 $32,736 $ 2,218 $ 2,573
Ratios (as a percentage of average daily
net assets):
Expenses(4) 0.94% 1.69% 1.69% 0.95% 1.70% 1.71%
Expenses after custodian fee
reduction(4) 0.91% 1.66% 1.66% 0.92% 1.67% 1.68%
Net investment income 4.37% 3.59% 3.58% 4.70% 3.93% 3.99%
Portfolio Turnover of the Portfolio 8% 8% 8% 8% 8% 8%
(See footnotes on last page.)
|
Financial Highlights (continued)
NEW JERSEY FUND
-----------------------------------------------------------------
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
2005 2004(1) 2003(1)
-----------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $ $ $10.300 $10.290 $10.000 $ 9.990
------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ 0.379 $ 0.302 $ 0.427 $ 0.343
Net realized and unrealized gain (loss) 0.052 0.051 0.301 0.306
------- ------- ------- -------
Total income (loss) from operations $ $ $ 0.431 $ 0.353 $ 0.728 $ 0.649
------- ------- ------- -------
Less distributions
From net investment income $ $ $(0.371) $(0.293) $(0.428) $(0.349)
------- ------- ------- -------
Total distributions $ $ $(0.371) $(0.293) $(0.428) $(0.349)
------- ------- ------- -------
Net asset value - End of year $ $ $10.360 $10.350 $10.300 $10.290
======= ======= ======= =======
Total Return(3) % % 4.22% 3.45% 7.45% 6.63%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $ $ $46,192 $10,211 $39,572 $ 8,099
Ratios (as a percentage of average daily
net assets):
Expenses(4) % % 0.84% 1.59% 0.90% 1.65%
Expenses after custodian fee reduction(4) % % 0.84% 1.59% 0.89% 1.64%
Net investment income % % 3.66% 2.91% 4.17% 3.35%
Portfolio Turnover of the Portfolio(5) % % 11% 11% 25% 25%
|
NEW JERSEY FUND
---------------------------------------------
YEAR ENDED MARCH 31,
---------------------------------------------
2002(1)(2) 2001
---------------------------------------------
CLASS A CLASS B CLASS A CLASS B
---------------------------------------------------------------------------------------------
Net asset value - Beginning of year $10.180 $10.180 $ 9.780 $ 9.780
------- ------- ------- -------
Income (loss) from operations
Net investment income $ 0.453 $ 0.376 $ 0.470 $ 0.411
Net realized and unrealized gain (loss) (0.169) (0.182) 0.392 0.373
------- ------- ------- -------
Total income (loss) from operations $ 0.284 $ 0.194 $ 0.862 $ 0.784
------- ------- ------- -------
Less distributions
From net investment income $(0.464) $(0.384) $(0.462) $(0.384)
------- ------- ------- -------
Total distributions $(0.464) $(0.384) $(0.462) $(0.384)
------- ------- ------- -------
Net asset value - End of year $10.000 $ 9.990 $10.180 $10.180
======= ======= ======= =======
Total Return(3) 2.82% 1.92% 9.04% 8.19%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $34,898 $ 3,152 $30,889 $ 2,476
Ratios (as a percentage of average daily
net assets):
Expenses(4) 0.96% 1.71% 0.98% 1.73%
Expenses after custodian fee reduction(4) 0.94% 1.69% 0.96% 1.71%
Net investment income 4.47% 3.70% 4.73% 3.97%
Portfolio Turnover of the Portfolio 17% 17% 11% 11%
(See footnotes on last page.)
|
Financial Highlights (continued)
NEW YORK FUND
------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
2005 2004(1) 2003(1)
------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $ $ $ $10.770 $10.760 $10.230 $10.360 $10.340 $ 9.840
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ $ 0.400 $ 0.318 $ 0.301 $ 0.430 $ 0.346 $ 0.324
Net realized and unrealized gain (loss) 0.081 0.081 0.081 0.415 0.428 0.401
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ $ $ $ 0.481 $ 0.399 $ 0.382 $ 0.845 $ 0.774 $ 0.725
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $ $ $ $(0.401) $(0.319) $(0.302) $(0.435) $(0.354) $(0.335)
------- ------- ------- ------- ------- -------
Total distributions $ $ $ $(0.401) $(0.319) $(0.302) $(0.435) $(0.354) $(0.335)
------- ------- ------- ------- ------- -------
Net asset value - End of year $ $ $ $10.850 $10.840 $10.310 $10.770 $10.760 $10.230
======= ======= ======= ======= ======= =======
Total Return(3) % % % 4.51% 3.73% 3.76% 8.32% 7.61% 7.49%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $ $ $ $67,711 $15,389 $42,627 $60,721 $14,227 $27,781
Ratios (as a percentage of average daily
net assets):
Expenses(4) % % % 0.79% 1.54% 1.54% 0.83% 1.58% 1.58%
Expenses after custodian fee
reduction(4) % % % 0.79% 1.54% 1.54% 0.81% 1.56% 1.56%
Net investment income % % % 3.69% 2.93% 2.92% 4.03% 3.24% 3.19%
Portfolio Turnover of the Portfolio(5) % % % 20% 20% 20% 18% 18% 18%
|
NEW YORK FUND
---------------------------------------------------------------
YEAR ENDED MARCH 31,
---------------------------------------------------------------
2002(1)(2) 2001
---------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $10.550 $10.550 $10.010 $10.030 $10.030 $ 9.510
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ 0.460 $ 0.378 $ 0.356 $ 0.470 $ 0.397 $ 0.369
Net realized and unrealized gain (loss) (0.180) (0.198) (0.163) 0.519 0.512 0.493
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ 0.280 $ 0.180 $ 0.193 $ 0.989 $ 0.909 $ 0.862
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $(0.470) $(0.390) $(0.363) $(0.469) $(0.389) $(0.362)
------- ------- ------- ------- ------- -------
Total distributions $(0.470) $(0.390) $(0.363) $(0.469) $(0.389) $(0.362)
------- ------- ------- ------- ------- -------
Net asset value - End of year $10.360 $10.340 $ 9.840 $10.550 $10.550 $10.010
======= ======= ======= ======= ======= =======
Total Return(3) 2.67% 1.70% 1.92% 10.11% 9.26% 9.26%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $44,811 $ 4,822 $ 7,408 $43,835 $ 4,227 $ 2,547
Ratios (as a percentage of average daily
net assets):
Expenses(4) 0.92% 1.67% 1.67% 0.94% 1.69% 1.68%
Expenses after custodian fee reduction(4) 0.89% 1.64% 1.64% 0.92% 1.67% 1.66%
Net investment income 4.37% 3.59% 3.57% 4.59% 3.83% 3.83%
Portfolio Turnover of the Portfolio 11% 11% 11% 10% 10% 10%
(See footnotes on last page.)
|
Financial Highlights (continued)
OHIO FUND
----------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------------
2005 2004(1) 2003(1) 2002(1)(2) 2001(1)
----------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value -
Beginning of year $ $ $10.010 $10.000 $ 9.590 $ 9.590 $ 9.760 $ 9.760 $ 9.430 $ 9.430
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ 0.361 $ 0.286 $ 0.392 $ 0.314 $ 0.394 $ 0.321 $ 0.431 $ 0.361
Net realized and unrealized
gain (loss) 0.014 0.017 0.410 0.407 (0.142) (0.139) 0.343 0.343
------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
operations $ $ $ 0.375 $ 0.303 $ 0.802 $ 0.721 $ 0.252 $ 0.182 $ 0.774 $ 0.704
------- ------- ------- ------- ------- ------- ------- -------
Less distributions
From net investment income $ $ $(0.365) $(0.293) $(0.382) $(0.311) $(0.422) $(0.352) $(0.444) $(0.374)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions $ $ $(0.365) $(0.293) $(0.382) $(0.311) $(0.422) $(0.352) $(0.444) $(0.374)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value -
End of year $ $ $10.020 $10.010 $10.010 $10.000 $ 9.590 $ 9.590 $ 9.760 $ 9.760
======= ======= ======= ======= ======= ======= ======= =======
Total Return(3) % % 3.80% 3.06% 8.52% 7.64% 2.62% 1.89% 8.42% 7.63%
Ratios/Supplemental Data
Net assets, end of year
(000's omitted) $ $ $20,404 $ 2,623 $18,313 $ 2,768 $16,310 $ 1,390 $15,046 $ 1,519
Ratios (as a percentage of
average daily net assets):
Expenses(4) % % 0.99% 1.74% 1.03% 1.78% 1.14% 1.89% 1.18% 1.93
Expenses after custodian fee
reduction(4) % % 0.99% 1.74% 1.02% 1.77% 1.11% 1.86% 1.14% 1.89
Net investment income % % 3.61% 2.86% 3.96% 3.17% 4.05% 3.30% 4.53% 3.79
Portfolio Turnover of the
Portfolio(5) % % 28% 28% 12% 12% 19% 19% 17% 17
(See footnotes on last page.)
|
Financial Highlights (continued)
PENNSYLVANIA FUND
------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
2005 2004(1) 2003(1)
------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $ $ $ $10.470 $10.460 $ 9.910 $10.130 $10.120 $ 9.590
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ $ $ $ 0.406 $ 0.327 $ 0.308 $ 0.440 $ 0.355 $ 0.339
Net realized and unrealized gain (loss) 0.084 0.093 0.091 0.349 0.354 0.330
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ $ $ $ 0.490 $ 0.420 $ 0.399 $ 0.789 $ 0.709 $ 0.669
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $ $ $ $(0.410) $(0.330) $(0.309) $(0.449) $(0.369) $(0.349)
------- ------- ------- ------- ------- -------
Total distributions $ $ $ $(0.410) $(0.330) $(0.309) $(0.449) $(0.369) $(0.349)
------- ------- ------- ------- ------- -------
Net asset value - End of year $ $ $ $10.550 $10.550 $10.000 $10.470 $10.460 $ 9.910
======= ======= ======= ======= ======= =======
Total Return(3) % % % 4.72% 4.04% 4.06% 7.97% 7.14% 7.11%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $ $ $ $35,175 $10,273 $21,398 $33,580 $ 9,313 $15,188
Ratios (as a percentage of average daily
net assets):
Expenses(4) % % % 0.85% 1.60% 1.60% 0.89% 1.64% 1.64%
Expenses after custodian fee
reduction(4) % % % 0.85% 1.60% 1.60% 0.87% 1.62% 1.62%
Net investment income % % % 3.85% 3.10% 3.08% 4.24% 3.42% 3.44%
Portfolio Turnover of the Portfolio(5) % % % 8% 8% 8% 3% 3% 3%
(See footnotes on the last page.)
|
Financial Highlights (continued)
PENNSYLVANIA FUND
--------------------------------------------------------------
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2002(1)(2) 2001(1)
--------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------
Net asset value - Beginning of year $10.270 $10.270 $ 9.720 $ 9.870 $ 9.870 $ 9.340
------- ------- ------- ------- ------- -------
Income (loss) from operations
Net investment income $ 0.453 $ 0.372 $ 0.354 $ 0.472 $ 0.397 $ 0.376
Net realized and unrealized gain (loss) (0.130) (0.138) (0.121) 0.388 0.384 0.363
------- ------- ------- ------- ------- -------
Total income (loss) from operations $ 0.323 $ 0.234 $ 0.233 $ 0.860 $ 0.781 $ 0.739
------- ------- ------- ------- ------- -------
Less distributions
From net investment income $(0.463) $(0.384) $(0.363) $(0.460) $(0.381) $(0.359)
------- ------- ------- ------- ------- -------
Total distributions $(0.463) $(0.384) $(0.363) $(0.460) $(0.381) $(0.359)
------- ------- ------- ------- ------- -------
Net asset value - End of year $10.130 $10.120 $ 9.590 $10.270 $10.270 $ 9.720
======= ======= ======= ======= ======= =======
Total Return(3) 3.18% 2.28% 2.40% 8.94% 8.08% 8.08%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) $29,845 $ 2,643 $ 7,262 $28,840 $ 2,286 $ 4,413
Ratios (as a percentage of average daily
net assets):
Expenses(4) 0.97% 1.72% 1.72% 0.99% 1.74% 1.73%
Expenses after custodian fee reduction(4) 0.92% 1.67% 1.67% 0.96% 1.71% 1.70%
Net investment income 4.41% 3.63% 3.64% 4.72% 3.96% 3.96%
Portfolio Turnover of the Portfolio 20% 20% 20% 6% 6% 6%
|
(1) Net investment income per share was computed using average shares
outstanding.
(2) The Fund, through its investment in the Portfolio, has adopted the
provisions of the revised AICPA Audit and Accounting Guide for Investment
Companies and began using the interest method to amortize premiums on
fixed-income securities. The effect of this change for the year ended March
31, 2002 was to increase net investment income per share by $0.002 for
California Fund, $0.001 for Florida Fund, Massachusetts Fund, New Jersey
Fund, New York Fund,and Pennsylvania Fund, and by less than $0.001 for Ohio
Fund, increase net realized and unrealized losses per share by $.002 for
California Fund, by $0.001 for Florida Fund, Massachusetts Fund, New Jersey
Fund, New York Fund and Pennsylvania Fund, and by less than $0.001 for Ohio
Fund and increase the ratio of net investment income to average net assets
from 4.17% to 4.19% for California Fund Class A, 3.42% to 3.44% for
Califonia Fund Class B, 4.41% to 4.42% for Florida Fund Class A, 3.71% to
3.72% for Florida Fund Class B, 3.62% to 3.63% for Florida Fund Class C,
4.36% to 4.37% for Massachusetts Fund Class A, 3.58% to 3.59% for
Massachusetts Fund Class B, 3.57% to 3.58% for Massachusetts Class C, 4.46%
to 4.47% for New Jersey Class A, 3.69% to 3.70% for New Jersey Fund Class
B, 4.36% to 4.37% for New York Fund Class A, 3.58% to 3.59% for New York
Fund Class B, 3.56% to 3.57% for New York Fund Class C, by less than 0.01%
for Ohio Fund Class A and Class B, 4.40% to 4.41% for Pennsylvania Fund
Class A, 3.62% to 3.63% for Pennsylvania Fund Class B and 3.63% to 3.64%
for Pennsylvania Fund Class C. Per share data and ratios for the periods
prior to April 1, 2001 have not been restated to reflect this change in
presentation.
(3) Returns are historical and are calculated by determining the percentage
change in net asset value with all distributions reinvested. Total return
is not computed on an annualized basis.
(4) Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
(5) Prior to October 8, 2004, each Fund invested its assets in a corresponding Portfolio.
LOGO
About the Funds: More information is available in the statement of additional information. The statement of additional information is incorporated by reference into this prospectus. Additional information about each Fund's investments is available in the annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected each Fund's performance during the past fiscal year. You may obtain free copies of the statement of additional information and the shareholder reports on Eaton Vance's website at www.eatonvance.com or by contacting the principal underwriter:
Eaton Vance Distributors, Inc. The Eaton Vance Building 255 State Street Boston, MA 02109 1-800-225-6265 website: www.eatonvance.com
You will find and may copy information about each Fund (including the statement of additional information and shareholder reports): at the Securities and Exchange Commission's public reference room in Washington, DC (call 1-202-942-8090 for information on the operation of the public reference room); on the EDGAR Database on the SEC's Internet site (http://www.sec.gov); or, upon payment of copying fees, by writing to the SEC's public reference section, Washington, DC 20549-0102, or by electronic mail at publicinfo@sec.gov.
About Shareholder Accounts: You can obtain more information from Eaton Vance Shareholder Services (1-800-262-1122). If you own shares and would like to add to, redeem or change your account, please write or call the transfer agent:
PFPC Inc. P.O. Box 9653 Providence, RI 02940-9653 1-800-262-1122
The Funds' SEC File No. is 811-4443. LTDP8/1
603-8/05 (C) 2005 Eaton Vance Management
{LOGO}
Eaton Vance
National Limited Maturity
Municipals
Fund
A mutual fund seeking tax-exempt income and limited principal fluctuation
Prospectus Dated
August 1, 2005
The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Information in this prospectus
Page Page
--------------------------------------------------------------------------------
Fund Summary 2 Sales Charges 9
Investment Objective & Principal Redeeming Shares 12
Policies and Risks 5 Shareholder Acount
Management and Organization 6 Features 12
Valuing Shares 7 Tax Information 14
Purchasing Shares 7 Financial Highlights 15
--------------------------------------------------------------------------------
|
This prospectus contains important information about the Fund and the services available to shareholders. Please save it for reference.
FUND SUMMARY
Investment Objective and Principal Strategies. Eaton Vance National Limited Maturity Municipals Fund's investment objective is to provide a high level of current income exempt from regular federal income tax and limited principal fluctuation. Under normal market conditions, the Fund will invest at least 80% of its net assets in municipal obligations that are exempt from regular federal income tax. The Fund primarily invests in investment grade municipal obligations (those rated BBB or Baa or higher), but may also invest in lower rated obligations. The Fund invests in obligations to seek to maintain a dollar weighted average portfolio duration of between three and nine years.
The Fund may concentrate in certain types of municipal obligations (such as industrial development bonds, housing bonds, hospital bonds or utility bonds), so Fund shares could be affected by events that adversely affect a particular sector. The Fund may purchase derivative instruments (such as futures contracts and options thereon, and interest rate swaps), bonds that do not make regular interest payments, bonds issued on a "when issued" basis and municipal leases. The portfolio manager may also trade securities to minimize taxable capital gains to shareholders. The manager attempts to limit principal fluctuation by investing to limit overall portfolio duration. A portion of the Fund's distributions generally will be subject to the federal alternative minimum tax.
Principal Risk Factors. The value of Fund shares may change when interest rates change. When interest rates rise, the value of Fund shares typically will decline. Fund yields will also fluctuate over time. Because obligations rated BBB or Baa and obligations rated below BBB or Baa (so-called "junk bonds") are more sensitive to the financial soundness of their issuers than higher quality obligations, Fund shares may fluctuate more in value than shares of a fund investing solely in higher quality obligations. Obligations rated BBB or Baa have speculative characteristics, while lower rated obligations are predominantly speculative.
The Fund's use of derivatives may expose the Fund to increased risk of principal loss due to imperfect correlation, failure of the counterparty and unexpected price or interest rate movements. Bonds that do not make regular interest payments may experience greater volatility in response to interest rate changes. When issued securities are subject to the risk that when delivered to the Fund they will be worth less than the price the Fund agreed to pay for them. Municipal leases often require a legislative appropriation of funds for payment. If the necessary appropriation is not made, the issuer of the lease may not be able to meet its obligations.
The Fund is not a complete investment program and you may lose money by investing in the Fund. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information. The following bar chart and table provide information about the Fund's performance for each calendar year through December 31, 2004. The returns in the bar chart are for Class B shares and do not reflect a sales charge. If the sales charge was reflected, the returns would be lower. Returns for Class B shares in the table are shown before and after the reduction of taxes, and include a comparison of the Fund's performance to the performance of a national index of intermediate-maturity municipal obligations. Although past performance (both before and after taxes) is no guarantee of future results, this performance information demonstrates the risk that the value of your investment will change from year to year.
During the ten years ended December 31, 2004, the highest quarterly total return for Class B was % for the quarter ended , and the lowest quarterly return was % for the quarter ended . The year-to-date total return through the end of the most recent calendar quarter (December 31, 2004 to June 30, 2005) was %. For the 30 days ended March 31, 2005, the SEC yield and SEC tax-equivalent yield (assuming a federal income tax rate of 35.0%) for Class A shares were % and %, respectively, for Class B shares were % and %, respectively, and for Class C shares were % and %, respectively. A lower tax rate would result in lower tax-equivalent yields. For current yield information call 1-800-225-6265.
One Five Ten
Average Annual Total Return as of December 31, 2004 Year Years Years
----------------------------------------------------------------------------------------------------------------------------------
Class A Return Before Taxes % % %
Class B Return Before Taxes % % %
Class B Return After Taxes on Distributions % % %
Class B Return After Taxes on Distributions and the Sale of Class B Shares % % %
Class C Return Before Taxes % % %
Lehman Brothers 7-Year Municipal Bond Index (reflects no deduction for fees, expenses or taxes) % % %
|
These returns reflect the maximum sales charge for Class A (2.25%) and any applicable contingent deferred sales charge ("CDSC") for Class B and Class C. The Class A performance shown above for the period prior to June 27, 1996 is the performance of Class B shares, adjusted for the sales charge that applies to Class A shares (but not adjusted for any other differences in the expenses of the class). Life of Fund returns are calculated from May 31, 1992. The Lehman Brothers 7-Year Municipal Bond Index is a broad-based, unmanaged market index of intermediate-maturity municipal obligations. Investors cannot invest directly in an Index. (Source for Lehman Brothers 7-Year Municipal Bond Index: Thomson Financial, Lipper Inc.)
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. The Fund's performance during certain periods reflects the strong bond market performance and/or the strong performance of bonds held during those periods. This performance is not typical and may not be repeated. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
After-tax returns are calculated using the highest historical individual federal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant for shareholders who hold Fund shares in tax-deferred accounts or to shares held by non-taxable entities. After-tax returns for other Classes of shares will vary from the after-tax returns presented for Class B shares. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period. Also, Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares.
Fund Fees and Expenses. These tables describe the fees and expenses that you may pay if you buy and hold shares.
Shareholder Fees
(fees paid directly from your investment) Class A Class B Class C
--------------------------------------------------------------------------------
Maximum Sales Charge (Load)
(as a percentage of offering price) 2.25% None None
Maximum Deferred Sales Charge (Load)
(as a percentage of the lower of net
asset value at time of purchase or time
of redemption) None 3.00% 1.00%
Maximum Sales Charge (Load)
Imposed on Reinvested Distributions None None None
Exchange Fee None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets) Class A Class B Class C
--------------------------------------------------------------------------------
Management Fees % % %
Distribution and Service (12b-1) Fees n/a 0.90% 0.90%
Other Expenses* % % %
----- ----- -----
Total Annual Fund Operating Expenses % % %
|
* Other Expenses for Class A includes a 0.15% service fee paid pursuant to a Service Plan.
Example. This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A shares $ $ $ $
Class B shares* $ $ $ $
Class C shares $ $ $ $
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* Reflects the expenses of Class A after four years because Class B shares convert to Class A after four years.
INVESTMENT OBJECTIVE & PRINCIPAL POLICIES AND RISKS
The investment objective of the Fund is to provide a high level of current income exempt from regular federal income tax and limited principal fluctuation. The Fund seeks to achieve its objective by investing at least 80% of its net assets during periods of normal market conditions in municipal obligations, the interest on which is exempt from regular federal income tax. This is a fundamental policy of the Fund which only may be changed with shareholder approval. For purposes of this policy, "net assets" includes any borrowings for investment purposes. The Fund's investment objective and certain other policies may be changed by the Trustees without shareholder approval. There is no present intention to make any such change and shareholders will receive 60 days notice of any material change in the Fund's investment objective.
At least 65% of net assets will normally be invested in municipal obligations rated at least investment grade at the time of investment (which are those rated Baa or higher by Moody's Investors Service, Inc. ("Moody's"), or BBB or higher by either Standard & Poor's Ratings Group ("S&P") or Fitch Ratings ("Fitch")) or, if unrated, determined by the investment adviser to be of at least investment grade quality. The balance of net assets may be invested in municipal obligations rated below investment grade and in unrated municipal obligations considered to be of comparable quality by the investment adviser. As of March 31, 2005, % of the Fund's net assets were invested in such obligations. Municipal obligations rated Baa or BBB have speculative characteristics, while lower quality obligations are predominantly speculative. Also, changes in economic conditions or other circumstances are more likely to reduce the capacity of issuers of lower-rated obligations to make principal and interest payments. Lower rated obligations also may be subject to greater price volatility than higher rated obligations. The Fund will not invest more than 10% of its net assets in obligations rated below B by Moody's, S&P or Fitch, or in unrated obligations considered to be of comparable quality by the investment adviser.
Municipal obligations include bonds, notes and commercial paper issued by a municipality for a wide variety of both public and private purposes. Municipal obligations also include 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. Certain municipal obligations may be purchased 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.
The investment adviser's process for selecting securities for purchase and sale is research intensive and emphasizes the creditworthiness of the issuer or other person obligated to repay the obligation.
The interest on municipal obligations is (in the opinion of the issuer's counsel) exempt from regular federal income tax. Interest income from certain types of municipal obligations generally will be subject to the federal alternative minimum tax (the "AMT") for individuals. Distributions to corporate investors may also be subject to the AMT. The Fund may not be suitable for investors subject to the AMT.
Although the Fund invests in obligations to maintain a dollar weighted average portfolio duration of between three and nine years, the Fund may invest in individual municipal obligations of any maturity. Duration represents the dollar weighted average maturity of expected cash flows (i.e., interest and principal payments) on one or more municipal obligations, discounted to their present values. The Fund may use various techniques to shorten or lengthen its dollar weighted average duration, including the acquisition of municipal obligations at a premium or discount, and transactions in futures contracts and options on futures. Many obligations permit the issuer at its option to "call", or redeem, its securities. If an issuer calls securities during a time of declining interest rates, it may not be possible to reinvest the proceeds in securities providing the same investment return as the securities redeemed.
The Fund may invest 25% or more of its total assets in municipal obligations in the same sector (such as leases, housing finance, public housing, municipal utilities, hospital and health facilities or industrial development). This may make the Fund more susceptible to adverse economic, political or regulatory occurrences or adverse court decisions affecting a particular sector.
The net asset value of the Fund's shares will change in response to changes in prevailing interest rates and changes in the value of securities held by the Fund. The value of securities held will be affected by the credit quality of the issuer of the obligation, and general economic and business conditions that affect the specific economic sector of the issuer. Changes by rating agencies in the rating assigned to an obligation may also affect the value of that obligation.
The Fund may purchase derivative instruments, which derive their value from another instrument, security or index. For example, the Fund may purchase and sell various kinds of financial futures contracts and options thereon to hedge against changes in interest rates or as a substitute for the purchase of portfolio securities. The Fund may also enter interest rate swaps and forward rate contracts, as well as purchase an instrument that has greater or lesser credit risk than the municipal bonds underlying the instrument. The use of
derivative instruments for both hedging and investment purposes involves a risk of loss or depreciation due to a variety of factors including counterparty risk, unexpected market, interest rate or securities price movements, and tax and regulatory constraints. The use of derivatives is highly specialized and engaging in derivative transactions for purposes other than hedging is speculative. Derivative hedging transactions may not be effective because of imperfect correlations and other factors.
The Fund may invest in zero coupon bonds, which do not require the issuer to make periodic interest payments. The values of these bonds are subject to greater fluctuation in response to changes in market interest rates than bonds which pay interest currently. The Fund accrues income on these investments and is required to distribute that income each year. The Fund may be required to sell securities to obtain cash needed for income distributions.
The limited liquidity of certain securities in which the Fund may invest (including those eligible for resale under Rule 144A of the Securities Act of 1933) could affect their market prices, thereby adversely affecting net asset value and the ability to pay income. The amount of publicly available information about certain municipal obligations may be limited and the investment performance of the Fund may be more dependent on the portfolio manager's analysis than if this were not the case.
The Fund may borrow amounts up to one-third of the value of its total assets (including borrowings), but it will not borrow more than 5% of the value of its total assets except to satisfy redemption requests or for other temporary purposes. Such borrowings would result in increased expense to the Fund and, while they are outstanding, would magnify increases or decreases in the value of Fund shares. The Fund will not purchase additional investment securities while outstanding borrowings exceed 5% of the value of its total assets.
During unusual market conditions, the Fund may temporarily invest up to 50% of its total assets in cash or cash equivalents, which is not consistent with the Fund's investment objective. While temporarily invested, the Fund may not achieve its objective, and interest income from temporary investments may be taxable. The Fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or the Statement of Additional Information. While at times the Fund may use alternative investment strategies in an effort to limit its losses, it may choose not to do so.
MANAGEMENT AND ORGANIZATION
Management. The Fund's investment adviser is Boston Management and Research ("BMR"), a subsidiary of Eaton Vance Management ("Eaton Vance"), with offices at The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. Eaton Vance has been managing assets since 1924 and managing mutual funds since 1931. Eaton Vance and its subsidiaries currently manage over $95 billion on behalf of mutual funds, institutional clients and individuals.
The investment adviser manages the investments of the Fund. Under its investment advisory agreement with the Fund, BMR receives a monthly advisory fee equal to the aggregate of a daily asset based fee and a daily income based fee. The fees are applied on the basis of the following categories.
Annual Daily
Category Daily Net Assets Asset Rate Income Rate
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1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
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Prior to October 8, 2004, the Fund invested its assets in a separate open-end investment company advised by BMR that had the same objective and policies of the Fund (the "Portfolio"). The Portfolio paid the same advisory fee as the Fund. On March 31, 2005, the Fund had net assets of $ . For the periods April 1, 2004 to October 8, 2004 and October 9, 2004 to March 31, 2004, the Portfolio and Fund paid BMR advisory fees equal to % (annualized) and % (annualized), respectively, of average daily net assets.
The Fund's most recent shareholder report provides information regarding the basis for the Trustees of the Fund's approval of the Fund's investment advisory agreement.
William H. Ahern, Jr. is the portfolio manager of the Fund. He also manages other Eaton Vance portfolios, has been an Eaton Vance portfolio manager for more than 5 years, and is a Vice President of Eaton Vance and BMR.
The Statement of Additional Information provides additional information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund with respect to which that portfolio manager has management responsibilities.
Eaton Vance serves as the administrator of the Fund, providing the Fund with administrative services and related office facilities. Eaton Vance does not currently receive a fee for serving as administrator.
Eaton Vance also serves as the sub-transfer agent for the Fund. For the sub-transfer agency services it provides, Eaton Vance receives an aggregate fee based upon the actual expenses it incurs in the performance of sub-transfer agency services. This fee is paid to Eaton Vance by the Fund's transfer agent from fees it receives from the Eaton Vance funds.
Organization. The Fund is a series of Eaton Vance Investment Trust (the "Trust), a Massachusetts business trust. The Fund offers multiple classes of shares. Each Class represents a pro rata interest in the Fund but is subject to different expenses and rights. The Fund does not hold annual shareholder meetings but may hold special meetings for matters that require shareholder approval (such as electing or removing trustees, approving management or advisory contracts or changing investment policies that may only be changed with shareholder approval).
Prior to October 8, 2004, the Fund invested its assets in the Portfolio. The Fund's investment policies include a fundamental investment provision allowing the Fund to invest its assets in one or more open-end investment companies having substantially the same investment objective, policies and restrictions as the Fund. Any such company or companies would be advised by the Fund's investment adviser (or an affiliate) and the Fund would not pay directly any advisory fee with respect to the assets so invested. The Fund may initiate investments in one or more investment companies at any time without shareholder approval.
VALUING SHARES
The Fund values its shares once each day only when the New York Stock Exchange is open for trading (typically Monday through Friday), as of the close of regular trading on the Exchange (normally 4:00 p.m. eastern time). The purchase price of Fund shares is their net asset value (plus a sales charge for Class A shares), which is derived from the value of Fund holdings. When purchasing or redeeming Fund shares, your investment dealer must communicate your order to the principal underwriter by a specific time each day in order for the purchase price or the redemption price to be based on that day's net asset value per share. It is the investment dealer's responsibility to transmit orders promptly. The Fund may accept purchase and redemption orders as of the time of their receipt by certain investment dealers (or their designated intermediaries).
The Trustees have adopted procedures for valuing investments and have delegated to the investment adviser the daily valuation of such investments. Municipal obligations owned by the Fund are normally valued on the basis of valuations furnished by a pricing service. The pricing service considers various factors relating to bonds and market transactions to determine value. In certain situations, the investment adviser may use the fair value of a security if market prices are unavailable or deemed unreliable. A security that is fair valued may be valued at a price higher or lower than actual market quotations or the value determined by other funds using their own fair valuation procedures. The investment adviser expects to use fair value pricing for municipal obligations under limited circumstances, such as when an obligation is not priced by the pricing service or is in default. Eaton Vance has established a Valuation Committee that oversees the valuation of investments.
PURCHASING SHARES
How to Purchase Shares. You may purchase shares through your investment dealer or by mailing an account application form to the transfer agent (see back cover for address). You may request an account application by calling 1-800-262-1122. Your initial investment must be at least $1,000. The Fund or your investment dealer must receive your purchase order no later than the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. eastern time) in order for your purchase to be effected at that day's net asset value.
After your initial investment, additional investments of $50 or more may be made at any time by sending a check payable to the order of the Fund or the transfer agent directly to the transfer agent (see back cover for address). Please include your name and account number and the name of the Fund and Class of shares with each investment.
You may make automatic investments of $50 or more each month or each quarter from your bank account. You can establish bank automated investing on the account application or by calling 1-800-262-1122. The minimum initial investment amount and Fund policy of redeeming accounts with low account balances are waived for bank automated investing accounts, certain group purchase plans and for persons affiliated with Eaton Vance and its service providers.
If you purchase shares through an investment dealer (which includes brokers, dealers and other financial institutions), that dealer may charge you a fee for executing the purchase for you. The Fund may suspend the sale of its shares at any time and any purchase order may be refused.
Restrictions on Excessive Trading and Market Timing. The Fund is not intended for excessive trading or market timing. Market timers seek to profit by rapidly switching money into a fund when they expect the share price of the fund to rise and taking money out of the fund when they expect those prices to fall. By realizing profits through short-term trading, shareholders that engage in rapid purchases and sales or exchanges of a fund's shares may dilute the value of shares held by long-term shareholders. Volatility resulting from excessive purchases and sales or exchanges of fund shares, especially involving large dollar amounts, may disrupt efficient portfolio management. In particular, excessive purchases and sales or exchanges of a fund's shares may cause a fund to have difficulty implementing its investment strategies, may force the fund to sell portfolio securities at inopportune times to raise cash or may cause increased expenses (such as increased brokerage costs, realization of taxable capital gains without attaining any investment advantage or increased administrative costs).
A fund that invests in securities that are, among other things, thinly traded, traded infrequently or relatively illiquid (including certain municipal obligations) is susceptible to the risk that the current market price for such securities may not accurately reflect current market values. A shareholder may seek to engage in short-term trading to take advantage of these pricing differences (commonly referred to as "price arbitrage"). The Fund has procedures authorizing the investment adviser to use the fair value of a security if market prices are unavailable or deemed unreliable (see "Valuing Shares"). The use of fair value pricing and the restrictions on excessive trading and market timing described below are intended to reduce a shareholder's ability to engage in price arbitrage to the detriment of the Fund.
The Boards of Trustees of the Eaton Vance funds have adopted policies to discourage short-term trading and market timing and to seek to minimize their potentially detrimental effects. Pursuant to these policies, if an investor (through one or more accounts) makes more than two round-trip exchanges (exchanging from one fund to another fund and back again) within 12 months, it will be deemed to constitute market timing or excessive trading. Under the policies, the Fund or its principal underwriter will reject or cancel a purchase order, suspend or terminate the exchange privilege or terminate the ability of an investor to invest in the Eaton Vance funds if the Fund or the principal underwriter determines that a proposed transaction involves market timing or excessive trading that it believes is likely to be detrimental to the Fund. The Fund and its principal underwriter cannot ensure that they will be able to identify all cases of market timing and excessive trading, although they believe they have adequate procedures in place to attempt to do so. The Fund or its principal underwriter may also reject or cancel any purchase order (including an exchange) from an investor or group of investors for any other reason. Decisions to reject or cancel purchase orders (including exchanges) in the Fund are inherently subjective and will be made in a manner believed to be in the best interest of a Fund's shareholders. No Eaton Vance fund has any arrangement to permit market timing.
The Fund and the principal underwriter have provided guidance to financial intermediaries (such as banks, broker-dealers, insurance companies and retirement administrators) concerning the application of the Eaton Vance funds' market timing and excessive trading policies to Fund shares held in omnibus accounts maintained and administered by such intermediaries, including guidance concerning situations where market timing or excessive trading is considered to be detrimental to the Fund. The Fund and the principal underwriter cannot ensure that these financial intermediaries will in all cases apply the policies of the Fund to accounts under their control.
Choosing a Share Class. The Fund offers different classes of shares. The different classes of shares represent investments in the same portfolio of securities, but the classes are subject to different sales charges and expenses and will likely have different share prices due to differences in class expenses. In choosing the class of shares that suits your investment needs, you should consider:
* how long you expect to own your shares;
* how much you intend to invest;
* the sales charge and total operating expenses associated with owning
each class; and
* whether you qualify for a reduction or waiver of any applicable sales charges (see "Reducing or Eliminating Class A Sales Charges" under "Sales Charges" below).
Each investor's considerations are different. You should speak with your investment dealer to help you decide which class of shares is best for you. Set forth below is a brief description of each class of shares offered by the Fund.
Class A shares are offered at net asset value plus a front-end sales charge of up to 2.25%. This charge is deducted from the amount you invest. The Class A sales charge is reduced for purchases of $100,000 or more. The sales charge applicable to your purchase may be reduced under the right of
accumulation or a statement of intention, which are described in "Reducing or Eliminating Class A Sales Charges" under "Sales Charges" below. Some investors may be eligible to purchase Class A shares at net asset value under certain circumstances, which are also described below. Class A shares pay service fees equal to 0.15% annually of average daily net assets. Returns on Class A shares are generally higher than returns on returns on the Fund's other classes of shares because Class A has lower annual expenses than those classes.
Class B shares are offered at net asset value with no front-end sales charge. If you sell your Class B shares within four years of purchase, you generally will be subject to a contingent deferred sales charge or "CDSC". The amount of the CDSC applicable to a redemption of Class B shares decreases over four years, as described in the CDSC schedule in "Contingent Deferred Sales Charge" under "Sales Charges" below. The CDSC is deducted from your redemption proceeds. Under certain circumstances, the Class B CDSC may be waived (such as in the case of the death of the shareholder). See "CDSC Waivers" under "Sales Charges" below. Class B shares pay distribution fees and service fees equal to 0.90% annually of average daily net assets. Returns on Class B shares are generally lower than returns on Class A shares because Class B has higher annual expenses than Class A. Class B shares will automatically convert to Class A shares after the longer of four years or the time when the CDSC applicable to the Class B shares expires. Because the sales charge applicable to Class A shares is reduced for larger purchases and Class A has lower operating expenses, purchasing Class B shares may not be appropriate if you are investing a large amount.
Orders for Class B shares of one or more Eaton Vance funds will be refused when the total value of the purchase (including the aggregate value of all Class B shares held within the purchasing shareholder's account) is $100,000 or more. Investors considering cumulative purchases of $100,000 or more, or who, after a purchase of Class B shares, would own shares of Eaton Vance funds with a current market value of $100,000 or more, should consider whether Class A shares would be more advantageous and consult their investment dealer.
Class C shares are offered at net asset value with no front-end sales charge. If you sell your Class C shares within one year of purchase, you generally will be subject to a CDSC. The CDSC is deducted from your redemption proceeds. Under certain circumstances, the Class C CDSC may be waived (such as certain redemptions from tax-deferred retirement plan accounts). See "CDSC Waivers" under "Sales Charges" below. Class C shares pay distribution fees and service fees equal to 0.90% annually of average daily net assets. Returns on Class C shares are generally lower than returns on Class A shares because Class C has higher annual expenses than Class A.
Orders for Class C shares of one or more Eaton Vance funds will be refused when the total value of the purchase (including the aggregate value of all Class C shares held within the purchasing shareholder's account) is $1,000,000 or more. Investors considering cumulative purchases of $1,000,000 or more, or who, after a purchase of Class C shares, would own shares of Eaton Vance funds with a current market value of $1,000,000 or more, should consider whether Class A shares would be more advantageous and consult their investment dealer.
Payments to Investment Dealers. In connection with sales of Fund shares, an investment dealer may receive sales charges and Fund distribution and/or service fees as described below. In addition, the principal underwriter, out of its own resources, may make cash payments to certain investment dealers who provide marketing support, transaction processing and/or administrative services and, in some cases, include some or all Eaton Vance funds in preferred or specialized selling programs. Payments made by the principal underwriter to an investment dealer may be significant and are typically in the form of fees based on Fund sales, assets, transactions processed and/or accounts attributable to that investment dealer. Investment dealers also may receive amounts from the principal underwriter in connection with educational or due diligence meetings that include information concerning Eaton Vance funds. The principal underwriter may pay or allow other promotional incentives or payments to investment dealers to the extent permitted by applicable laws and regulations.
Certain investment dealers that maintain "street name" or omnibus accounts provide sub-accounting, recordkeeping and/ or administrative services to the Eaton Vance funds and are compensated for such services by the funds. As used in this prospectus, the term "investment dealer" includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, their designated intermediaries and any other firm having a selling, administration or similar agreement with the principal underwriter or its affiliates.
SALES CHARGES
Class A Front-End Sales Charge. Class A shares are offered at net asset value per share plus a sales charge that is determined by the amount of your investment. The current sales charge schedule is:
Sales Charge* Sales Charge* Dealer Commission
as Percentage of as Percentage of Net as a Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
---------------------------------------------------------------------------------------------------
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.50% 1.52% 1.25%
$500,000 but less than $1,000,000 1.00% 1.01% 1.00%
$1,000,000 or more 0.00** 0.00** 1.00%
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The principal underwriter will pay an upfront commission of 1.00% to investment dealers on sales of $1 million or more. For Class A share purchases in a single fund in a single transaction totaling $5 million or more, the principal underwriter will pay investment dealers this 1.00% commission monthly in arrears. The rate will be applied to the amount originally invested minus any redemptions (as calculated at month end) and will be paid ratably over the first 18 months after the investment is made.
The principal underwriter may pay additional compensation from its own resources to investment dealers in connection with sales promotions sponsored by the principal underwriter or sales programs sponsored by investment dealers.
Reducing or Eliminating Class A Sales Charges. Front-end sales charges on purchases of Class A shares may be reduced under the right of accumulation or under a statement of intention. To receive a reduced sales charge, you must inform your investment dealer or the Fund at the time you purchase shares that you qualify for such a reduction. If you do not let your investment dealer or the Fund know you are eligible for a reduced sales charge, you may not receive the discount to which you are otherwise entitled.
Under the right of accumulation, the sales charge you pay is reduced if the current market value of your holdings in the Fund or any other Eaton Vance fund (based on the current maximum public offering price) plus your new purchase total $100,000 or more. Class A, Advisers Class, Class B, Class C, Class I and/or Class R shares of the Fund or other Eaton Vance funds, as well as shares of Eaton Vance Money Market Fund, owned by you may be included for this purpose. Shares of Eaton Vance Cash Management Fund and Eaton Vance Tax Free Reserves cannot be included under the right of accumulation. Shares owned by you, your spouse and children under age twenty-one may be combined for purposes of the right of accumulation, including shares held for the benefit of any of you in trust or fiduciary accounts (including retirement accounts) or omnibus or "street name" accounts. You may be required to provide documentation to establish your ownership of shares included under the right of accumulation (such as account statements for you, your spouse and children or marriage certificates, birth certificates and/or trust or other fiduciary-related documents).
Under a statement of intention, purchases of $100,000 or more made over a 13-month period are eligible for reduced sales charges. Shares eligible under the right of accumulation may be included to satisfy the amount to be purchased under a statement of intention. Under a statement of intention, the principal underwriter may hold 5% of the dollar amount to be purchased in escrow in the form of shares registered in your name until you satisfy the statement or the 13-month period expires. A statement of intention does not obligate you to purchase (or the Fund to sell) the full amount indicated in the statement.
Class A shares are offered at net asset value (without a sales charge) to clients of financial intermediaries who charge a fee for their services; accounts affiliated with those financial intermediaries; investment and institutional clients of Eaton Vance; certain persons affiliated with Eaton Vance; and certain Eaton Vance and fund service providers. Class A shares may also be purchased at net asset value pursuant to the reinvestment privilege and exchange privilege and when distributions are reinvested. See "Shareholder Account Features" for details.
Contingent Deferred Sales Charge. Each Class of shares is subject to a CDSC on certain redemptions. Class A shares purchased at net asset value in amounts of $1 million or more (other than shares purchased in a single transaction of $5 million or more) are subject to a 1.00% CDSC if redeemed within 18 months of purchase. Investors who purchase Class A shares of a single fund in a single transaction at net asset value in amounts of $5 million or more will not be
subject to any CDSC for such investment or any subsequent investment in the same fund. Class C shares are subject to a 1.00% CDSC if redeemed within 12 months of purchase. Class B shares are subject to the following CDSC schedule:
Year of Redemption After Purchase CDSC The CDSC is based on the lower of the ---------------------------------------- net asset value at the time of
First 3.0% purchase or at the time of
Second 2.5% redemption. Shares acquired through
Third 2.0% the reinvestment of distributions are
Fourth 1.0% exempt from the CDSC. Redemptions are
Fifth or following 0% made first from shares that are not
subject to a CDSC.
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The sales commission payable to investment dealers in connection with sales of Class B and Class C shares is described under "Distribution and Service Fees" below.
CDSC Waivers. CDSCs are waived for certain redemptions pursuant to a Withdrawal Plan (see "Shareholder Account Features"). The Class B CDSC is also waived following the death of a beneficial owner of shares (a death certificate and other applicable documents may be required).
Class B Conversion Feature. After the longer of four years or the time when the CDSC applicable to your Class B shares expires, Class B shares automatically convert to Class A shares. Class B shares acquired through the reinvestment of distributions convert in proportion to shares not so acquired.
Distribution and Service Fees. Class B and Class C shares have in effect plans under Rule 12b-1 that allow the Fund to pay distribution fees for the sale and distribution of shares (so-called "12b-1 fees"). Class B and Class C shares pay distribution fees to the principal underwriter of 0.75% of average daily net assets annually. Because these fees are paid from Fund assets on an ongoing basis, they will increase your cost over time and may cost you more than paying other types of sales charges. The principal underwriter compensates investment dealers on sales of Class B and Class C shares (except exchange transactions and reinvestments) in an amount equal to 3.0% and 1.00%, respectively, of the purchase price of the shares. After the first year, investment dealers also receive 0.75% of the value of Class C shares in annual distribution fees.
All Classes pay service fees for personal and/or account services equal to 0.15% of average daily net assets annually. Although there is no present intention to do so, the Fund could pay service fees of up to 0.25% annually upon Trustee approval. After the sale of shares, the principal underwriter typically receives the service fees for one year and thereafter investment dealers generally receive them based on the value of shares sold by such dealers. Distribution and service fees are subject to the limitations contained in the sales charge rule of the National Association of Securities Dealers, Inc.
More information about sales charges is available free of charge on the Eaton Vance website at www.eatonvance.com and in the Statement of Additional Information. Please consult the Eaton Vance website for any updates to sales charge information before making a purchase of Fund shares.
REDEEMING SHARES
You can redeem shares in any of the following ways:
By Mail Send your request to the transfer agent along with any
certificates and stock powers. The request must be
signed exactly as your account is registered and
signature guaranteed. You can obtain a signature
guarantee at certain banks, savings and loan
institutions, credit unions, securities dealers,
securities exchanges, clearing agencies and registered
securities associations. You may be asked to provide
additional documents if your shares are registered in
the name of a corporation, partnership or fiduciary.
By Telephone You can redeem up to $100,000 per account (which may
include shares of one or more Eaton Vance funds) b y
calling the transfer agent at 1-800-262-1122 on Monday
through Friday, 9:00 a.m. to 4:00 p.m. (eastern time).
Proceeds of a telephone redemption can be mailed only to
the account address. Shares held by corporations,
trusts or certain other entities and shares that are
subject to fiduciary arrangements cannot be redeemed by
telephone.
Through an
Investment Dealer Your investment dealer is responsible for transmitting
the order promptly. An investment dealer may charge a
fee for this service.
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If you redeem shares, your redemption price will be based on the net asset value per share next computed after the redemption request is received. Your redemption proceeds will be paid in cash within seven days, reduced by the amount of any applicable CDSC and any federal income tax required to be withheld. Payments will be sent by mail unless you complete the Bank Wire Redemptions section of the account application.
If you recently purchased shares, the proceeds of a redemption will not be sent until the purchase check (including a certified or cashier's check) has cleared. If the purchase check has not cleared, redemption proceeds may be delayed up to 15 days from the purchase date. If your account value falls below $750 (other than due to market decline), you may be asked either to add to your account or redeem it within 60 days. If you take no action, your account will be redeemed and the proceeds sent to you.
While redemption proceeds are normally paid in cash, redemptions may be paid by distributing marketable securities. If you receive securities, you could incur brokerage or other charges in converting the securities to cash.
SHAREHOLDER ACCOUNT FEATURES
Once you purchase shares, the transfer agent establishes a Lifetime Investing Account(R) for you. Share certificates are issued only on request.
Distributions. You may have your Fund distributions paid in one of the following ways:
*Full
Reinvest
Option Dividends and capital gains are reinvested in additional shares.
This option will be assigned if you do not specify an option.
*Partial
Reinvest
Option Dividends are paid in cash and capital gains are reinvested in
additional shares.
*Cash
Option Dividends and capital gains are paid in cash.
*Exchange
Option Dividends and/or capital gains are reinvested in additional
shares of any class of another Eaton Vance fund chosen by you,
subject to the terms of that fund's prospectus. Before selecting
this option, you must obtain a prospectus of the other fund and
consider its objectives, risks, and charges and expenses
carefully.
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Information about the Fund. From time to time, you may be mailed the following:
* Semiannual and annual reports containing a list of portfolio holdings as of the end of the second and fourth fiscal quarters, respectively, performance information and financial statements.
* Periodic account statements, showing recent activity and total share
balance.
* Form 1099 and tax information needed to prepare your income tax
returns.
* Proxy materials, in the event a shareholder vote is required.
* Special notices about significant events affecting your Fund.
The Fund will file with the Securities and Exchange Commission ("SEC") a list of its portfolio holdings as of the end of the first and third fiscal quarters on Form N-Q. The Fund's annual and semiannual reports (as filed on Form N-CSR) and each Form N-Q may be viewed on the SEC's website (www.sec.gov). The most recent fiscal quarter end holdings may also be viewed on the Eaton Vance website (www.eatonvance.com). Portfolio holdings information is filed with the SEC or posted on the Eaton Vance website approximately 60 days after the end of the quarter to which it relates. The Fund also posts information about certain portfolio characteristics (such as top ten holdings and asset allocation) as of each calendar quarter end on the Eaton Vance website approximately ten business days after quarter end.
The Eaton Vance funds have established policies and procedures with respect to the disclosure of portfolio holdings and other information concerning Fund characteristics. A description of these policies and procedures is provided in the Statement of Additional Information. Such policies and procedures regarding disclosure of portfolio holdings are designed to prevent the misuse of material, non-public information about the funds.
Withdrawal Plan. You may redeem shares on a regular monthly or quarterly basis by establishing a systematic withdrawal plan. Withdrawals will not be subject to any applicable CDSC if they are, in the aggregate, less than or equal to 12% annually of the greater of either the initial account balance or the current account balance. A minimum account size of $5,000 is required to establish a systematic withdrawal plan. Because purchases of Class A shares are generally subject to an initial sales charge, Class A shareholders should not make withdrawals from their accounts while also making purchases.
Exchange Privilege. You may exchange your Fund shares for shares of the same Class of another Eaton Vance fund, or, in the case of Class B and Class C shares, Eaton Vance Money Market Fund. Exchanges are made at net asset value. If your shares are subject to a CDSC, the CDSC will continue to apply to your new shares at the same CDSC rate. For purposes of the CDSC, your shares will continue to age from the date of your original purchase of Fund shares.
Before exchanging, you should read the prospectus of the new fund carefully. If you wish to exchange shares, write to the transfer agent (see back cover for address) or call 1-800-262-1122. Periodic automatic exchanges are also available. The exchange privilege may be changed or discontinued at any time. You will receive 60 days' notice of any material change to the privilege. This privilege may not be used for "market timing". If an account (or group of accounts) makes more than two round-trip exchanges (exchanged from one fund to another and back again) within 12 months, it will be deemed to be market timing. As described under "Purchasing Shares", the exchange privilege may be terminated for market timing accounts or for other reasons.
Reinvestment Privilege. If you redeem shares, you may reinvest at net asset value all or any portion of the redemption proceeds in the same class of shares of the Fund you redeem from (or, for Class A shares, in Class A shares of any other Eaton Vance fund), provided that the reinvestment occurs within 60 days of the redemption, and the privilege has not been used more than once in the prior 12 months. Under these circumstances your account will be credited with any CDSC paid in connection with the redemption. Any CDSC period applicable to the shares you acquire upon reinvestment will run from the date of your original share purchase. Reinvestment requests must be in writing. If you reinvest, you will be sold shares at the next determined net asset value following receipt of your request.
Telephone and Electronic Transactions. You can redeem or exchange shares by telephone as described in this prospectus. In addition, certain transactions may be conducted through the Internet. The transfer agent and the principal underwriter have procedures in place to authenticate telephone and electronic instructions (such as using security codes or verifying personal account information). As long as the transfer agent and principal underwriter follow reasonable procedures, they will not be responsible for unauthorized telephone or electronic transactions and you bear the risk of possible loss resulting from these transactions. You may decline the telephone redemption option on the account application. Telephone instructions are tape recorded.
"Street Name" Accounts. If your shares are held in a "street name" account at an investment dealer, that dealer (and not the Fund or its transfer agent) will perform all recordkeeping, transaction processing and distribution payments. Because the Fund will have no record of your transactions, you should contact your investment dealer to purchase, redeem or exchange shares, to make changes in your account, or to obtain account information. You will not be able to utilize a number of shareholder features, such as telephone transactions, directly with the Fund. The transfer of shares in a "street name" account to an account with another investment dealer or to an account directly with the Fund involves special procedures and you will be required to obtain historical information about your shares prior to the transfer. Before establishing a "street name" account with an investment dealer, you should determine whether that dealer allows reinvestment of distributions in "street name" accounts.
Procedures for Opening New Accounts. To help the government fight the funding of terrorism and money laundering activities, federal law requires the Fund to obtain, verify and record information that identifies each person who opens a Fund account. When you open an account, the transfer agent or your investment dealer will ask you for your name, address, date of birth and other identifying information. You also may be asked to produce a copy of your driver's license and other identifying documents. If a person fails to provide the information requested, any application by that person to open a new account will be rejected. Moreover, if the transfer agent or the investment dealer is unable to verify the identity of a person based on information provided by that person, it may take additional steps including, but not limited to, requesting additional information from the person, closing the person's account or reporting the matter to the appropriate federal authorities. If your account is closed for this reason, your shares may be automatically redeemed. If the Fund's net asset value has decreased since your purchase, you will lose money as a result of this redemption.
Account Questions. If you have any questions about your account or the services available, please call Eaton Vance Shareholder Services at 1-800-262-1122, or write to the transfer agent (see back cover for address).
TAX INFORMATION
The Fund declares dividends daily and ordinarily pays distributions monthly. Different Classes will distribute different dividend amounts. Your account will be credited with dividends beginning on the business day after the day when the funds used to purchase your Fund shares are collected by the transfer agent. For tax purposes, the entire monthly distribution of the Fund's daily dividends ordinarily will constitute federally tax-exempt income to you. Distribution of any net realized gains will be made once each year (usually in December). The Fund may invest a portion of its assets in securities that generate income that is not exempt from federal income tax. In addition, the exemption of "exempt-interest dividend" income from regular federal income taxation does not necessarily result in similar exemptions from such income under the state or local tax laws.
Distributions of any taxable income and net short-term capital gains will be taxable as ordinary income. Distributions of any long-term capital gains are taxable as long-term capital gains. Distributions of interest on certain municipal obligations are a tax preference item under the AMT provisions applicable to individuals and corporations, and all tax-exempt distributions may affect a corporation's AMT liability. The Fund's distributions will be treated as described above for federal income tax purposes whether they are paid in cash or reinvested in additional shares. A redemption of Fund shares, including an exchange for shares of another fund, is a taxable transaction.
Shareholders, particularly corporations, recipients of social security or railroad retirement benefits and those subject to alternative minimum tax, should consult with their advisers concerning the applicability of state, local and other taxes to an investment.
FINANCIAL HIGHLIGHTS
The financial highlights are intended to help you understand the Fund's financial performance for the past five years. Certain information in the table reflects the financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all distributions and not taking into account a sales charge). This information has been audited by , an independent registered public accounting firm. The report of and the Fund's financial statements are incorporated herein by reference and included in the annual report, which is available on request.
[TO BE PROVIDED]
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About the Fund: More information is available in the statement of additional information. The statement of additional information is incorporated by reference into this prospectus. Additional information about the Fund's investments is available in the annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during the past fiscal year. You may obtain free copies of the statement of additional information and the shareholder reports on Eaton Vance's website at www.eatonvance.com or by contacting the principal underwriter:
Eaton Vance Distributors, Inc. The Eaton Vance Building 255 State Street Boston, MA 02109 1-800-225-6265 website: www.eatonvance.com
You will find and may copy information about the Fund (including the statement of additional information and shareholder reports): at the Securities and Exchange Commission's public reference room in Washington, DC (call 1-202-942-8090 for information on the operation of the public reference room); on the EDGAR Database on the SEC's Internet site (http://www.sec.gov); or, upon payment of copying fees, by writing to the SEC's public reference section, Washington, DC 20549-0102, or by electronic mail at publicinfo@sec.gov.
About Shareholder Accounts: You can obtain more information from Eaton Vance Shareholder Services (1-800-262-1122). If you own shares and would like to add to, redeem or change your account, please write or call the transfer agent:
The Fund's SEC File No. is 811-0443. LNAP 604-8/05 (c) 2005 Eaton Vance Management |
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 2005
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Eaton Vance California Limited Maturity Municipals Fund Eaton Vance Florida Limited Maturity Municipals Fund Eaton Vance Massachusetts Limited Maturity Municipals Fund Eaton Vance New Jersey Limited Maturity Municipals Fund Eaton Vance New York Limited Maturity Municipals Fund Eaton Vance Ohio Limited Maturity Municipals Fund Eaton Vance Pennsylvania Limited Maturity Municipals Fund
The Eaton Vance Building 255 State Street Boston, Massachusetts 02109 1-800-262-1122
This Statement of Additional Information ("SAI") provides general information about the Funds. Each Fund is a non-diversified open-end management investment company. Each Fund is a series of Eaton Vance Investment Trust (the "Trust"). Capitalized terms used in this SAI and not otherwise defined have the meanings given to them in the prospectus. This SAI contains additional information about:
Page Page
Strategies and Risks 2 Purchasing and Redeeming Shares 20
Investment Restrictions 8 Sales Charges 21
Management and Organization 9 Performance 23
Investment Advisory and Taxes 25
Administrative Services 15 Portfolio Securities Transactions 27
Other Service Providers 19 Financial Statements 29
Calculation of Net Asset Value 19
Appendix A: Class A Fees, Performance and Ownership 31
Appendix B: Class B Fees, Performance and Ownership 35
Appendix C: Class C Fees, Performance and Ownership 39
Appendix D: State Specific Information 42
Appendix E: Ratings 69
Appendix F: Eaton Vance Funds Proxy Voting Policies and Procedures 73
Appendix G: Adviser Proxy Voting Policies 75
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Although each Fund offers only its shares of beneficial interest, it is possible that a Fund (or Class) might become liable for a misstatement or omission in this SAI regarding another Fund (or Class) because the Funds use this combined SAI. The Trustees of the Trust have considered this factor in approving the use of a combined SAI.
This SAI is NOT a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by the Funds' prospectus dated August 1, 2005, as supplemented from time to time, which is incorporated herein by reference. This SAI should be read in conjunction with the prospectus, which may be obtained by calling 1-800-225-6265.
(c) 2005 Eaton Vance Management
The following defined terms may be used herein: "SEC" for the Securities and Exchange Commission; "CFTC" for the Commodities Futures Trading Commission; "Code" for the Internal Revenue Code of 1986, as amended; "1940 Act" for the Investment Company Act of 1940, as amended; and "NASD" for the National Association of Securities Dealers, Inc.
During the fiscal year ended March 31, 2005, each Fund invested all of its assets in a registered open-end management investment company that had the same investment objectives and policies as the Fund (each, a "Portfolio"). On October 8, 2004, each Fund withdrew its pro rata share of the Portfolio's net assets and began investing directly in securities. There were no changes in the Funds' investment objectives or policies as the result of this change in investment structure. Each Fund is expected to pay similar fees and transaction-related expenses as reported herein for its corresponding Portfolio.
STRATEGIES AND RISKS
Primary strategies are defined in the prospectus. The following is a description of the various investment practices that may be engaged in, whether as a primary or secondary strategy, and a summary of certain attendant risks. The investment adviser(s) may not buy any of the following instruments or use any of the following techniques unless it believes that doing so will help achieve the investment objective(s).
Municipal Obligations. Municipal obligations are issued to obtain funds for various public and private purposes. Municipal obligations include bonds as well as tax-exempt commercial paper, project notes and municipal notes such as tax, revenue and bond anticipation notes of short maturity, generally less than three years. While most municipal bonds pay a fixed rate of interest semi-annually in cash, there are exceptions. Some bonds pay no periodic cash interest, but rather make a single payment at maturity representing both principal and interest. Bonds may be issued or subsequently offered with interest coupons materially greater or less than those then prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of municipal obligations, the interest 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, each Fund will rely on an opinion of the issuer's counsel (when available) and will not undertake any independent verification of the basis for the opinion.
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 a 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, a Fund's distributions derived from interest on all municipal obligations (whenever issued) are 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).
The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. Issuers of general obligation bonds include states, counties, cities, towns and regional districts. The proceeds of these obligations are used to fund a wide range of public projects including the construction or improvement of schools, highways and roads, water and sewer systems and a variety of other public purposes. The basic security of general obligation bonds is the issuer's pledge of its faith, credit, and taxing power for the payment of principal and interest. The taxes that can be levied for the payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a particular facility or group of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Revenue bonds have been issued to fund a wide variety of capital projects including: electric, gas, water, sewer and solid waste disposal systems; highways, bridges and tunnels; port, airport and parking facilities; transportation systems; housing facilities, colleges and universities and hospitals. Although the principal security behind these bonds varies widely, many provide additional security in the form of a debt service reserve fund whose monies may be used to make principal and interest payments on the issuer's obligations. Housing finance authorities have a wide range of security including partially or fully insured, rent subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. In addition to a debt service reserve fund, some authorities provide further security in the form of a state's ability (without legal obligation) to make up deficiencies in the debt service reserve fund. Lease rental revenue bonds issued by a state or local authority for capital projects are normally secured by annual lease rental payments from the state or locality to the authority sufficient to cover debt service on the authority's obligations. Such payments are usually subject to annual appropriations by the state or locality. Industrial development and pollution control bonds, although nominally issued by municipal authorities, are in most
cases revenue bonds and are generally not secured by the taxing power of the municipality, but are usually secured by the revenues derived by the authority from payments of the industrial user or users. Each Fund 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, each Fund anticipates that it would, under normal circumstances, dispose of any equity securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and interest on a municipal obligation are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions the power or ability of any person or entity to pay when due principal of and interest on a municipal obligation may be materially affected or interest and principal previously paid may be required to be refunded. There have been recent instances of defaults and bankruptcies involving municipal obligations which were not foreseen by the financial and investment communities. Each Fund 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 a Fund as a result of any such event, and a Fund may also manage (or engage other persons to manage) or otherwise deal with any real estate, facilities or other assets so acquired. Each Fund 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 each Fund. Each Fund will incur additional expenditures in taking protective action with respect to portfolio obligations in (or anticipated to be in) default and assets securing such obligations.
The yields on municipal obligations will be dependent on a variety of factors, including purposes of issue and source of funds for repayment, general money market conditions, general conditions of the municipal bond market, size of a particular offering, maturity of the obligation and rating of the issue. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the municipal obligations which they undertake to rate. It should be emphasized, however, that ratings are based on judgment and are not absolute standards of quality. Consequently, municipal obligations with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield. In addition, the market price of such obligations will normally fluctuate with changes in interest rates, and therefore the net asset value of a Fund will be affected by such changes.
State-Specific Concentration. For a discussion of the risks associated with investing in municipal obligations of a particular state's issuers, see "Risks of Concentration" in Appendix D. Each Fund may also invest a total of up to 35% of its net assets in the obligations of Puerto Rico, the U.S. Virgin Islands and Guam. Accordingly, a Fund 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. Each Fund may also invest to a limited extent in obligations issued by the N. Marianna Territories and American Samoa. Information about some of these conditions and developments is included in Appendix D.
Sector Concentration. Each Fund may invest 25% or more of its total assets in municipal obligations in the same sectors. There could be economic, business or political developments or court decisions that adversely affect all municipal obligations in the same sector. In particular, investments in revenue bonds might involve (without limitation) the following risks.
Hospital bond ratings are often based on feasibility studies which contain projections of expenses, revenues and occupancy levels. Among the influences affecting a hospital's gross receipts and net income available to service its debt are demand for hospital services, the ability of the hospital to provide the services required, management capabilities, economic developments in the service area, efforts by insurers and government agencies to limit rates and expenses, confidence in the hospital, service area economic developments, competition, availability and expense of malpractice insurance, Medicaid and Medicare funding and possible federal legislation limiting the rates of increase of hospital charges.
Electric utilities face problems in financing large construction programs in an inflationary period, cost increases and delay occasioned by safety and environmental considerations (particularly with respect to nuclear facilities), difficulty in obtaining fuel at reasonable prices, and in achieving timely and adequate rate relief from regulatory commissions, effects of energy conservation and limitations on the capacity of the capital market to absorb utility debt.
Industrial development bonds ("IDBs") are normally secured only by the revenues from the project and not by state or local government tax payments, they are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, IDBs are sensitive to the risk of a slowdown in the economy.
Tobacco bonds are secured by a single source of revenue, installment payments made by tobacco companies stemming from the settlement of lawsuits brought against them by various states. These payments are not generally fixed but rather are tied to the volume of the company's U.S. sales of cigarettes. Tobacco bonds are subject to several risks, including the risk that cigarette consumption declines or that a tobacco company defaults on its obligation to make payments to the state.
In addition, with respect to the airline industry, there are a number of major carriers that are experiencing significant operation problems. These problems include, but are not limited to, bankruptcy filings, competition from low cost carriers, labor and union conflicts, increasing costs associated with terrorism, increasing jet fuel prices and decreasing yields per passenger. United Airlines is currently in bankruptcy, and recent court rulings associated with the bankruptcy have been split on determining whether certain special facility "lease-backed" debt issuances are considered loans and not leases, significantly impacting the return potential of "lease-backed" airline bonds if the rulings stand.
Duration. In pursuing its investment objective each Fund seeks to maintain a dollar weighted average portfolio duration of between three and nine years. Duration represents the dollar weighted average maturity of expected cash flows (i.e., interest and principal payments) on one or more debt obligations, discounted to their present values. The duration of an obligation is usually not more than its stated maturity and is related to the degree of volatility in the market value of the obligation. Maturity measures only the time until a bond or other debt security provides its final payment; it does not take into account the pattern of a security's payments over time. Duration takes both interest and principal payments into account and, thus, in the investment adviser's opinion, is a more accurate measure of a municipal obligation's sensitivity to changes in interest rates. In computing the duration of its portfolio, a Fund will have to estimate the duration of debt obligations that are subject to prepayment or redemption by the issuer, based on projected cash flows from such obligations.
Credit Quality. While municipal obligations rated investment grade or below and comparable unrated municipal obligations may have some quality and protective characteristics, these characteristics can be expected to be offset or outweighed by uncertainties or major risk exposures to adverse conditions. Lower rated and comparable unrated municipal obligations are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to greater price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated municipal obligations are also more likely to react to real or perceived developments affecting market and credit risk than are more highly rated obligations, which react primarily to movements in the general level of interest rates.
Municipal obligations held by a Fund which are rated below investment grade but which, subsequent to the assignment of such rating, are backed by escrow accounts containing U.S. Government obligations may be determined by the investment adviser to be of investment grade quality for purposes of the Fund's investment policies. A Fund may retain in its portfolio an obligation whose rating drops after its acquisition, including defaulted obligations, if such retention is considered desirable by the investment adviser; provided, however, that holdings of obligations rated below Baa or BBB will be less than 35% of net assets and holdings rated below B will be less than 10% of net assets. In the event the rating of an obligation held by a Fund is downgraded, causing the Fund to exceed this limitation, the investment adviser will (in an orderly fashion within a reasonable period of time) dispose of such obligations as it deems necessary in order to comply with each Fund's credit quality limitations. In the case of a defaulted obligation, a Fund may incur additional expense seeking recovery of its investment. See "Portfolio of Investments" in the "Financial Statements" incorporated by reference into this SAI with respect to any defaulted obligations held by a Fund.
When a Fund invests in lower rated or unrated municipal obligations, the achievement of the Fund's goals is more dependent on the investment adviser's ability than would be the case if the Fund were investing in municipal obligations in the higher rating categories. In evaluating the credit quality of a particular issue, whether rated or unrated, the investment adviser may 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 may also purchase structured derivative products with greater or lesser credit risk than the underlying bonds. Such bonds may be rated investment grade, as well as below investment grade. For a description of municipal bond ratings, see Appendix E.
Municipal Leases. Each Fund may invest in municipal leases and participations therein, which arrangements frequently involve special risks. Municipal leases are obligations in the form of a lease, installment purchase or conditional sales contract (which typically provide for the title to the leased asset to pass to the governmental issuer) which is issued by state or local governments to acquire equipment and facilities. Interest income from such obligations is generally exempt from local and state taxes in the state of issuance. "Participations" in such leases are undivided interests in a portion of the total obligation. Participations entitle their holders to receive a pro rata
share of all payments under the lease. The obligation of the issuer to meet its obligations under such leases is often subject to the appropriation by the appropriate legislative body, on an annual or other basis, of funds for the payment of the obligations. Investments in municipal leases are thus subject to the risk that the legislative body will not make the necessary appropriation and the issuer will not otherwise be willing or able to meet its obligation.
Certain municipal lease obligations owned by a Fund may be deemed illiquid for the purpose of the Fund's 15% limitation on investments in illiquid securities, unless determined by the investment adviser, pursuant to guidelines adopted by the Trustees, to be liquid securities for 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 obligation; (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, including the time needed to dispose of the obligation, the method of soliciting offers, and the mechanics of transfer. In addition, the investment adviser will consider factors unique to particular lease obligations affecting the marketability thereof. These include the general creditworthiness of the issuer, the importance of the equipment, property or facility covered by the lease or contract to the municipality, and the likelihood that the marketability of the obligation will be maintained throughout the time the obligation is held by a Fund. In the event a Fund acquires an unrated municipal lease obligation, the investment adviser will be responsible for determining the credit quality of such obligation on an ongoing basis, including an assessment of the likelihood that the lease may or may not be 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. Each Fund 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 each Fund is required to distribute that income for each taxable year. Thus, a Fund may have to sell other investments to obtain cash needed to make income distributions.
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 a Fund's commitment and are subject to certain conditions such as the issuance of satisfactory legal opinions. Each Fund 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 a Fund to buy such securities on a settlement date that could be several months or several years in the future. Each Fund may also purchase instruments that give the Fund the option to purchase a municipal obligation when and if issued.
Each Fund 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 a Fund enters into the purchase commitment. When a Fund 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 a Fund 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 a Fund 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 Fund's net asset value than if it solely set aside cash to pay for when-issued securities.
Redemption, Demand and Put Features and Put Options. Issuers of municipal obligations reserve the right to call (redeem) the bond. If an issuer redeems securities held by a Fund during a time of declining interest rates, the Fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. Also, some bonds may have "put" or "demand" features that allow early redemption by the bondholder. Longer term fixed-rate bonds may give the holder a right to request redemption at certain times (often annually after the lapse of an intermediate term). These bonds are more defensive than conventional long term bonds (protecting to some degree against a rise in interest rates) while providing greater opportunity than comparable intermediate term bonds, because a Fund may retain the bond if interest rates decline.
Liquidity and Protective Put Options. Each Fund may enter into a separate agreement with the seller of the security or some other person granting the Fund the right to put the security to the seller thereof or the other person at an agreed upon price. Each Fund 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 a Fund or that selling institutions will be willing
to permit a Fund to exercise a put to hedge against rising interest rates. A Fund does not expect to assign any value to any separate put option which may be acquired to facilitate portfolio liquidity, inasmuch as the value (if any) of the put will be reflected in the value assigned to the associated security; any put acquired for hedging purposes would be valued in good faith under methods or procedures established by the Trustees after consideration of all relevant factors, including its expiration date, the price volatility of the associated security, the difference between the market price of the associated security and the exercise price of the put, the creditworthiness of the issuer of the put and the market prices of comparable put options. Interest income generated by certain bonds having put or demand features may be taxable.
Variable Rate Obligations. Each Fund 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 which are frequently secured by letters of credit or other 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 purposes of complying with the diversification requirements set forth in Section 5(b) of the 1940 Act and Rule 5b-2 thereunder. A Fund would anticipate using these bonds as cash equivalents pending longer term investment of its funds.
Inverse Floaters. Each Fund 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 and income 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 a portfolio when short-term interest rates rise, and increase the interest paid to a Fund when short-term interest rates fall. Inverse floaters have varying degrees of liquidity, and the market for these securities is 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.
Under certain circumstances, a Fund may enter into a so-called shortfall and forebearance agreement with the sponsor of an inverse floater held by the Fund. Such agreements commit a Fund to reimburse the sponsor of such inverse floater, upon the termination of the trust issuing the inverse floater, the difference between the liquidation value of the underlying security (which is the basis of the inverse floater) and the principal amount due to the holders of the floating rate security issued in conjunction with the inverse floater. Under the standard terms of an inverse floater, a Fund would not be required to make such a reimbursement. If a Fund chooses not to enter into such an agreement, the inverse floater will be terminated and the Fund may incur a loss. Although entering into such an agreement exposes a Fund to the risk that it may have to make a reimbursement of the type described above, the Fund can receive higher interest payments than it would under a typical inverse floater and would be able to defer recognizing a loss on the inverse floater covered by the shortfall and forebearance agreement.
Interest Rate Swaps and Forward Rate Contracts. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of fixed rate payments for floating rate payments. A Fund will only enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Each Fund may also enter forward rate contracts. Under these contracts, the buyer locks in an interest rate at a future settlement date. If the interest rate on the settlement date exceeds the lock rate, the buyer pays the seller the difference between the two rates. If the lock rate exceeds the interest rate on the settlement date, the seller pays the buyer the difference between the two rates. Any such gain received by the Fund would be taxable.
If the other party to an interest rate swap or forward rate contract defaults, a Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive. The net amount of the excess, if any, of a Fund's obligations over its entitlements will be maintained in a segregated account by the Fund's custodian. No Fund will enter into any interest rate swap or forward rate contract unless the claims-paying ability of the other party thereto is considered to be investment grade by the investment adviser. If there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction. These instruments are traded in the over-the-counter market.
Illiquid Obligations. At times, a substantial portion of a Fund's assets may be invested in securities as to which the Fund, 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, a Fund 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 a Fund's net asset value. Illiquid securities may also include those legally restricted as to resale, and securities eligible for resale pursuant to Rule 144A thereunder. Rule 144A securities may be treated as liquid securities if the investment adviser determines that such treatment is warranted. Even if determined to be liquid, holdings of these securities may increase the level of Fund illiquidity if eligible buyers become uninterested in purchasing them.
The secondary market for some municipal obligations issued within a state (including issues which are privately placed with a Fund) is less liquid than that for taxable debt obligations or other more widely traded municipal obligations. No Fund will own illiquid securities if more than 15% of its net assets would be invested in securities that are not readily marketable. No established resale market exists for certain of the municipal obligations in which a Fund 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, a Fund may be unable to dispose of these municipal obligations at times when it would otherwise wish to do so at the prices at which they are valued.
Securities Lending. Each Fund may lend up to 30% of the value of its total assets (including borrowings) or such other amount as is permitted under relevant law. Each Fund may seek to earn income by lending portfolio securities to broker-dealers or other institutional borrowers. 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. In the judgment of the investment adviser the loans will be made only to organizations whose credit quality or claims paying ability is considered to be at least investment grade and the investment adviser will periodically monitor the financial condition of such organizations while any loans are outstanding. In addition, loans will only be made when the investment adviser believes the expected returns, net of administrative expenses and any finders' fees, justify the attendant risk. Securities loans currently are required to be secured continuously by collateral in cash, cash equivalents (such as money market instruments) or other liquid securities held by the custodian and maintained in an amount at least equal to the market value of the securities loaned. Distributions of any income realized from securities loans will be taxable as ordinary income.
Futures Contracts and Options on Futures Contracts. A change in the level of interest rates may affect the value of the securities held by a Fund (or of securities that a Fund expects to purchase). To hedge against changes in rates or as a substitute for the purchase of securities, a Fund 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 a Fund are traded on exchanges or boards of trade that are licensed and regulated by the CFTC and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant exchange. Each Fund may purchase and write call and put options on futures contracts which are traded on a United States exchange or board of trade. Each Fund 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 Fund's custodian for the benefit of the futures commission merchant through whom the Fund 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 a Fund from closing out positions and limiting its losses.
Each Fund will engage in futures and related options transactions for either hedging or non-hedging purposes. Each Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or which it expects to purchase. Each Fund 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 a Fund as a regulated investment company for federal income tax purposes. Each Fund has claimed an exclusion from the definition of a Commodity Pool Operator ("CPO") under the Commodity Exchange Act and therefore are not subject to registration or regulation as a CPO.
Asset Coverage. To the extent required by SEC guidelines, each Fund will only engage in transactions that expose it to an obligation to another party if it owns either (1) an offsetting ("covered") position for the same type of financial asset, or (2) cash or liquid securities, segregated with its custodian, with a value sufficient at all times to cover its potential obligations not covered as provided in (1). Assets used as cover or segregated with the custodian cannot be sold while the position(s) requiring cover is open unless replaced with other appropriate assets. As a result, if a large portion of assets is segregated or committed as cover, it could impede portfolio management or the ability to meet redemption requests or other current obligations.
Temporary Investments. Under unusual market conditions, each Fund may invest temporarily in cash or cash equivalents. Cash equivalents are highly liquid, short-term securities such as commercial paper, time deposits, certificates of deposit, short-term notes and short-term U.S. Government obligations. These securities may be subject to federal income, state income and/or other taxes.
Portfolio Turnover. Each Fund 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). A Fund cannot accurately predict its portfolio turnover rate, but it is anticipated that the annual portfolio turnover rate will generally not exceed 100% (excluding turnover of securities having a maturity of one year or less). A 100% annual turnover rate could occur, for example, if all the securities held by a Fund were replaced once in a period of one year. A high turnover rate (100% or more) necessarily involves greater expenses to a Fund.
INVESTMENT RESTRICTIONS
The following investment restrictions of each Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of a Fund's outstanding voting securities, which as used in this SAI means the lesser of (a) 67% of the shares of a Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b) more than 50% of the outstanding shares of a Fund. Accordingly, each Fund may not:
(1) Borrow money or issue senior securities except as permitted by the 1940
Act;
(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 (including limited partnership interests in
real estate but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest or deal in real estate or securities which are secured by real
estate);
(5) Purchase or sell physical commodities or contracts for the purchase or sale
of physical commodities; or
(6) Make loans to any person except by (a) the acquisition of debt instruments
and making portfolio investments, (b) entering into repurchase agreements
and (c) lending portfolio securities.
In connection with Restriction (1) above, the 1940 Act currently permits investment companies to borrow money so long as there is 300% asset coverage of the borrowing (i.e., borrowings do not exceed one-third of the investment company's total assets after subtracting liabilities other than the borrowings). There is no current intent to borrow money, except for the limited purposes described in the prospectus.
Notwithstanding the investment policies and restrictions of each 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 following nonfundamental investment policies have been adopted by each Fund. A policy may be changed by the Trustees with respect to a Fund without approval by the Fund's shareholders. Each Fund will not:
* make short sales of securities or maintain a short position, unless at all times when a short position is open (i) 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 or (ii) it holds in a segregated account cash or other liquid securities (to the extent required under the 1940 Act) in an amount equal to the current market value of the
securities sold short, and unless not more than 25% of its net assets
(taken at current value) is held as collateral for such sales at any one
time; or
* invest more than 15% of net assets in investments which are not readily
marketable, including restricted securities and repurchase agreements
maturing in more than seven days. Restricted securities for the purposes of
this limitation do not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 and commercial paper issued
pursuant to Section 4(2) of said Act that the Board of Trustees, or its
delegate, determines to be liquid. Any such determination by a delegate
will be made pursuant to procedures adopted by the Board. When investing in
Rule 144A securities, the level of portfolio illiquidity may be increased
to the extent that eligible buyers become uninterested in purchasing such
securities.
No Fund will invest 25% or more of its total assets in any one industry. For purposes of the foregoing policy, securities of the U.S. Government, its agencies, or instrumentalities are not considered to represent industries. Municipal obligations backed by the credit of a governmental entity are also not considered to represent industries. However, municipal obligations backed only by the assets and revenues of non-governmental users may for this purpose be deemed to be issued by such non-governmental users. The foregoing 25% limitation would apply to these issuers. As discussed in the prospectus and this SAI, a Fund may invest more than 25% of its total assets in certain economic sectors, such as revenue bonds, housing, hospitals and other health care facilities, utilities and industrial development bonds. Each Fund reserves the right to invest more than 25% of total assets in each of these sectors.
For purposes of a Fund's investment restrictions and diversification status, the determination of the "issuer" of a municipal obligation will be made by the Fund's 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 acquisition by a Fund of such security or asset. Accordingly, any later increase or decrease resulting from a change in values, assets or other circumstances or any subsequent rating change made by a rating service (or as determined by the investment adviser if the security is not rated by a rating agency), will not compel a Fund to dispose of such security or other asset. However, a Fund must always be in compliance with the borrowing policy and limitation on investing in illiquid securities set forth above. If a sale of securities is required to comply with the 15% limit on illiquid securities, such sales will be made in an orderly manner with consideration of the best interests of shareholders.
MANAGEMENT AND ORGANIZATION
Fund Management. The Trustees of the Trust are responsible for the overall management and supervision of the affairs of the Trust. The Trustees and officers of the Trust 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. Trustees and officers of the Trust hold indefinite terms of office. The "noninterested Trustees" consist of those Trustees who are not "interested persons" of the Trust, as that term is defined under the 1940 Act. The business address of each Trustee and officer is The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton Vance Corp., "EV" refers to Eaton Vance Inc. and "EVD" refers to Eaton Vance Distributors, Inc. EVC and EV are the corporate parent and trustee, respectively, of Eaton Vance and BMR. EVD is the principal underwriter of each Fund (see "Principal Underwriter" under "Other Service Providers").
Number of
Portfolios in
Fund Complex Other
Position(s) with the Term of Office and Principal Occupations(s) Overseen By Directorships
Name and Date of Birth Trust Length of Service During Past Five Years Trustee(1) Held
---------------------- -------------------- ------------------ ------------------------ ------------- -------------
INTERESTED TRUSTEE
JAMES B. HAWKES Vice President and Vice President Chairman, President and 197 Director of EVC
11/9/41 Trustee and Trustee since Chief Executive Officer of
1985 BMR, Eaton Vance, EVC and
EV; Director of EV; Vice
President and Director of
EVD. Trustee and/or officer
of 197 registered investment
companies in the Eaton Vance
Fund Complex. Mr. Hawkes is
an interested person because
of his positions with BMR,
Eaton Vance EVC and EV, which
are affiliates of the Trust
and the Portfolio.
9
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Number of
Portfolios in
Fund Complex Other
Position(s) with the Term of Office and Principal Occupations(s) Overseen By Directorships
Name and Date of Birth Trust Length of Service During Past Five Years Trustee(1) Held
---------------------- -------------------- ------------------ ------------------------ ------------- -------------
NONINTERESTED TRUSTEES
BENJAMIN C. ESTY Trustee Since 2005 Professor, Harvard University 135 None
1/2/63 Graduate School of Business
Administration (since 2003).
Formerly, Associate Professor,
Harvard University Graduate
School of Business
Administration (2000-2003).
SAMUEL L. HAYES, III Chairman of the Trustee since 1986 Jacob H. Schiff Professor of 197 Director of
2/23/35 Board and Trustee and Chairman of Investment Banking Emeritus, Tiffany & Co.
the Board since Harvard University Graduate (specialty
2005 School of Business retailer) and
Administration. Telect, Inc.
(telecommunication
services company)
WILLIAM H. PARK Trustee Since 2003 President and Chief Executive 197 None
9/19/47 Officer, Prizm Capital
Management, LLC (investment
management firm) (since
(2002). Executive Vice
President and Chief
Financial Officer, United
Asset Management Corporation
(a holding company owning
institutional investment
management firms)
(1982-2001).
RONALD A. PEARLMAN Trustee Since 2003 Professor of Law, Georgetown 197 None
7/10/40 University Law Center (since
1999). Tax Partner, Covington
& Burling, Washington, DC
(1991-2000).
NORTON H. REAMER Trustee Since 1985 President, Chief Executive 197 None
9/21/35 Officer and a Director of
Asset Management Finance
Corp. (a specialty finance
company serving the
investment management
industry) (since October
2003). President, Unicorn
Corporation (an investment
and financial advisory
services company) (since
September 2000). Formerly,
Chairman and Chief Operating
Officer, Hellman, Jordan
Management Co., Inc. (an
investment management
company) (2000-2003).
Formerly, Advisory Director
of Berkshire Capital
Corporation (investment
banking firm) (2002-2003).
Formerly Chairman of the
Board, United Asset
Management Corporation (a
holding company owning
institutional investment
management firms) and
Chairman, President and
Director, UAM Funds (mutual
funds) (1980-2000).
LYNN A. STOUT Trustee Since 1998 Professor of Law, University 197 None
9/14/57 of California at Los Angeles
School of Law (since July
2001). Formerly, Professor of
Law, Georgetown University
Law Center.
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RALPH F. VERNI Trustee Since 2005 Consultant and private 135 Director of W.P.
1/26/43 investor (since 2000). Formerly Carey & Company LLC
President and Chief Executive (manager of real
Officer, Redwood Investment estate investment
Systems, Inc. (software trusts)
developer (2000). Formerly,
President and Chief Executive
Officer, State Street Research
& Management (investment
adviser), SSRM Holdings (parent
of State Street Research &
Management), and SSR Realty
(institutional realty manager)
(1992-2000).
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(1) Includes both master and feeder funds in a master-feeder structure.
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
Position(s) with the Term of Office and
Name and Date of Birth Trust Length of Service Principal Occupations(s) During Past Five Years
---------------------- -------------------- ------------------ -----------------------------------------------
THOMAS J. FETTER President Since 1990 Vice President of Eaton Vance and BMR. Officer of 124
8/20/43 registered investment companies managed by Eaton Vance or BMR.
WILLIAM H. AHERN, JR. Vice President Since 2004 Vice President of Eaton Vance and BMR. Officer of 78 registered
7/28/59 investment companies managed by Eaton Vance or BMR.
CRAIG R. BRANDON Vice President Since 2004 Vice President of Eaton Vance and BMR. Officer of 44 registered
12/21/66 investment companies managed by Eaton Vance or BMR.
CYNTHIA J. CLEMSON Vice President Since 2004 Vice President of Eaton Vance and BMR. Officer of 107
3/2/63 registered investment companies managed by Eaton Vance or BMR.
10
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ROBERT B. MACINTOSH Vice President Since 1993 Vice President of Eaton Vance and BMR. Officer of 124
1/22/57 registered investment companies managed by Eaton Vance or BMR.
THOMAS M. METZOLD Vice President Since 2004 Vice President of Eaton Vance and BMR. Officer of 49 registered
8/3/58 investment companies managed by Eaton Vance or BMR.
ALAN R. DYNNER Secretary Since 1997 Vice President, Secretary and Chief Legal Officer of BMR, Eaton
10/10/40 Vance, EVD, EV and EVC. Officer of 197 registered investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR Treasurer Since 1988 Vice President of Eaton Vance, BMR and EVD. Officer of 121
4/1/45 registered investment companies managed by Eaton Vance or BMR.
PAUL M. O'NEIL Chief Compliance Since 2004 Vice President of Eaton Vance and BMR. Officer of 197
7/11/53 Officer registered investment companies managed by Eaton Vance or BMR.
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* Prior to 2004, Mr. Fetter was President of each Portfolio since 1992, Mr.
Ahern was Vice President of New Jersey and Ohio Portfolios since 1995 and
Massachusetts and New York Portfolios since 1997, Ms. Clemson was Vice
President of California Portfolio since 1997, of Florida Portfolio since
1998, and of Pennsylvania Portfolio since 2000 and Mr. MacIntosh was Vice
President of each Portfolio since 1992.
The Board of Trustees of the Trust have several standing Committees, including the Governance Committee, the Audit Committee and the Special Committee. The Governance, the Audit and the Special Committees are each comprised of only noninterested Trustees. The former Contract Review Subcommittee of the Special Committee was comprised of only noninterested Trustees.
Messrs. Messrs. Hayes, Park, Pearlman, Reamer and Ms. Stout are members of the Governance Committee of the Board of Trustees of the Trust. Ms. Stout currently serves as chairperson of the Governance Committee. The purpose of the Governance Committee is to consider, evaluate and make recommendations to the Board of Trustees with respect to the structure, membership and operation of the Board of Trustees and the Committees thereof, including the nomination and selection of noninterested Trustees and a Chairperson of the Board of Trustees and the compensation of such persons. During the fiscal year ended March 31, 2005, the Governance Committee convened six times.
The Governance Committee will, when a vacancy exists or is anticipated, consider any nominee for noninterested Trustee recommended by a shareholder if such recommendation is submitted in writing to the Governance Committee, contains sufficient background information concerning the candidate, including evidence the candidate is willing to serve as a noninterested Trustee if selected for the position, and is received in a sufficiently timely manner.
Messrs. Reamer (Chair), Hayes, Park, Verni and Ms. Stout are members of the
Audit Committee of the Board of Trustees of the Trust. The Board of Trustees has
designated Messrs. Hayes, Park and Reamer, each a noninterested Trustee, as
audit committee financial experts. The Audit Committee's purposes are to (i)
oversee each Fund's accounting and financial reporting processes, its internal
control over financial reporting, and, as appropriate, the internal control over
financial reporting of certain service providers; (ii) oversee or, as
appropriate, assist Board oversight of the quality and integrity of each Fund's
financial statements and the independent audit thereof; (iii) oversee, or, as
appropriate, assist Board oversight of, each Fund's compliance with legal and
regulatory requirements that relate to each Fund's accounting and financial
reporting, internal control over financial reporting and independent audits;
(iv) approve prior to appointment the engagement and, when appropriate,
replacement of the independent registered public accounting firm, and, if
applicable, nominate the independent registered public accounting firm to be
proposed for shareholder ratification in any proxy statement of a Fund; (v)
evaluate the qualifications, independence and performance of the independent
registered public accounting firm and the audit partner in charge of leading the
audit; and (vi) prepare, as necessary, audit committee reports consistent with
the requirements of Rule 306 of Regulation S-K for inclusion in the proxy
statement of a Fund. During the fiscal year ended March 31, 2005, the Audit
Committee convened five times.
Messrs. Hayes (Chair), Esty, Park, Pearlman and Reamer are currently members of the Special Committee of the Board of Trustees of the Trust. Prior to February 9, 2004, the Special Committee's members were Messrs. Hayes (Chairman), Park, Pearlman and Reamer. Prior to February 9, 2004, the purpose of the Special Committee was to consider, evaluate and make recommendations to the full Board of Trustees concerning (i) all contractual arrangements with service providers to the Trust, including investment advisory, 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 Funds or investors therein. On February 9, 2004,
the Special Committee adopted a new charter and expanded its membership to include Ms. Stout. Under its new charter, the purposes of the Special Committee are to consider, evaluate and make recommendations to the Board of Trustees concerning the following matters: (i) contractual arrangements with each service provider to the Funds, including advisory, sub-advisory, transfer agency, custodial and fund accounting, distribution services and administrative services; (ii) any and all other matters in which any service provider (including Eaton Vance or any affiliated entity thereof) has an actual or potential conflict of interest with the interests of the Funds or investors therein; and (iii) any other matter appropriate for review by the noninterested Trustees, unless the matter is within the responsibilities of the Audit Committee or the Governance Committee. In addition, pursuant to its revised charter, the Special Committee established a Contract Review Subcommittee to perform certain functions, including to request and evaluate, not less frequently than annually, such information as may reasonably be necessary to allow the Subcommittee to evaluate the terms of each: (a) proposed new or amended or existing contracts for the provision of services by any investment adviser, sub-adviser, underwriter, administrator and any affiliate of the foregoing; and (b) plan of distribution pursuant to Rule 12b-1 under the 1940 Act. On August 16, 2004, the Special Committee adopted a revised Special Committee Charter which eliminated the Contract Review Subcommittee, because it was determined that its function could be carried out by the full Special Committee. The members of the Contract Review Subcommittee were Messrs. Hayes (Chairman), Park, Pearlman and Reamer. During the fiscal year ended March 31, 2005, the Special Committee convened eleven times.
Share Ownership. The following table shows the dollar range of equity securities beneficially owned by each Trustee in each Fund and in all Eaton Vance Funds overseen by the Trustee as of December 31, 2004. Interests in a Portfolio cannot be purchased by a Trustee.
Dollar Range of Equity Securities Owned by
------------------------------------------
Fund Name Benjamin C. Esty(2)(3) James B. Hawkes(1) Samuel L. Hayes(2) William H. Park(2)
--------- ---------------------- ------------------ ------------------ ------------------
California Fund None None None None
Florida Fund None None None None
Massachusetts Fund None None None None
New Jersey Fund None None None None
New York Fund None None None None
Ohio Fund None None None None
Pennsylvania Fund None None None None
Aggregate Dollar Range of Equity
Securities Owned in all Registered
Funds Overseen by Trustee in the
Eaton Vance Family of Funds None over $100,000 over $100,000* over $100,000
Dollar Range of Equity Securities Owned by
------------------------------------------
Fund Name Ronald A. Pearlman(2) Norton H. Reamer(2) Lynn A. Stout(2) Ralph F. Verni(2)(3)
--------- --------------------- ------------------- ---------------- --------------------
California Fund None None None None
Florida Fund None None None None
Massachusetts Fund None None None None
New Jersey Fund None None None None
New York Fund None None None None
Ohio Fund None None None None
Pennsylvania Fund None None None None
Aggregate Dollar Range of Equity
Securities Owned in all Registered
Funds Overseen by Trustee in the
Eaton Vance Family of Funds over $100,000 over $100,000 over $100,000* None
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(1) Interested Trustee.
(2) Noninterested Trustees.
(3) Messrs. Esty and Verni were elected as Trustees on April 29, 2005 and thus
had no beneficial ownership of securities in a Fund or in the Eaton Vance
Fund Complex as of December 31, 2004.
* Includes shares which may be deemed to be beneficially owned through a
Trustee Deferred Compensation Plan.
As of December 31, 2004, no noninterested Trustee or any of their immediate family members owned beneficially or of record any class of securities of EVC, EVD or any person controlling, controlled by or under common control with EVC or EVD.
During the calendar years ended December 31, 2003 and December 31, 2004, no noninterested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any person controlling, controlled by or under common control with EVC or EVD;
2. Any direct or indirect material interest in any transaction or series of similar transactions with (i) the Trust or any Fund; (ii) another fund managed by EVC, distributed by EVD or a person controlling, controlled by or under common control with EVC or EVD; (iii) EVC or EVD; (iv) a person controlling, controlled by or under common control with EVC or EVD; or (v) an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Trust or any Fund; (ii)
another fund managed by EVC, distributed by EVD or a person controlling,
controlled by or under common control with EVC or EVD; (iii) EVC or EVD;
(iv) a person controlling, controlled by or under common control with EVC
or EVD; or (v) an officer of any of the above.
During the calendar years ended December 31, 2003 and December 31, 2004, no officer of EVC, EVD or any person controlling, controlled by or under common control with EVC or EVD served on the Board of Directors of a company where a noninterested Trustee of the Trust or any of their immediate family members served as an officer.
Trustees of each Fund 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 a Fund 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 a Fund's assets, liabilities, and net income per share, and will not obligate a Fund to retain the services of any Trustee or obligate a Fund to pay any particular level of compensation to the Trustee. The Trust does not have a retirement plan for Trustees.
The fees and expenses of the Trustees of the Trust are paid by the Funds (and other series of the Trust). (A Trustee of the Trust who is a member of the Eaton Vance organization receives no compensation from the Trust). During the fiscal year ended March 31, 2005, the Trustees of the Trust earned the following compensation in their capacity as Trustees from the Trust. Prior to October 8, 2004, each Fund invested all of its assets in a corresponding Portfolio. During the fiscal year ended March 31, 2005, the Trustees of the Portfolios earned the following compensation in their capacity as Portfolio Trustees. For the year ended December 31, 2004, the Trustees earned the following compensation in their capacities as Trustees of the funds in the Eaton Vance fund complex(1):
Jessica M. Samuel L. William H. Ronald A. Norton H. Lynn A.
Sounce of Compensation Bibliowicz(7) Hayes Park(3) Pearlman Reamer Stout(4)
----------------------- ------------- --------- ---------- --------- --------- --------
Trust(2) $ $ $ $ $ $
California Portfolio
Florida Portfolio
Massachusetts Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Trust and Fund Complex (5)
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(1) As of August 1, 2005, the Eaton Vance fund complex consists of 197
registered investment companies or series thereof. Messrs. Esty and Verni
were elected as Trustees on April 29, 2005, and thus did not receive fees
for the period shown in the above table.
(2) The Trust consisted of 8 Funds as of March 31, 2005.
(3) Includes a cumulative deferred compensation from Trust and Portfolio as
follows: California - $___; Florida - $___; Massachusetts - $___; New
Jersey - $___ ; New York - $___; Ohio - $___; and Pennsylvania - $___.
(4) Includes a cumulative deferred compensation from Trust and Portfolio as
follows: California - $___; Florida - $___; Massachusetts - $___; New
Jersey - $___; New York - $___; Ohio - $___; and Pennsylvania - $___.
(5) Includes a cumulative $___ of deferred compensation from Trust and
Portfolio.
(6) Includes a cumulative $___ of deferred compensation from Trust and
Portfolio.
(7) Ms. Bibliowicz resigned as a Trustee effective April 15, 2004.
Organization. Each Fund is a series of the Trust, which was established under Massachusetts law on October 23, 1985 and is operated as an open-end management investment company. Prior to October 8, 2004, each Fund invested all of its assets in a corresponding Portfolio.
The Trust may issue an unlimited number of shares of beneficial interest (no par value per share) in one or more series (such as a Fund). The Trustees of the Trust have divided the shares of each Fund into multiple classes. Each class represents an interest in a Fund, but is subject to different expenses, rights and privileges. The Trustees have the authority under the Declaration of Trust to create additional classes of shares with differing rights and privileges. When issued and outstanding, shares are fully paid and nonassessable by the Trust. Shareholders are entitled to one vote for each full share held. Fractional shares may be voted proportionately. Shares of a Fund will be voted together except that only shareholders of a particular class may vote on matters affecting only that class. Shares have no preemptive or conversion rights and
are freely transferable. In the event of the liquidation of a Fund, shareholders of each class are entitled to share pro rata in the net assets attributable to that class available for distribution to shareholders.
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 or her from that office either by a written declaration filed with the Trust's custodian or by votes cast at a meeting called for that purpose. The By-laws further provide that under certain circumstances the shareholders may call a meeting to remove a Trustee and that the Trust is required to provide assistance in communication with shareholders about such a meeting.
The Trust's Declaration of Trust may be amended by the Trustees when authorized
by vote of a majority of the outstanding voting securities of the Trust, the
financial interests of which are affected by the amendment. The Trustees may
also amend the Declaration of Trust without the vote or consent of shareholders
to change the name of the Trust or any series or to make such other changes
(such as reclassifying series or classes of shares or restructuring the Trust)
as do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable federal or
state laws or regulations. The Trust's By-laws provide that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with any litigation or proceeding in which they may be involved
because of their offices with the Trust. However, no indemnification will be
provided to any Trustee or officer for any liability to the Trust or
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
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.
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 Fund shareholders and the Trust's By-laws provide that the Trust shall assume the defense on behalf of any Fund shareholders. The Declaration of Trust also contains provisions limiting the liability of a series or class to that series or class. Moreover, the Trust's By-laws also provide for indemnification out of Fund property 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 each Fund are readily marketable and will ordinarily substantially exceed its liabilities. In light of the nature of each Fund's business and the nature of its assets, management believes that the possibility of the Fund's liability exceeding its assets, and therefore the shareholder's risk of personal liability, is remote.
Proxy Voting Policy. The Boards of Trustees of the Trust have adopted a proxy voting policy and procedure (the "Fund Policy"), pursuant to which the Trustees have delegated proxy voting responsibility to the investment adviser and adopted the proxy voting policies and procedures of the investment adviser (the "Policies"), which are described below. The Trustees will review each Fund's proxy voting records from time to time and will annually consider approving the Policies for the upcoming year. In the event that a conflict of interest arises between each Fund's shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund, the investment adviser will generally refrain from voting the proxies related to the companies giving rise to such conflict until it consults with the Board's Special Committee except as contemplated under the Fund Policy. The Board's Special Committee will instruct the investment adviser on the appropriate course of action.
The Policies are designed to promote accountability of a company's management to its shareholders and to align the interests of management with those shareholders. The investment adviser will generally support company management on proposals relating to environmental and social policy issues, on matters regarding the state of organization of the company and routine matters related to corporate administration which are not expected to have a significant economic impact on the company or its shareholders. On all other matters, the investment adviser will review each matter on a case-by-case basis and reserves
the right to deviate from the Policies' guidelines when it believes the situation warrants such a deviation. The Policies include voting guidelines for matters relating to, among other things, the election of directors, approval of independent auditors, executive compensation, corporate structure and anti-takeover defenses. The investment adviser may abstain from voting from time to time where it determines that the costs associated with voting a proxy outweigh the benefits derived from exercising the right to vote.
In addition, the investment adviser will monitor situations that may result in a conflict of interest between each Fund's shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund by maintaining a list of significant existing and prospective corporate clients. The investment adviser's personnel responsible for reviewing and voting proxies on behalf of each Fund will report any proxy received or expected to be received from a company included on that list to members of senior management of the investment adviser identified in the Policies. Such members of senior management will determine if a conflict exists. If a conflict does exist, the investment adviser will seek instruction on how to vote from the Special Committee. For a copy of the Fund Policy and investment adviser Policies, see Appendix F and Appendix G, respectively. Information on how each Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30 is available (1) without charge, upon request, by calling 1-800-262-1122, and (2) on the Securities and Exchange Commission's website at http://www.sec.gov.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Investment Advisory Services. The investment adviser manages the investments and affairs of each Fund and provides related office facilities and personnel subject to the supervision of the Trust's Board of Trustees. The investment adviser furnishes investment research, advice and supervision, furnishes an investment program and determines what securities will be purchased, held or sold by the Fund and what portion, if any, of the Fund's assets will be held uninvested. Each Investment Advisory Agreement requires the investment adviser to pay the salaries and fees of all officers and Trustees of the Trust who are members of the investment adviser's organization and all personnel of the investment adviser performing services relating to research and investment activities.
For a description of the compensation that each Fund pays the investment adviser, see the prospectus. The following table sets forth the net assets of each Fund and the advisory fees earned during the three fiscal years ended March 31, 2005.
Advisory Fee Paid for Fiscal Years Ended
----------------------------------------
Portfolio Net Assets at 3/31/05 3/31/05* 3/31/04* 3/31/03*
--------- --------------------- -------- -------- --------
California $ $ $156,301 $113,500
Florida 304,522 239,550
Massachusetts 352,838 251,173
New Jersey 231,685 190,709
New York 527,635 346,953
Ohio 97,505 87,291
Pennsylvania 286,372 212,121
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* For the fiscal year ending March 31, 2005, represents advisory fees paid by each Fund and each Portfolio and for the fiscal year ended March 31, 2004 and 2003, represents advisory fees paid by each Portfolio
Each Investment Advisory Agreement with the investment adviser 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 Trust 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 Trust or by vote of a majority of the outstanding voting securities of the Fund. Each 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 Fund, and the Agreement will terminate automatically in the event of its assignment. Each Agreement provides that the investment adviser may render services to others. Each Agreement also provides that the investment adviser shall not be liable for any loss incurred in connection with the performance of its duties, or action taken or omitted under the 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.
Portfolio Managers. The portfolio managers, as the case may be, (each referred to as a "portfolio manager") of each Fund are listed below. Each portfolio manager manages other investment companies and/or investment accounts in addition to a Fund. The following tables show, as of a Fund's most recent fiscal year end, the number of accounts each portfolio manager managed in each of the listed categories and the total assets in the accounts managed within each category. The table also shows the number of accounts with respect to which the
advisory fee is based on the performance of the account, if any, and the total assets in those accounts.
Number of Total Assets of Number of Accounts Total Assets of Accounts
California Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
----------------------- ------------ --------------- ------------------------ ------------------------
Cynthia J. Clemson
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
Number of Total Assets of Number of Accounts Total Assets of Accounts
Florida Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
-------------------- ------------ --------------- ------------------------ ------------------------
Craig R. Brandon
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
Number of Total Assets of Number of Accounts Total Assets of Accounts
Massachusetts Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
-------------------------- ------------ --------------- ------------------------ ------------------------
William H. Ahern
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
Number of Total Assets of Number of Accounts Total Assets of Accounts
New Jersey Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
----------------------- ------------ --------------- ------------------------ ------------------------
Craig R. Brandon
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
Number of Total Assets of Number of Accounts Total Assets of Accounts
New York Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
--------------------- ------------ --------------- ------------------------ ------------------------
William H. Ahern
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
16
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Number of Total Assets of Number of Accounts Total Assets of Accounts
Ohio Limited Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
----------------- ------------ --------------- ------------------------ ------------------------
William H. Ahern
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
Number of Total Assets of Number of Accounts Total Assets of Accounts
Pennsylvania Limitd Fund All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee
------------------------ ------------ --------------- ------------------------ ------------------------
Craig R. Brandon
Registered Investment Companies $ $
Other Pooled Investment Vehicles $ $
Other Accounts $ $
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* In millions of dollars. For registered investment companies, assets represent net assets of all open-end investment companies and gross assets of all closed-end investment companies.
The following table shows the shares beneficially owned of a Fund as of the Fund's most recent fiscal year ended March 31, 2005. Interests in a Portfolio cannot be purchased by a portfolio manager.
Dollar Range of Equity Securities
Portfolio Manager Owned in the Fund
----------------- -----------------
Cynthia J. Clemson $
Craig R. Brandon $
William H. Ahern $
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It is possible that conflicts of interest may arise in connection with the portfolio managers' management of a Fund's investments on the one hand and the investments of other accounts for which the portfolio manager is responsible for on the other. For example, a portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Fund and other accounts he or she advises. In addition, due to differences in the investment strategies or restrictions between a Fund and the other accounts, a portfolio manager may take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by a portfolio manager may compensate the investment adviser based on the performance of the securities held by that account. The existence of such a performance based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities. Whenever conflicts of interest arise, the portfolio manager will endeavor to exercise his or her discretion in a manner that he or she believes is equitable to all interested persons.
Compensation Structure. Compensation of the investment adviser's portfolio managers and other investment professional has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) annual stock-based compensation consisting of options to purchase shares of EVC's nonvoting common stock and/or restricted shares of EVC's nonvoting common stock. The investment adviser's investment professionals also receive certain retirement, insurance and other benefits that are broadly available to all the investment adviser's employees. Compensation of the investment adviser's investment professionals is reviewed primarily on an annual basis. Cash bonuses, stock-based compensation awards, and adjustments in base salary are typically paid or put into effect at or shortly after the October 31st fiscal year-end of EVC.
Method to Determine Compensation. The investment adviser compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities and the total return performance of managed funds and accounts versus appropriate peer groups or benchmarks. Performance is normally based on periods ending on the September 30th preceding fiscal year-end. Fund performance is evaluated primarily versus peer groups of funds as determined by Lipper Inc. and/or Morningstar, Inc. In evaluating the performance of a fund and its manager, primary emphasis is normally placed on three-year performance, with secondary consideration of performance over longer and shorter periods. For funds that are tax-managed or otherwise have an objective of after-tax returns, performance is measured net of taxes. For other funds, performance is evaluated on a pre-tax basis. In addition to rankings within peer groups of funds on the basis of absolute performance, consideration may also be given to risk-adjusted performance. For funds with an investment objective other than total return
(such as current income), consideration will also be given to the fund's success in achieving its objective. For managers responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis, based on averages or weighted averages among managed funds and accounts. Funds and accounts that have performance-based advisory fees are not accorded disproportionate weightings in measuring aggregate portfolio manager performance.
The compensation of portfolio managers with other job responsibilities (such as heading an investment group or providing analytical support to other portfolios) will include consideration of the scope of such responsibilities and the managers' performance in meeting them.
The investment adviser seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. The investment adviser participates in investment-industry compensation surveys and utilizes survey data as a factor in determining salary, bonus and stock-based compensation levels for portfolio managers and other investment professionals. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of the investment adviser and its parent company. The overall annual cash bonus pool is based on a substantially fixed percentage of pre-bonus operating income. While the salaries of the investment adviser's portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in manager performance and other factors as described herein. For a high performing portfolio manager, cash bonuses and stock-based compensation may represent a substantial portion of total compensation.
Administrative Services. As indicated in the prospectus, Eaton Vance serves as administrator of each Fund, but currently receives no compensation for providing administrative services to the Fund. Under its Administrative Services Agreement, Eaton Vance has been engaged to administer each Fund's affairs, subject to the supervision of the Trustees of the Trust, and shall furnish office space and all necessary office facilities, equipment and personnel for administering the affairs of each Fund.
Sub-Transfer Agency Services. Eaton Vance also serves as sub-transfer agent for each Fund. As sub-transfer agent, Eaton Vance performs the following services directly on behalf of each Fund: 1) provides call center services to financial intermediaries and shareholders; 2) answers written inquiries related to shareholder accounts (matters relating to portfolio management, distribution of shares and other management policy questions will be referred to each Fund); 3) furnishes an SAI to any shareholder who requests one in writing or by telephone from each Fund; and 4) processes transaction requests received via telephone. For the transfer agency services it provides, Eaton Vance receives an aggregate annual fee equal to the lesser of $2.5 million or the actual expenses incurred by Eaton Vance in the performance of those services. This fee is paid to Eaton Vance by a Fund's transfer agent from fees it receives from the Eaton Vance funds. Each Fund will pay a pro rata share of such fee. For the fiscal year ended March 31, 2005, Eaton Vance was paid or accrued as follows by the transfer agent for sub-transfer agency services performed on behalf of each Fund:
California Florida Massachusetts New Jersey New York Ohio Pennsylvania
$ $ $ $ $ $ $
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Information About BMR and Eaton Vance. BMR and Eaton Vance are business trusts organized under Massachusetts law. Eaton Vance, Inc. ("EV") serves as trustee of BMR and Eaton Vance. EV and Eaton Vance are wholly-owned subsidiaries of Eaton Vance Corporation ("EVC"), a Maryland corporation and publicly-held holding companyBMR and Eaton Vance are EVC through its subsidiaries and affiliates engages primarily in investment management, administration and marketing activities. The Directors of EVC are James B. Hawkes, Thomas E. Faust Jr., John G.L. Cabot, Leo I. Higdon, Jr., Vincent M. O'Reilly, Winthrop H. Smith, Jr. and Ralph Z. Sorenson. All shares of the outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the Voting Trustees of which are Messrs. Hawkes, Faust, Jeffrey P. Beale, Alan R. Dynner, Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M. Steul, Payson F. Swaffield, Michael W. Weilheimer, and Wharton P. Whitaker (all of whom are officers of Eaton Vance). The Voting Trustees have unrestricted voting rights for the election of Directors of EVC. All of the outstanding voting trust receipts issued under said Voting Trust are owned by certain of the officers of BMR and Eaton Vance who are also officers, or officers and Directors of EVC and EV. As indicated under "Management and Organization", all of the officers of the Trust (as well as Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance organization.
Code of Ethics. The investment adviser, principal underwriter, and each Fund have adopted Codes of Ethics governing personal securities transactions. Under the Codes, Eaton Vance employees may purchase and sell securities (including
securities held or eligible for purchase by a Fund) subject to the provisions of the Codes and certain employees are also subject to pre-clearance, reporting requirements and other procedures.
Expenses. Each Fund is responsible for all expenses not expressly stated to be payable by another party (such as expenses required to be paid pursuant to an agreement with the investment adviser, the principal underwriter or the administrator). In the case of expenses incurred by the Trust, each Fund is responsible for its pro rata share of those expenses. The only expenses of a Fund allocated to a particular class are those incurred under the Distribution or Service Plan applicable to that class, the fee paid to the principal underwriter for handling repurchase transactions and certain other class-specific expenses.
OTHER SERVICE PROVIDERS
Principal Underwriter. Eaton Vance Distributors, Inc. ("EVD"), The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109, is the principal underwriter of each Fund. The principal underwriter acts as principal in selling shares under a Distribution Agreement with the Trust. The expenses of printing copies of prospectuses used to offer shares and other selling literature and of advertising are borne by the principal underwriter. The fees and expenses of qualifying and registering and maintaining qualifications and registrations of a Fund and its shares under federal and state securities laws are borne by the Fund. The Distribution Agreement as it applies to Class A shares is renewable annually by the Board of Trustees of the Trust (including a majority of the noninterested Trustees), may be terminated on six months' notice by either party and is automatically terminated upon assignment. The Distribution Agreement as it applies to Class B and C shares 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 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 Class B and C shares or on six months' notice by the principal underwriter and is automatically terminated upon assignment. The principal underwriter distributes shares on a "best efforts" basis under which it is required to take and pay for only such shares as may be sold. The Trust has authorized the principal underwriter to act as its agent in repurchasing shares at a rate of $2.50 for each repurchase transaction handled by the principal underwriter. EVD is an indirect, wholly-owned subsidiary of EVC. Mr. Hawkes is a Vice President and Director, Mr. Dynner is a Vice President, Secretary and Clerk and Mr. O'Connor is a Vice President of EVD.
Custodian. Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116, serves as custodian to each Fund. IBT has custody of all cash and securities of a Fund, maintains the general ledger of each Fund and computes the daily net asset value of shares of each Fund. In such capacity it attends to details in connection with the sale, exchange, substitution, transfer or other dealings with each Fund's investments, receives and disburses all funds and performs various other ministerial duties upon receipt of proper instructions from the Trust. IBT provides services in connection with the preparation of shareholder reports and the electronic filing of such reports with the SEC. EVC and its affiliates and their officers and employees from time to time have transactions with various banks, including IBT. It is Eaton Vance's opinion that the terms and conditions of such transactions were not and will not be influenced by existing or potential custodial or other relationships between each Fund and such banks.
Independent Registered Public Accounting Firm. _________________________, is the independent registered public accounting firm of each Fund, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation of filings with the SEC.
Transfer Agent. PFPC Inc., P.O. Box 9653, Providence, RI 02940-9653, serves as transfer and dividend disbursing agent for each Fund.
CALCULATION OF NET ASSET VALUE
The net asset value of Fund is computed by IBT (as agent and custodian for Fund) by subtracting the liabilities of the Fund from the value of its total assets. Each Fund will be closed for business and will not price their respective shares on the following business holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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 a Fund, and such obligations, including those purchased on a when-issued basis, will normally be valued on the basis of valuations furnished by a pricing service. The pricing service uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities, various relationships between securities, and yield to maturity in determining value. Taxable obligations for which price quotations are readily available normally will be valued at the mean between the latest available bid and asked prices. Open futures positions on debt securities are valued at the most recent settlement prices, unless such price does not reflect the fair value of the
contract, in which case the positions will be valued by or at the direction of the Trustees. Other assets are valued at fair value using methods determined in good faith by or at the direction of the Trustees considering relevant factors, data and information including the market value of freely tradable securities of the same class in the principal market on which such securities are normally traded.
PURCHASING AND REDEEMING SHARES
Additional Information About Purchases. Fund shares are offered for sale only in states where they are registered. Fund shares are continuously offered through investment dealers which have entered into agreements with the principal underwriter. Shares of the Fund are sold at offering price, which is the net asset value plus the initial sales charge, if any. The Fund receives the net asset value. The Fund's principal underwriter receives the sales charge, all or a portion of which may be reallowed to the investment dealers responsible for selling Fund shares. The sales charge table in the prospectus is applicable to purchases of a Fund alone or in combination with purchases of certain other funds offered by the principal underwriter, made at a single time by (i) an individual, or an individual, his or her spouse and their children under the age of twenty-one, purchasing shares for his or their own account, and (ii) a trustee or other fiduciary purchasing shares for a single trust estate or a single fiduciary account. The table is also presently applicable to (1) purchases of Class A shares pursuant to a written Statement of Intention; or (2) purchases of Class A shares pursuant to the Right of Accumulation and declared as such at the time of purchase. See "Sales Charges".
In connection with employee benefit or other continuous group purchase plans, a Fund may accept initial investments of less than $1,000 on the part of an individual participant. In the event a shareholder who is a participant of such a plan terminates participation in the plan, his or her shares will be transferred to a regular individual account. However, such account will be subject to the right of redemption by a Fund as described below.
Suspension of Sales. The Trust may, in its absolute discretion, suspend, discontinue or limit the offering of one or more of its classes of shares at any time. In determining whether any such action should be taken, the Trust's management intends to consider all relevant factors, including (without limitation) the size of a Fund or class, the investment climate and market conditions, the volume of sales and redemptions of shares, and (if applicable) the amount of uncovered distribution charges of the principal underwriter. The Class B and C Distribution Plan may continue in effect and payments may be made under the Plan following any such suspension, discontinuance or limitation of the offering of shares; however, there is no contractual obligation to continue any Plan for any particular period of time. Suspension of the offering of shares would not, of course, affect a shareholder's ability to redeem shares.
Additional Information About Redemptions. The right to redeem shares of a Fund can be suspended and the payment of the redemption price deferred when the Exchange is closed (other than for customary weekend and holiday closings), during periods when trading on the Exchange is restricted as determined by the SEC, or during any emergency as determined by the SEC which makes it impracticable for a Fund to dispose of its securities or value its assets, or during any other period permitted by order of the SEC for the protection of investors.
Due to the high cost of maintaining small accounts, the Trust reserves the right to redeem accounts with balances of less than $750. Prior to such a redemption, shareholders will be given 60 days' written notice to make an additional purchase. However, no such redemption would be required by the Trust if the cause of the low account balance was a reduction in the net asset value of shares. No CDSC will be imposed with respect to such involuntary redemptions.
While normally payments will be made in cash for redeemed shares, the Trust, subject to compliance with applicable regulations, has reserved the right to pay the redemption price of shares of a Fund, either totally or partially, by a distribution in kind of readily marketable securities. The securities so distributed would be valued pursuant to the valuation procedures described in
this SAI. If a shareholder received a distribution in kind, the shareholder could incur brokerage or other charges in converting the securities to cash.
Systematic Withdrawal Plan. The transfer agent will send to the shareholder regular monthly or quarterly payments of any permitted amount designated by the shareholder based upon the value of the shares held. The checks will be drawn from share redemptions and hence, may require the recognition of taxable gain or loss. Income dividends and capital gains distributions in connection with withdrawal plan accounts will be credited at net asset value as of the record date for each distribution. Continued withdrawals in excess of current income will eventually use up principal, particularly in a period of declining market prices. A shareholder may not have a withdrawal plan in effect at the same time he or she has authorized Bank Automated Investing or is otherwise making regular purchases of Fund shares. The shareholder, the transfer agent or the principal underwriter may terminate the withdrawal plan at any time without penalty.
SALES CHARGES
Dealer Commissions. The principal underwriter may, from time to time, at its own expense, provide additional incentives to investment dealers 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 investment dealers 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 investment dealers. The principal underwriter may allow, upon notice to all investment dealers with whom it has agreements, discounts up to the full sales charge during the periods specified in the notice. During periods when the discount includes the full sales charge, such investment dealers may be deemed to be underwriters as that term is defined in the Securities Act of 1933.
Sales Charge Waivers. Class A shares may be sold at net asset value to current and retired Directors and Trustees of Eaton Vance funds and portfolios; to clients (including custodial, agency, advisory and trust accounts) and current and retired officers and employees of Eaton Vance, its affiliates and other investment advisers of Eaton Vance sponsored funds; to officers and employees of IBT and the transfer agent; to persons associated with law firms, consulting firms and others providing services to Eaton Vance and the Eaton Vance funds; and to such persons' spouses, parents, siblings and lineal descendants and their beneficial accounts. Such shares may also be issued at net asset value (1) in connection with the merger (or similar transaction) of an investment company (or series or class thereof) or personal holding company with a Fund (or class thereof), (2) to investors making an investment as part of a fixed fee program whereby an entity unaffiliated with the investment adviser provides multiple investment services, such as management, brokerage and custody, and (3) to investment advisors, financial planners or other intermediaries who place trades for their own accounts or the accounts of their clients and who charge a management, consulting or other fee for their services; clients of such investment advisors, financial planners or other intermediaries who place trades for their own accounts if the accounts are linked to the master account of such investment advisor, financial planner or other intermediary on the books and records of the broker or agent. Class A shares may also be sold at net asset value to registered representatives and employees of investment dealers and bank employees who refer customers to registered representatives of investment dealers. Class A shares are offered at net asset value to the foregoing persons and in the foregoing situations because either (i) there is no sales effort involved in the sale of shares or (ii) the investor is paying a fee (other than the sales charge) to the investment dealer involved in the sale. Any new or revised sales charge or CDSC waiver will be prospective only.
Statement of Intention. If it is anticipated that $100,000 or more of Class A shares and shares of other funds exchangeable for Class A shares of another Eaton Vance fund will be purchased within a 13-month period, the Statement of Intention section of the account application should be completed so that shares may be obtained at the same reduced sales charge as though the total quantity were invested in one lump sum. Shares eligible for the right of accumulation (see below) as of the date of the Statement and purchased during the 13-month period will be included toward the completion of the Statement. If you make a Statement of Intention, the transfer agent is authorized to hold in escrow sufficient shares (5% of the dollar amount specified in the Statement) which can be redeemed to make up any difference in sales charge on the amount intended to be invested and the amount actually invested. A Statement of Intention does not obligate the shareholder to purchase or the Fund to sell the full amount indicated in the Statement.
If the amount actually purchased during the 13-month period is less than that indicated in the Statement, the shareholder will be requested to pay the difference between the sales charge applicable to the shares purchased and the sales charge paid under the Statement of Intention. If the payment is not received in 20 days, the appropriate number of escrowed shares will be redeemed in order to realize such difference. If the total purchases during the 13-month period are large enough to qualify for a lower sales charge than that applicable to the amount specified in the Statement, all transactions will be computed at the expiration date of the Statement to give effect to the lower sales charge. Any difference will be refunded to the shareholder in cash or applied to the purchase of additional shares, as specified by the shareholder. This refund will be made by the investment dealer and the principal underwriter. If at the time
of the recomputation, the investment dealer for the account has changed, the adjustment will be made only on those shares purchased through the current investment dealer for the account.
Right of Accumulation. Under the right of accumulation, the applicable sales charge level is calculated by aggregating the dollar amount of the current purchase and the value (calculated at the maximum current offering price) of any Class A, Advisers Class, Class B, Class C, Class I and/or Class R shares of a Fund or other Eaton Vance funds, as well as shares of Eaton Vance Money Market Fund, owned by the shareholder. Shares of Eaton Vance Cash Management Fund and Eaton Vance Tax Free Reserves cannot be accumulated for purposes of this privilege. The sales charge on the shares being purchased will then be applied at the rate applicable to the aggregate. Shares purchased by an individual, his or her spouse and their children under the age of twenty-one, including shares held for the benefit of any such persons in trust or fiduciary accounts (including retirement accounts) or omnibus or "street name" accounts, will be combined for the purpose of determining whether a purchase will qualify for the right of accumulation and if qualifying, the applicable sales charge level. For any such discount to be made available at the time of purchase a purchaser or his or her investment dealer must provide the principal underwriter (in the case of a purchase made through an investment dealer) or the transfer agent (in the case of an investment made by mail) with sufficient information to permit verification that the purchase order qualifies for the accumulation privilege. Confirmation of the order is subject to such verification. The right of accumulation privilege may be amended or terminated at any time as to purchases occurring thereafter.
Exchange Privilege. In addition to exchanges into the same class of another Eaton Vance fund, Class B shares may be exchanged for shares of a money market fund sponsored by an investment dealer and approved by the principal underwriter (an "investment dealer fund"). The CDSC will not be charged to the shareholder when the shares are exchanged for shares of the investment dealer fund, however, the shareholder will receive no credit toward the completion of the CDSC period for the time that the shareholder holds the exchanged shares of the investment dealer fund. If a shareholder redeems the exchanged shares of the investment dealer fund and does not invest the proceeds into Class B shares of an Eaton Vance fund, the shareholder will be subject to any CDSC applicable at the time the shareholder received the exchanged shares of the investment dealer fund.
Conversion Feature. Class B shares held for the longer of (i) four years or (ii) the time at which the CDSC applicable to such shares expires will automatically convert to Class A shares. For purposes of this conversion, all distributions paid on Class B shares which the shareholder elects to reinvest in Class B shares will be considered to be held in a separate sub-account. Upon the conversion of Class B shares not acquired through the reinvestment of distributions, a pro rata portion of the Class B shares held in the sub-account will also convert to Class A shares. This portion will be determined by the ratio that the Class B shares being converted bears to the total of Class B shares (excluding shares acquired through reinvestment) in the account. This conversion feature is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that the conversion is not taxable for federal income tax purposes.
Distribution and Service Plans
The Trust has in effect a Service Plan (the "Class A Plan") for each Fund's Class A shares that is designed to meet the service fee requirements of the sales charge rule of the NASD. (Management believes service fee payments are not distribution expenses governed by Rule 12b-1 under the 1940 Act, but has chosen to have the Plan approved as if that Rule were applicable.) The Class A Plan provides that Class A shares of each Fund may make service fee payments for personal services and/or the maintenance of shareholder accounts to the principal underwriter, investment dealers and other persons in amounts not exceeding 0.25% of its average daily net assets for any fiscal year. Class A service fees are paid quarterly in arrears. For the service fees paid by Class A shares, see Appendix A.
The Trust also has in effect a compensation-type Distribution Plan (the "Class B
and Class C Plan") pursuant to Rule 12b-1 under the 1940 Act for each Fund's
Class B and Class C shares. On each sale of shares (excluding reinvestment of
distributions) a Class will pay the principal underwriter amounts representing
(i) sales commissions equal to 3% in the case of California, Florida,
Massachusetts, New Jersey, New York and Pennsylvania Funds and 3.5% in the case
of the Ohio Fund of Class B sales and 6.25% of Class C sales of the amount
received by a Fund for each Class share sold and (ii) interest at the rate of 1%
over the prime rate then reported in The Wall Street Journal applied to the
outstanding amounts owed to the principal underwriter, so-called "uncovered
distribution charges". Each Class pays the principal underwriter a distribution
fee, accrued daily and paid monthly, at an annual rate not exceeding 0.75% of
its average daily net assets to finance the distribution of its shares. Such
fees compensate the principal underwriter for the sales commissions paid by it
to investment dealers on the sale of shares, for other distribution expenses
(such as personnel, overhead, travel, printing and postage) and for interest
expenses. The principal underwriter currently pays an up-front sales commission
(except on exchange transactions and reinvestments) of 3.0% of the purchase
price of Class B and 0.85% of the purchase price of Class C shares, and an
up-front service fee of 0.15% on Class C shares. Distribution fees paid by a
Class and CDSCs paid to the Fund by redeeming Class shareholders reduce the
outstanding uncovered distribution charges of the Class. Whenever there are no outstanding uncovered distribution charges of a Class, the Class discontinues payment of distribution fees.
The Trustees of the Trust believe that each Plan will be a significant factor in the expected growth of each Fund's assets, and will result in increased investment flexibility and advantages which have benefitted and will continue to benefit the Fund and its shareholders. The Eaton Vance organization will profit by reason of the operation of each Class B and Class C Plan through an increase in Fund assets and if at any point in time the aggregate amounts received by the principal underwriter pursuant to the Plan and from CDSCs have exceeded the total expenses incurred in distributing Class B and Class C shares. Because payments to the principal underwriter under the Class B and Class C Plan are limited, uncovered distribution charges (sales expenses of the principal underwriter plus interest, less the above fees and CDSCs received by it) may exist indefinitely. For sales commissions, CDSCs and uncovered distribution charges, see Appendix B and Appendix C.
The Class B and Class C Plan also authorize the payment of service fees to the principal underwriter, investment dealers and other persons in amounts not exceeding 0.25% of its average daily net assets for personal services, and/or the maintenance of shareholder accounts. For Class B, this fee is paid quarterly in arrears based on the value of shares sold by such persons. For Class C, investment dealers currently receive (a) a service fee (except on exchange transactions and reinvestments) at the time of sale equal to 0.15% of the purchase price of Class C shares sold by such dealer, and (b) monthly service fees approximately equivalent to 1/12 of 0.15% of the value of Class C shares sold by such dealer. During the first year after a purchase of Class C shares, the principal underwriter will retain the service fee as reimbursement for the service fee payment made to investment dealers at the time of sale. For the service fees paid, see Appendix B and Appendix C.
The Plans continue 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 "Plan Trustees") and (ii) all of the Trustees then in office. Each Plan may be terminated at any time by vote of a majority of the Plan Trustees or by a vote of a majority of the outstanding voting securities of the applicable Class. Each 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 Plans may not be amended to increase materially the payments described therein without approval of the shareholders of the affected Class and the Trustees. So long as a Plan is in effect, the selection and nomination of the noninterested Trustees shall be committed to the discretion of such Trustees. The current Plans were initially approved by the Trustees, including the Plan Trustees, on June 23, 1997. The Trustees of the Trust who are "interested" persons of the Trust have an indirect financial interest in the Plans because their employers (or affiliates thereof) receive distribution and/or service fees under the Plans or agreements related thereto.
PERFORMANCE
Performance Calculations. Average annual total return before deduction of taxes ("pre-tax 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 (i) that all distributions are reinvested at net asset value on the reinvestment dates during the period, (ii) the deduction of the maximum of any initial sales charge from the initial $1,000 purchase, (iii) a complete redemption of the investment at the end of the period, and (iv) the deduction of any applicable CDSC at the end of the period.
Average annual total return after the deduction of taxes on distributions is calculated in the same manner as pre-tax return except the calculation assumes that any federal income taxes due on distributions are deducted from the distributions before they are reinvested. Average annual total return after the deduction of taxes on distributions and taxes on redemption also is calculated in the same manner as pre-tax return except the calculation assumes that (i) any federal income taxes due on distributions are deducted from the distributions before they are reinvested and (ii) any federal income taxes due upon redemption are deducted at the end of the period. After-tax returns are based on the highest federal income tax rates in effect for individual taxpayers as of the time of each assumed distribution and redemption (taking into account their tax character), and do not reflect the impact of state and local taxes. In calculating after-tax returns, the net value of any federal income tax credits available to shareholders is applied to reduce federal income taxes payable on distributions at or near year-end and, to the extent the net value of such credits exceeds such distributions, is then assumed to be reinvested in additional Fund shares at net asset value on the last day of the fiscal year in which the credit was generated or, in the case of certain tax credits, on the date on which the year-end distribution is paid. For pre-tax and after-tax total return information, see Appendix A, Appendix B and Appendix C.
In addition to the foregoing total return figures, each Fund may provide pre-tax and after-tax annual and cumulative total return, as well as the ending redeemable cash value of a hypothetical investment. If shares are subject to a
sales charge, total return figures may be calculated based on reduced sales charges or at net asset value. These returns would be lower if the full sales charge was imposed. After-tax returns may also be calculated using different tax rate assumptions and taking into account state and local income taxes as well as federal taxes.
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 the maximum of any initial 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 based on prescribed methods, reduced by accrued expenses for the period with the resulting number being divided by the average daily number of shares outstanding and entitled to receive distributions during the period. Yield figures do not reflect the deduction of any applicable CDSC, but assume the maximum of any initial sales charge. (Actual yield may be affected by variations in sales charges on investments.) A tax-equivalent yield is computed by using the tax-exempt yield and dividing by one minus a stated tax rate. The stated tax rate will reflect the federal income and certain state and local (if any) taxes applicable to investors in a particular tax bracket and may reflect certain assumptions relating to tax exemptions and deductions. The tax-equivalent yield will differ for investors in other tax brackets or for whom the assumed exemptions and deductions are not available. Tax-equivalent yield is designed to show the approximate yield a taxable investment would have to earn to produce an after-tax yield equal to the tax-exempt yield.
Disclosure of Portfolio Holdings and Related Information. The Board of Trustees has adopted policies and procedures (the "Policies") with respect to the disclosure of information about portfolio holdings of each Fund. Pursuant to the Policies, information about portfolio holdings of a Fund may not be disclosed to any party except as follows:
* Disclosure made in filings with the SEC and posted on the Eaton Vance
website: In accordance with rules established by the SEC, each Fund sends
semiannual and annual reports to shareholders that contain a complete list
of portfolio holdings as of the end of the second and fourth fiscal
quarters, respectively, within 60 days of quarter-end. Each Fund also
discloses complete portfolio holdings as of the end of the first and third
fiscal quarters on Form N-Q, which is filed with the SEC within 60 days of
quarter-end. Each Fund's complete portfolio holdings as reported in annual
and semiannual reports and on Form N-Q are available for viewing on the SEC
website at http:// www.sec.gov and may be reviewed and copied at the SEC's
public reference room (information on the operation and terms of usage of
the SEC public reference room is available at
http://www.sec.gov/info/edgar/prrrules.htm or by calling 1-800-SEC-0330).
Generally within 5 business days of filing with the SEC, each Fund's
portfolio holdings as reported in annual and semiannual reports and on Form
N-Q also are available on Eaton Vance's website at www.eatonvance.com and
are available upon request at no additional cost by contacting Eaton Vance
at 1-800-225-6265.
* Disclosure of certain Portfolio characteristics: Each Fund may also post
information about certain portfolio characteristics (such as top ten
holdings and asset allocation information) as of each calendar quarter end
on the Eaton Vance website approximately ten business days after
quarter-end. Such information is also available upon request by contacting
Eaton Vance at 1-800-225-6265.
* Confidential disclosure for a legitimate Fund purpose: Portfolio holdings
may be disclosed, from time to time as necessary, for a legitimate business
purpose of a Fund, believed to be in the best interests of the Fund and its
shareholders, provided there is a duty or an agreement that the information
be kept confidential. The Policies permit disclosure of portfolio holdings
information to the following: 1) affiliated and unaffiliated service
providers (including the investment adviser, custodian, transfer agent,
principal underwriter, etc.) that have a legal or contractual duty to keep
such information confidential; 2) other persons who owe a fiduciary or
other duty of trust or confidence to the Fund (such as Fund legal counsel
and independent registered public accounting firm); or 3) persons to whom
the disclosure is made in advancement of a legitimate business purpose of a
Fund and who have expressly agreed in writing to maintain the disclosed
information in confidence and to use it only in connection with the
legitimate business purpose underlying the arrangement (such as
arrangements with securities lending agents, credit rating agencies,
statistical ratings agencies, analytical service providers engaged by the
investment adviser, proxy evaluation vendors, pricing services, translation
services, lenders under Fund credit facilities and, for the purpose of
facilitating portfolio transactions of the Eaton Vance Municipals Funds,
municipal bond dealers). Additional categories of disclosure involving a
legitimate business purpose may be added to this list upon the
authorization of a Fund's Board of Trustees.
The Fund, the investment adviser and principal underwriter will not receive any monetary or other consideration in connection with the disclosure of information concerning a Fund's portfolio holdings.
The Policies may not be waived, or exception made, without the consent of the Chief Compliance Officer ("CCO") of the Fund. The CCO may not waive or make exception to the Policies unless such waiver or exception is consistent with the
intent of the Policies, which is to ensure that disclosure of portfolio information is in the best interest of Fund shareholders. In determining whether to permit a waiver of or exception to the Policies, the CCO will consider whether the proposed disclosure serves a legitimate purpose of a Fund, whether it could provide the recipient with an advantage over Fund shareholders or whether the proposed disclosure gives rise to a conflict of interest between a Fund's shareholders and its investment adviser, principal underwriter or other affiliated person. The CCO will report all waivers of or exceptions to the Policies to the Trustees at their next meeting. The Trustees may impose additional restrictions on the disclosure of portfolio holdings information at any time.
The Policies are designed to provide useful information concerning a Fund to existing and prospective Fund shareholders while at the same time inhibiting the improper use of portfolio holdings information in trading Fund shares and/or portfolio securities held by a Fund. However, there can be no assurance that the provision of any portfolio holdings information is not susceptible to inappropriate uses (such as the development of "market timing" models), particularly in the hands of highly sophisticated investors, or that it will not in fact be used in such ways beyond the control of the Fund.
TAXES
Each series of the Trust is treated as a separate entity for federal income tax purposes. Each Fund has elected to be treated and intends to qualify each year as a regulated investment company ("RIC") under the Code. Accordingly, each Fund intends to satisfy certain requirements relating to sources of its income and diversification of its assets and to distribute substantially all of its net income (including tax-exempt income) and net short-term and long-term capital gains (after reduction by any available capital loss carryforwards) in accordance with the timing requirements imposed by the Code, so as to maintain its RIC status and to avoid paying any federal income or excise tax. To the extent it qualifies for treatment as a RIC and satisfies the above-mentioned distribution requirements, a Fund will not be subject to federal income tax on income paid to its shareholders in the form of dividends or capital gain distributions. Each Fund is qualified as a RIC for its fiscal year ended March 31, 2005.
In order to avoid incurring a federal excise tax obligation, the Code requires that a Fund distribute (or be deemed to have distributed) by December 31 of each calendar year (i) at least 98% of its ordinary income (not including tax-exempt income) for such year, (ii) at least 98% of its capital gain net income (which is the excess of its realized capital gains over its realized capital losses), generally computed on the basis of the one-year period ending on October 31 of such year, after reduction by any available capital loss carryforwards and (iii) 100% of any income and capital gains from the prior year (as previously computed) that was not paid out during such year and on which the Fund paid no federal income tax. Under current law, provided that a Fund qualifies as a RIC for federal tax purposes, the Fund should not be liable for any income, corporate excise or franchise tax in the Commonwealth of Massachusetts.
If a Fund does not qualify as a RIC for any taxable year, the Fund's taxable income will be subject to corporate income taxes, and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to the shareholder as ordinary income. In addition, in order to requalify for taxation as a RIC, the Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
A Fund's investment in zero coupon and certain other securities will cause it to realize income prior to the receipt of cash payments with respect to these securities. Such income will be accrued daily by the Fund and, in order to avoid a tax payable by the Fund, the Fund may be required to liquidate securities that it might otherwise have continued to hold in order to generate cash so that the Fund may make required distributions to its shareholders.
Investments in lower-rated or unrated securities may present special tax issues for a Fund to the extent that the issuers of these securities default on their obligations pertaining thereto. The Code is not entirely clear regarding the federal income tax consequences of a Fund's taking certain positions in connection with ownership of such distressed securities.
Distributions by a Fund of net tax-exempt interest income that are properly
designated as "exempt-interest dividends" may be treated by shareholders as
interest excludable from gross income for federal income tax purposes under
Section 103(a) of the Code. In order for a Fund to be entitled to pay the
tax-exempt interest income allocated to it by the Portfolio as exempt-interest
dividends to its shareholders, the Fund must and intends to satisfy certain
requirements, including the requirement that, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
obligations the interest on which is exempt from regular federal income tax
under Code Section 103(a). For purposes of applying this 50% requirement, a Fund
will be deemed to own its proportionate share of each of the assets of the
Portfolio, and the Portfolio currently intends to invest its assets in a manner
such that the Fund can meet this 50% requirement. Interest on certain municipal
obligations may be taxable for purposes of the federal AMT and for state and
local purposes. In addition, corporate shareholders must include the full amount
of exempt-interest dividends in computing the preference items for the purposes
of the AMT. Shareholders of a Fund are required to report tax-exempt interest on
their federal income tax returns.
For taxable years beginning on or before December 31, 2008, distributions of investment income designated by a Fund as derived from "qualified dividend income" will be taxed in the hands of individual shareholders at the rates applicable to long-term capital gain, provided holding period and other requirements are met at both the shareholder and Fund level. It is not expected a significant portion of Fund distributions would be derived from qualified dividend income.
Tax-exempt distributions received from a Fund are taken into account in determining, and may increase, the portion of social security and certain railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of a Fund is not deductible to the extent it is deemed related to the Fund's distributions of tax-exempt interest. Further, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development or private activity bonds should consult their tax advisers before purchasing shares of a Fund. "Substantial user" is defined in applicable Treasury regulations to include a "non-exempt person" who regularly uses in its trade or business a part of a facility financed from the proceeds of industrial development bonds, and the same definition should apply in the case of 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 (except to the extent of a portion of the discount attributable to original issue discount), is taxable as ordinary income. A long-term debt obligation is generally treated as acquired at a market discount if purchased after its original issue at a price less than (i) the stated principal amount payable at maturity, in the case of an obligation that does not have original issue discount or (ii) in the case of an obligation that does have original issue discount, the sum of the issue price and any original issue discount that accrued before the obligation was purchased, subject to a de minimis exclusion.
From time to time proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on certain types of municipal obligations, and it can be expected that similar proposals may be introduced in the future. Under federal tax legislation enacted in 1986, the federal income tax exemption for interest on certain municipal obligations was eliminated or restricted. As a result of such legislation, the availability of municipal obligations for investment by a Fund and the value of the securities held by it may be affected.
In the course of managing its investments, a Fund may realize some short-term and long-term capital gains (and/or losses) as well as other taxable income. Any distributions by a Fund of its share of such capital gains (after reduction by any capital loss carryforwards) or other taxable income would be taxable to shareholders of the Fund. However, it is expected that such amounts, if any, would normally be insubstantial in relation to the tax-exempt interest earned by the Fund.
A Fund's investments in options, futures contracts, hedging transactions, forward contracts (to the extent permitted) and certain other transactions will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules), the effect of which may be to accelerate income to a Fund, defer Fund losses, cause adjustments in the holding periods of Fund securities, convert capital gain into ordinary income and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to investors.
Any loss realized upon the sale or exchange of Fund shares with a tax holding period of 6 months or less will be disallowed to the extent of any distributions treated as tax-exempt interest with respect to such shares and if the loss exceeds the disallowed amount, will be treated as a long-term capital loss to the extent of any distributions treated as long-term capital gain with respect to such shares. In addition, all or a portion of a loss realized on a redemption or other disposition of Fund shares may be disallowed under "wash sale" rules to the extent the shareholder acquired other shares of the same Fund (whether through the reinvestment of distributions or otherwise) within the period beginning 30 days before the redemption of the loss shares and ending 30 days after such date. Any disallowed loss will result in an adjustment to the shareholder's tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares subject to a front-end sales charge cannot be taken into account for purposes of determining gain or loss on a redemption or exchange of the shares before the 91st day after their purchase to the extent a sales charge is reduced or eliminated in a subsequent acquisition of shares of the Fund (or of another fund) pursuant to the reinvestment or exchange privilege. Any disregarded amounts will result in an adjustment to the shareholder's tax basis in some or all of any other shares acquired.
Dividends and distributions on a Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be distributed even when a Fund's net asset value also reflects unrealized losses. Certain distributions declared in October, November or December and paid in the following January will be taxed to shareholders as if received on December 31 of the year in which they were declared.
In general, dividends (other than capital gain dividends) paid to a shareholder that is not a "U.S. person" within the meaning of the Code (a "foreign person"), are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate). Under the American Jobs Creation Act of 2004 (the "2004 Act"), before January 1, 2008, a Fund generally will not be required to withhold any amounts with respect to distributions of (i) U.S.-source interest income that would not be subject to U.S. federal income tax if earned directly by an individual foreign person, and (ii) net short-term capital gains in excess of net long-term capital losses, in each case to the extent such distributions are properly designated by a Fund.
The 2004 Act modifies the tax treatment of distributions from a Fund that are paid to a foreign person and are attributable to gain from "U.S. real property interests" ("USRPIs"), which the Code defines to include direct holdings of U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations" such as REITs. Under the 2004 Act, which applies to dividends paid or deemed paid on or before December 31, 2007, distributions to foreign persons attributable to gains from the sale or exchange of USRPIs will give rise to an obligation for those foreign persons to file a U.S. tax return and pay tax, and may well be subject to withholding under future regulations. It is not expected that a significant portion of the Fund's distributions will be attributable to gains from the sale or exchange of USRPIs.
Amounts paid by a Fund to individuals and certain other shareholders who have not provided the Fund with their correct taxpayer identification number ("TIN") and certain certifications required by the Internal Revenue Service (the "IRS") as well as shareholders with respect to whom the Fund has received certain information from the IRS or a broker, may be subject to "backup" withholding of federal income tax arising from the Fund's taxable dividends and other distributions as well as the proceeds of redemption transactions (including repurchases and exchanges), at a rate of 28% for amounts paid through 2010. The backup withholding rate will be 31% for amounts paid thereafter. An individual's TIN is generally his or her social security number.
Under Treasury regulations, if a shareholder realizes a loss on disposition of a Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs.
The foregoing discussion does not address the special tax rules applicable to certain classes of investors, such as tax-exempt entities, foreign investors, insurance companies and financial institutions. Shareholders should consult their own tax advisers with respect to special tax rules that may apply in their particular situations, as well as the state, local, and, where applicable, foreign tax consequences of investing in a Fund.
See Appendix D for state tax information for certain states.
PORTFOLIO SECURITIES TRANSACTIONS
Decisions concerning the execution of portfolio security transactions, including the selection of the market and the executing firm, are made by BMR, each Fund's investment adviser. Each Fund is responsible for the expenses associated with portfolio transactions. The investment adviser is also responsible for the execution of transactions for all other accounts managed by it. The investment adviser places the portfolio security transactions for execution with many firms. The investment adviser uses its best efforts to obtain execution of portfolio security transactions at prices which are advantageous and at reasonably competitive spreads or (when a disclosed commission is being charged) at reasonably competitive commission rates. In seeking such execution, the investment adviser will use its best judgment in evaluating the terms of a transaction, and will give consideration to various relevant factors, including without limitation the full range and quality of the executing firm's services including the responsiveness of the firm to the investment adviser, 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 other transactions, and the reasonableness of the spread or commission, if any. In addition, the investment adviser may consider the receipt of Proprietary Research Services (as defined below), provided it does not compromise the investment adviser's obligation to seek best overall execution for a Fund. The investment adviser may engage in portfolio brokerage transactions with a broker-dealer firm that sells shares of Eaton Vance funds, provided such transactions are not directed to that firm as compensation for the promotion or sale of such shares.
Municipal obligations, including state obligations, purchased and sold by each Fund 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. Each Fund may also purchase municipal obligations from underwriters, and dealers in fixed-price offerings, the cost of which may include undisclosed fees and concessions to the underwriters. On occasion it may be necessary or appropriate to purchase or sell a security through a broker on an agency basis, in which case the Fund will incur a brokerage commission. Although spreads or commissions on portfolio security transactions will, in the judgment of the investment adviser, 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 each Fund and the investment adviser's other clients for providing brokerage and research services to the investment adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a broker or dealer who executes a portfolio transaction may receive a commission that is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the investment adviser 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 the investment adviser and its affiliates have for accounts over which they exercise investment discretion. 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. The investment adviser may also receive Research Services from underwriters and dealers in fixed-price offerings.
It is a common practice of the investment advisory industry and of the advisers of investment companies, institutions and other investors to receive research, analytical, statistical and quotation services, data, information and other services, products and materials which assist such advisers in the performance of their investment responsibilities ("Research Services") from broker-dealer firms that execute portfolio transactions for the clients of such advisers and from affiliates of executing broker-dealers. Investment advisers also commonly receive Research Services from research providers that are not affiliated with an executing broker-dealer, but which have entered into payment arrangements involving an executing broker-dealer ("Third Party Research Services"). In a typical Third Party Research Services arrangement involving transactions in municipal obligations, an executing broker-dealer enters into an arrangement with an investment adviser pursuant to which the investment adviser receives a credit for portfolio transactions executed for its clients through that broker-dealer. These credits are referred to herein as "research credits" and are primarily generated as the result of acquisitions of new issuances of municipal obligations in fixed-price offerings. The amount of the research credit generated as the result of a particular transaction is typically a negotiated percentage of the offering price of the municipal obligations. The investment adviser may use research credits to acquire Third Party Research Services, which are then paid for by the executing broker-dealer. The investment adviser may receive Research Services and Third Party Research Services consistent with the foregoing.
Research Services received by the investment adviser include such matters as general economic, political, business and market information, industry and company reviews, evaluations of securities and portfolio strategies and transactions, proxy voting data and analysis services, technical analysis of various aspects of the securities markets, 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 the investment adviser 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 the investment adviser 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 investment adviser evaluates the nature and quality of the various Research Services obtained through broker-dealer firms and may attempt to allocate sufficient portfolio security transactions to such firms to ensure the continued receipt of Research Services which the investment adviser believes are useful or of value to it in rendering investment advisory services to its clients.
In the event that the investment adviser uses research credits generated from a Fund securities transactions to pay for Third Party Research Services (as described above), the investment adviser has agreed to reduce the advisory fee payable by a Fund by the amount of such research credits generated as the result of portfolio transactions occurring on or after May 1, 2004. However, the investment adviser generally does not expect to acquire Third Party Research Services with research credits.
Some executing broker-dealers develop and make available directly to their brokerage customers proprietary Research Services ("Proprietary Research Services"). As a general matter, broker-dealers bundle the cost of Proprietary Research Services with trade execution services rather than charging separately for each. In such circumstances, the cost or other value of the Proprietary Research Services cannot be determined. The advisory fee paid by a Fund will not be reduced in connection with the receipt of Proprietary Research Services by the investment adviser.
The investment companies sponsored by the investment adviser or its affiliates may allocate trades in such offerings to acquire information relating to the performance, fees and expenses of such companies and other mutual funds, which information is used by the Trustees of such companies to fulfill their responsibility to oversee the quality of the services provided by various entities, including the investment adviser, to such companies. Such companies may also pay cash for such information.
Municipal obligations considered as investments for a Fund may also be
appropriate for other investment accounts managed by the investment adviser or
its affiliates. Whenever decisions are made to buy or sell securities by a Fund
and one or more of such other accounts simultaneously, the investment adviser
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 a Fund 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 the investment adviser 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 a Fund from time to time, it is the opinion of the
Trustees of the Trust that the benefits from the investment adviser organization
outweigh any disadvantage that may arise from exposure to simultaneous
transactions.
The following table shows brokerage commissions paid during the three fiscal years ended March 31, 2005, as well as the amount of Fund security transactions for the most recent fiscal year (if any) that were directed to firms that provided some Research Services to the investment adviser or its affiliates, and the commissions paid in connection therewith. As described above, the investment adviser may consider the receipt of Research Services in selecting a broker-dealer firm, provided it does not compromise the investment adviser's obligation to seek best overall execution.
Amount of Commissions Paid
Transactions on Transactions
Brokerage Commissions Paid Directed to Firms Directed to Firms
for the Fiscal Year Ended Providing Research Providing Research
-------------------------- ------------------ ------------------
Fund/Portfolio 3/31/05 3/31/04* 3/31/03 3/31/05 3/31/05
-------------- ------- -------- ------- ------- -------
California $ $ 2,184 $ 715 $ $
Florida 4,869 1,486
Massachusetts 7,728 3,240
New Jersey 5,248 2,994
New York 11,893 3,620
Ohio 2,168 1,515
Pennsylvania 3,627 1,343
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* The increase in brokerage commissions for the fiscal year ended March 31, 2004 resulted from ___________________.
FINANCIAL STATEMENTS
The audited financial statements of, and the report of the independent registered public accounting firm for the Funds and Portfolios, appear in the Funds' most recent annual report to shareholders and are incorporated by reference into this SAI. A copy of the annual report accompanies this SAI.
Householding. Consistent with applicable law, duplicate mailings of shareholder reports and certain other Fund information to shareholders residing at the same address may be eliminated.
Registrant incorporates by reference the audited financial information for the Funds and the Portfolios listed below for the fiscal year ended March 31, 2005, as previously filed electronically with the SEC:
Eaton Vance California Limited Maturity Municipals Fund California Limited Maturity Municipals Portfolio
Eaton Vance Florida Limited Maturity Municipals Fund Florida Limited Maturity Municipals Portfolio
Eaton Vance Massachusetts Limited Maturity Municipals Fund Massachusetts Limited Maturity Municipals Portfolio
Eaton Vance New Jersey Limited Maturity Municipals Fund New Jersey Limited Maturity Municipals Portfolio
Eaton Vance New York Limited Maturity Municipals Fund New York Limited Maturity Municipals Portfolio
Eaton Vance Ohio Limited Maturity Municipals Fund Ohio Limited Maturity Municipals Portfolio
Eaton Vance Pennsylvania Limited Maturity Municipals Fund Pennsylvania Limited Maturity Municipals Portfolio
(Accession No. 0001047469-05-_______)
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APPENDIX A
Class A Fees, Performance & Ownership
Sales Charges, Service Fees and Repurchase Transaction Fees. For the fiscal year
ended March 31, 2005, the following table shows (1) total sales charges paid by
each Fund, (2) sales charges paid to investment dealers, (3) sales charges paid
to the principal underwriter, (4) CDSC payments to the principal underwriter,
(5) total service fees paid by each Fund, (6) service fees paid to investment
dealers, and (7) repurchase transaction fees paid to the principal underwriter.
Service fees that were not paid to investment dealers were retained by the
principal underwriter.
Repurchase
Service Transaction
Sales Charges Sales Charges CDSC Fees Paid Fees Paid
Total Sales to Investment to Principal to Principal Total Service to Investment to Principal
Fund Charges Paid Dealers Underwriter Underwriter Fees Paid Dealers Underwriter
---- ------------ ------------- ------------- ------------- -------------- ------------- ------------
California $ $ $ $ $ $ $
Florida
Massachusetts
New Jersey
New York
Ohio
Pennsylvania
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For the fiscal years ended March 31, 2004 and March 31, 2003, the following total sales charges were paid on sales of Class A, of which the principal underwriter received the following amounts. The balance of such amounts was paid to investment dealers.
March 31, 2004 March 31, 2004 March 31, 2003 March 31, 2003
Total Sales Sales Charges to Total Sales Sales Charges to
Fund Charges Paid Principal Underwriter Charges Paid Principal Underwriter
---- -------------- --------------------- -------------- ---------------------
California $92,915 $6,254 86,018 3,352
Florida 114,471 8,331 125,311 5,425
Massachusetts 94,919 6,161 136,817 9,319
New Jersey 104,702 8,548 78,252 6,794
New York 168,238 12,173 196,687 15,483
Ohio 54,192 3,112 28,694 3,329
Pennsylvania 83,378 4,906 68,062 6,178
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Performance Information. The tables below indicate the average annual total return (both before and after taxes) on a hypothetical investment in shares of $1,000. Total return prior to the date this Class was first offered reflects the total return of Class B, adjusted to reflect the Class A sales charge. The Class B total return has not been adjusted to reflect certain other expenses (such as distribution and/or service fees). If such adjustments were made, the Class A total return would be different. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. Each Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, a Fund's current performance may be lower or higher than the quoted return. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
California Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations May 29, 1992. |
Florida Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations May 29, 1992. |
Massachusetts Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations June 1, 1992. |
New Jersey Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations June 1, 1992. |
New York Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations May 29, 1992. |
Ohio Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on October 22, 1996. Class B commenced operations April 16, 1993. |
Pennsylvania Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class A began offering its shares on June 27, 1996. Class B commenced operations June 1, 1992. |
Control Persons and Principal Holders of Securities. At May 2, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of a Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
California Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 24.7%
Wells Fargo Investments LLC Minneapolis, MN 7.9%
Citigroup Global Markets, Inc. New York, NY 7.1%
Legg Mason Wood Walker Inc. Baltimore, MD 6.0%
Florida Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 16.2%
Citigroup Global Markets, Inc. New York, NY 9.2%
LPL Financial Services San Diego, CA 6.9%
Massachusetts Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 14.8%
ADP Clearing & Outsourcing New York, NY 6.8%
Citigroup Global Markets, Inc. New York, NY 6.7%
New Jersey Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 13.0%
Citigroup Global Markets, Inc. New York, NY 10.8%
First Clearing, LLC - Harvey B. Fine Short Hills, NJ 5.5%
New York Citigroup Global Markets, Inc. New York, NY 18.8%
Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 10.5%
Morgan Stanley Jersey City, NJ 7.5%
Ohio McDonald Investments Inc. Cleveland, OH 13.8%
Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 12.8%
Citigroup Global Markets, Inc. New York, NY 6.4%
McDonald Investments Inc. Cleveland, OH 5.5%
Pennsylvania Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 17.0%
Citigroup Global Markets, Inc. New York, NY 11.9%
Pershing LLC Jersey City, NJ 6.6%
|
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of a Fund as of such date.
APPENDIX B
Class B Fees, Performance & Ownership
Distribution, Service and Repurchase Transaction Fees. For the fiscal year ended
March 31, 2005, the following table shows (1) sales commissions paid by the
principal underwriter to investment dealers on sales of Class B shares, (2)
distribution fees paid to the principal underwriter under the Distribution Plan,
(3) CDSC payments to the principal underwriter, (4) uncovered distribution
charges under the Distribution Plan (dollar amount and as a percentage of net
assets attributable to Class B), (5) service fees paid under the Distribution
Plan, (6) service fees paid to investment dealers, and (7) repurchase
transaction fees paid to the principal underwriter. The service fees paid by the
Fund that were not paid to investment dealers were retained by the principal
underwriter.
Commissions
Paid by Uncovered Service Repurchase
Principal Distribution CDSC Distribution Fees Transaction
Underwriter to Fee Paid to Paid to Charges (as a Paid to Fees Paid to
Investment Principal Principal % of Class Service Investment Principal
Fund Dealers Underwriter Underwriter Net Assets) Fees Dealers Underwriter
---- -------------- ------------ ----------- ----------- ------- ---------- ------------
California $ $ $ $ ( %) $ $ $
Florida ( %)
Massachusetts ( %)
New Jersey ( %)
New York ( %)
Ohio ( %)
Pennsylvania ( %)
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Performance Information. The tables below indicate the average annual total return (both before and after taxes) on a hypothetical investment of $1,000 in this Class of shares for the periods shown in each table. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. Each Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, a Fund's current performance may be lower or higher than the quoted return. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
California Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations May 29, 1992. |
Florida Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations May 29, 1992. |
Massachusetts Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations June 1, 1992. |
New Jersey Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations June 1, 1992. |
New York Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations May 29, 1992. |
Ohio Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations April 16, 1993. |
Pennsylvania Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Class B commenced operations June 1, 1992. |
Control Persons and Principal Holders of Securities. At May 2, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of a Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
California Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 42.8%
Citigroup Global Markets, Inc. New York, NY 8.2%
Morgan Stanley Jersey City, NJ 5.8%
Florida Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 26.3%
Morgan Stanley Jersey City, NJ 13.0%
Citigroup Global Markets, Inc. New York, NY 7.6%
Massachusetts Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 13.6%
Morgan Stanley Jersey City, NJ 10.07%
Citigroup Global Markets, Inc. New York, NY 8.2%
New Jersey Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 26.2%
New York Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 27.3%
Citigroup Global Markets, Inc. New York, NY 10.0%
Morgan Stanley Jersey City, NJ 7.6%
Ohio Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 24.7%
Pershing LLC Jersey City, NJ 23.5%
UBS Financial Services Inc. FBO James D.
Krammes and Ellen L. Krammes TTees North Canton, OH 14.6%
Pennsylvania Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 18.9%
Morgan Stanley Jersey City, NJ 7.2%
|
Beneficial owners of 25% or more of the Class are presumed to be in control of the the Class for purposes of voting on certain matters submitted to shareholders.
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of a Fund as of such date.
APPENDIX C
Class C Fees, Performance & Ownership
Distribution, Service and Repurchase Transaction Fees. For the fiscal year ended
March 31, 2005, the following table shows (1) sales commissions paid by the
principal underwriter to investment dealers on sales of Class C shares, (2)
distribution fees paid to the principal underwriter under the Distribution Plan,
(3) CDSC payments to the principal underwriter, (4) uncovered distribution
charges under the Distribution Plan (dollar amount and as a percentage of net
assets attributable to Class C), (5) service fees paid under the Distribution
Plan, (6) service fees paid to investment dealers, and (7) repurchase
transaction fees paid to the principal underwriter. The service fees paid by the
Fund that were not paid to investment dealers were retained by the principal
underwriter.
Commissions
Paid by Uncovered Service Repurchase
Principal Distribution CDSC Distribution Fees Transaction
Underwriter to Fee Paid to Paid to Charges (as a Paid to Fees Paid to
Investment Principal Principal % of Class Service Investment Principal
Fund Dealers Underwriter Underwriter Net Assets) Fees Dealers Underwriter
---- -------------- ------------ ----------- ----------- ------- ---------- ------------
California ( %)
Florida ( %)
Massachusetts ( %)
New York ( %)
Pennsylvania ( %)
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Performance Information. The tables below indicate the average annual total return (both before and after taxes) on a hypothetical investment in shares of $1,000. Total return for the period prior to April 1, 1998 reflects the total return of a predecessor to Class C. Total return prior to the Predecessor Fund's commencement of operations reflects the total return of Class B, adjusted to reflect the Class C CDSC. The Class B total return has not been adjusted to reflect certain other expenses (such as distribution and/or service fees). If such adjustments were made, the Class C total return would be different. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. Each Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, a Fund's current performance may be lower or higher than the quoted return. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
California Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Predecessor Fund commenced operations December 8, 1993. |
Florida Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Predecessor Fund commenced operations December 8, 1993. |
Massachusetts Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Predecessor Fund commenced operations December 8, 1993. |
New York Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Predecessor Fund commenced operations December 8, 1993. |
Pennsylvania Fund Length of Period Ended March 31, 2005 Average Annual Total Return: One Year Five Years Ten Years ---------------------------- -------- ---------- --------- Before Taxes and Excluding Maximum Sales Charge % % % Before Taxes and Including Maximum Sales Charge % % % After Taxes on Distributions and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Including Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % % After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % % Predecessor Fund commenced operations December 8, 1993. |
Control Persons and Principal Holders of Securities. At May 2, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of a Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
California First Clearing, LLC - The Whitmer Family Trust Glen Allen, VA 24.2%
AG Edwards & Sons Inc. FBO C. Gordon Wright TTEE St. Louis, MO 23.0%
First Clearing, LLC - Faye M. Johansen Rev. Trust Glen Allen, VA 20.9%
Legg Mason Wood Walker Inc. Baltimore, MD 6.3%
Citigroup Global Markets, Inc. New York, NY 5.3%
Florida Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 56.6%
Massachusetts Merrill Lynch, Pierce, Fenner & Smith, Inc. Jersey City, NJ 14.3%
Morgan Stanley Chelsea, MA 6.7%
ADP Clearing & Outsources New York, NY 6.4%
New York Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 28.5%
Citigroup Global Markets, Inc. New York, NY 7.2%
Pennsylvania Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 42.1%
Morgan Stanley Jersey City, NJ 5.9%
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Beneficial owners of 25% or more of the Class are presumed to be in control of the the Class for purposes of voting on certain matters submitted to shareholders.
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of a Fund as of such date.
APPENDIX D
STATE SPECIFIC INFORMATION
Risks of Concentration. The following information as to certain state specific considerations is given to investors in view of a Fund's policy of concentrating its investments in particular state issuers. Such information supplements the information in the prospectus. It is derived from sources that are generally available to investors and is believed to be accurate. Such information constitutes only a brief summary, does not purport to be a complete description and is based on information from official statements relating to securities offerings of issuers of each particular state. The Trust has not independently verified this information.
The bond ratings provided in the prospectus are current as of the date of the prospectus and are based on economic conditions which may not continue; moreover, there can be no assurance that particular bond issues may not be adversely affected by changes in economic, political or other conditions. Unless stated otherwise, the ratings indicated are for obligations of the state. A state's political subdivisions may have different ratings which are unrelated to the ratings assigned to state obligations.
CALIFORNIA
General Economic Conditions. The economy of the state of California (referred to herein as the "state" or "California") is the largest among the 50 states and is one of the largest in the world, having major components in high technology, trade, entertainment, agriculture, manufacturing, tourism, construction and services. California's economy slipped into a recession in early 2001 which was concentrated in the state's high-tech sector and geographically, in the San Francisco Bay Area. The economy has since stabilized with only 45,600 jobs gained between January 2002 and April 2004 compared with 295,400 lost jobs between March 2001 and January 2002. (See "Current State Budget" below.)
The state projects nonfarm employment in calendar year 2004 to be approximately 14,400 jobs, an increase of approximately 2,400 jobs since 1993. The state forecasted that the unemployment rate -- a lagging indicator -- would remain constant at a 6.7% average in 2004 as was in 2002.
California's July 1, 2003 population of nearly 36 million represented over 12% of the total United States population. California's population is concentrated in metropolitan areas. As of the April 1, 2000 census 97% of the state's population resided in the 25 Metropolitan Statistical Areas in the state. As of July 1, 2002, the five-county Los Angeles area accounted for 49% of the state's population with over 17.0 million residents and the 10-county San Francisco Bay Area represented 20% of the state's population with a population of over 7.0 million.
Construction trends are expected by the state to be mixed. Low interest rates and a large backlog of unmet demand continued to encourage further gains in new residential construction in 2003. The state forecasted 195,500 new units to be authorized by home building permits in 2003, up from 167,000 in 2002.
The state expected that slower job growth, coupled with new supply already under construction, would result in rising commercial and retail vacancy rates, which in turn would discourage nonresidential construction starts. After several years of strong double-digit growth, nonresidential permit values (not adjusted for inflation) declined in 2001, 2002 and 2003.
In recent years, the state has experienced a decline in state revenues attributable in large part to declines in personal income tax receipts including particularly stock market related income tax revenues, such as capital gains realizations and employee stock option income. The state estimates that stock market related revenue declined from $17.6 billion in fiscal year 2000-01 to $8.6 billion in fiscal year 2001-02, and to $5.2 billion in 2002-03, a total 70% decline. Total personal income tax revenue declines from $44.6 billion to $32.7 billion in the same period. The state's economy continued to grow slowly through the end of 2003 but the state projects the economy to grow moderately for the remainder of 2004.
Prior fiscal years' Financial Results. Since early 2001 the state has faced severe financial challenges, which may continue for several years.
2002-2003 Fiscal Year Budget. The 2002 Budget Act was signed by Governor Davis on September 5, 2002. The 2002 Budget Act addressed the $23.6 billion budget gap between expenditures and resources through a combination of program reductions, interfund borrowings, fund shifts, payment deferrals, accelerations and transfers, debt service restructuring savings and modest tax changes.
Within a few months after the 2002 Budget Act was adopted, it became evident that revenue projections incorporated in the 2002 Budget Act were substantially overstated and that certain program cost savings included in the 2002 Budget Act would not be realized.
In late November 2002, Governor Davis directed State agencies to take immediate action to reduce any non-critical or non-essential activities by not filling any vacant positions; to cancel, postpone or amend contracts, grants, purchase orders and similar commitments; to eliminate additional non-essential vacant positions; to delay construction or signing of new leases for space; to cancel or postpone non-essential trips; and to generate new proposals for current year program reductions. In the spring of 2003, the Legislature passed budget adjustment legislation, totaling about $10.4 billion in spending reductions, deferrals and funding transfers ($5.1 billion for 2002-03 and $5.3 billion for 2003-04). The largest part of the reductions (including a $1.1 billion deferral into the 2003-04 fiscal year) were for K-12 education funding.
2003-04 Fiscal Year Budget. The 2003 Budget Act was adopted by the Legislature on July 29, 2003, along with a number of implementing measures, and signed by Governor Davis on August 2, 2003. Under the 2003 Budget Act, General Fund revenues were projected to increase 3.3 percent, from $70.9 billion in 2002-03 to $73.3 billion in 2003-04. The revenue projections incorporated a 4 percent increase in state tax revenues (as projected by the LAO's office in August of 2003), reflecting a correspondingly moderate growth in the state's economy believed to be reasonable by the State Department of Finance. The projection also incorporated approximately $2 billion of proceeds from the tobacco settlement bonds and $680 million of additional revenue resulting from renegotiating compact agreements between Indian tribes and the state.
The June 30, 2004 reserve was projected in the 2003 Budget Act to be just over $2 billion. This projection reflected the elimination of the $10.675 billion accumulated deficit through June 30, 2003 (as estimated in the 2003 Budget Act), through the issuance of the fiscal recovery bonds (which were replaced by the issuance of economic recovery bonds). See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Economic Recovery Bonds."
General Fund expenditures were estimated to drop 9 percent from $78.1 billion in 2002-03 to $71.1 billion in 2003-04. Most of this decline was explained by four factors:
(1) the suspension of vehicle license fee "backfill" payments to local governments, which was estimated to result in $4.2 billion of savings in 2003-04. However, on November 17, 2003, by executive order, Governor Schwarzenegger rescinded the vehicle license fee increase retroactive to October 1, and the Controller resumed making "backfill" payments to local governments and began issuing refunds to taxpayers.
(2) approximately $1.8 billion of federal funds under the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 to cover state costs in 2003-04 of which approximately $694 million was to be used to offset Medi-Cal costs in 2003-04, and the remainder was to be used to cover other critical state program spending. These new federal funds are not expected to be available in 2004-05 and beyond;
(3) the receipt of $1.9 billion of pension obligation bond proceeds to cover all of the state's quarterly contributions to CalPERS for 2003-04, which would reduce General Fund expenditures by $900 million and increase revenues by $1 billion. Delays caused by litigation contesting the issuance of such bonds have made it certain that such bonds will not be issued in fiscal year 2003-04; and
(4) a one-time shift of Medi-Cal accounting from accrual to cash basis ($930 million).
In the LAO's Budget Analysis, dated August 1, 2003, the LAO concluded that, absent the above-described factors, underlying spending for 2002-03 and 2003-04 would have been roughly equal. Moreover, the LAO concluded that "the 2003-04 spending level is considerably less than what would be required to maintain "baseline spending" for the [2003-04 fiscal] year." The LAO defines "baseline spending" to include spending requirements imposed by existing law, policies and State mandates at the beginning of the fiscal year.
Election of New Governor. At a special election held on October 7, 2003, the Governor of the state of California, Gray Davis, was recalled and was replaced as Governor by Arnold Schwarzenegger. Governor Schwarzenegger took office on November 17, 2003. Compared to the 2003 Budget Act, the 2004-05 Governor's Budget's projection for 2003-04 was $1.274 billion of additional revenues, $3.879 billion of additional expenditures and $205 million additional prior year adjustments. After accounting for a $473 million reduction in other reserves, the June 30, 2004 General Fund reserve was projected to be $290 million, down approximately $1.9 billion from the 2003 Budget Act.
The 2004-05 Governor's Budget assumed the implementation of mid-year spending reductions described below, as well as voter approval in the March 2, 2004 statewide primary election of the California Economic Recovery Bond Act (Proposition 57) and the Balanced Budget Amendment (Proposition 58). Both measures were approved by the voters. In connection with the issuance of the first two series of economic recovery bonds, the Department of Finance certified that the state had an accumulated budget deficit of more than $22 billion, consisting of a $9.3 billion accumulated deficit through 2003-03, a $3.0 billion operating deficit in 2003-04, and $9.8 billion of obligations to be repaid in fiscal years 2003-05 and thereafter for prior obligations. At the time of the
2004-05 Governor's Budget, the state expected to sell a sufficient amount of economic recovery bonds to provide net proceeds to the General Fund in 2003-04 of $12.254 billion. The May Revision has revised this estimate to $11.254 billion.
On May 13, 2004, the Governor released the May Revision to the 2004-05 Governor's Budget, which provided updated revenue and economic forecasts and revised budget proposals. The May Revision projected a $1.597 billion increase to the June 30, 2004 reserve compared to the 2004-05 Governor's Budget. This increase is due to the combination of (1) a $2.229 billion increase in prior year adjustments, primarily due to revenue increases from the Voluntary Compliance Initiative ($1.225 billion), proper accrual of unbilled and audit tax proceeds ($1.0 billion) and tax amnesty ($185 million) offset by revenue losses due to the adverse court decisions relating to corporate tax matters ($465 million), (2) $36 million decrease in other revenues and (3) $596 million increase in expenditures, primarily due to increased expenditures in the health and human services and corrections areas for enrollment, caseload and population increases ($283 million) and increased Proposition 98 expenditures ($257 million).
In December 2003, the Governor proposed reductions (the "Mid-Year Spending Reduction Proposals") totaling $3.9 billion ($2.3 billion in 2003-04 and $1.6 billion in 2004-05). Of these proposals, approximately $1.366 billion were either not adopted or are now unachievable and the May Revision addresses these increased costs (including increased costs of $947 million due to the federal injunction preventing the implementation of Medi-Cal provider rate reductions).
Set forth below is a chart showing a General Fund Budget Summary for the current fiscal year as originally projected by the 2003 Budget Act, as subsequently revised by 2004-05 Governor's Budget released on January 9, 2004, and as further revised by the May Revision released on May 13, 2004. A detailed explanation of the revised assumptions for fiscal year 2003-04 is set forth below in Figure 1.
FIGURE 1
2003-04 General Fund Budget Summary
(Dollars in millions)
The May Revision contained the following significant revenue adjustments compared to the 2003 Budget Act:
As of 2003 As of 2004-05 As of 2004-05
Budget Act Governor's Budget May Revision
Prior Year Resources Available $ 1,402 $ 1,607 $ 3,837
Revenues and Transfers 73,353 74,627 74,591
Economic Recovery Bonds --- 3,012 2,012
Expenditures 71,137 75,016 75,612
Transfer to Deficit Recovery Fund --- 3,012 2,012
------- ------- -------
Fund Balance $ 3,618 $ 1,219 $ 2,816
Reserve for Liquidation of Encumbrances $ 1,402 $ 929 $ 929
Special Fund for Economic Uncertainties $ 2,216 $ 290 $ 1,887
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* $2.8 billion increase in major revenues due to the improved economic
forecast;
* $60 million increase in transfer from transportation funds to the General
Fund (revised downward from $855 million in the 2004-05 Governor's Budget
due to the finding that $795 million of such transfer were unachievable);
* $680 million loss in revenues due to delays in renegotiations of tribal
gaming compacts;
* $996 million loss in revenues due to present litigation contesting the
issuance of pension obligation bonds.
The May Revision included the following significant expenditure changes since the 2003 Budget Act:
* $885 million in payments of retirement contributions from the General Fund, due to present litigation contesting the issuance of pension obligation bonds;
* $2.65 billion in expenditures for vehicle license fee offsets due to the
rescinding of their suspension;
* $440 million additional Proposition 98 expenditures;
* $786 million additional expenditures due to enrollment and population
growth as well as other natural cost increases; and
* $1.3 billion for the proposed State-Local agreement. See "Local
Governments."
2004-05 Governor's Budget and May Revision
The 2004-05 Governor's Budget, released on January 9, 2004, reported that, in the absence of corrective actions to change existing policies, operating deficits, estimated at $14 billion for fiscal 2004-05, would continue to be incurred. On May 13, 2004, the Governor released the May Revision to the 2004-05 Governor's Budget, which provided updated revenue and economic forecasts and revised budget proposals. The May Revision projected a June 30, 2005 General Fund reserve of $998 million, up $363 million from the 2004-05 Governor's Budget projections. The increase in the reserve is the result of a $2.229 billion increase in prior year adjustments, a $245 million increase in revenues (over both 2003-04 and 2004-05), a $1.0 billion reduction in the sale of economic recovery bonds, and a $1.112 billion increase in expenditures (over both 2003-04 and 2004-05).
The 2004-05 Governor's Budget (as updated by the May Revision) contained the following major components:
1. Resetting Proposition 98 Minimum Funding Guarantee--The level of Proposition 98 appropriations was proposed to be reset at a level approximately $2 billion less than would otherwise be required for 2004-05. This proposal requires a two-thirds vote of the Legislature. See "STATE FINANCES--Proposition 98."
2. Higher Education--Proposed fee increases of 14 percent for undergraduate and 40 percent for graduate students at the University of California and the California State University, of which 20-33 percent would be set aside for financial aid. In fiscal year 2003-04, such fees were increased 30 percent. The proposed budget also reflects 44% increases in per unit costs for community college undergraduates and 92% increase in per unit costs for degree holders.
3. Health and Human Services--The Administration proposed major reform of the Medi-Cal program. Key components included realigning eligibility standards, requiring copayments, implementing a tiered benefit structure, and conforming basic optional benefits to those offered under private plans. The Administration also proposed to increase work incentives under the CalWORKs program as well as reductions to the services and assistance payments provided under that program.
4. Pension Reform--The Administration proposed to increase existing state employees' retirement contributions by one percent, pursue legislation to repeal retirement benefit enhancements implemented in 1999 for new state employees, and issue pension obligation bonds to cover a portion of the pension contributions in 2004-05 and 2005-06.
5. California Performance Review--The Administration revealed its plan to conduct a fundamental review of state government that would focus on the following areas: executive branch reorganization, program performance assessment and budgeting, improved services and productivity, and acquisition reform.
6. Substantially Reduced External Borrowings--The Administration proposed to issue $929 million pension obligation bonds to pay a portion of the pension obligations in 2004-05. In addition, approximately $2 billion of economic recovery bond proceeds deposited in the Deficit Recovery Fund would be used to offset fiscal year 2004-05 General Fund expenditures. In contrast, in fiscal year 2003-04, aggregate borrowings to address current expenses and accumulated deficits are estimated at $11.5 billion, including $2.3 billion of tobacco securitization proceeds and the projected $9.2 billion of economic recovery proceeds (representing approximately $11.3 billion of total bond proceeds, less $2 billion deposited into the Deficit Recovery Fund).
7. Tax Relief--Elimination of the VLF offset program beginning in 2004-05. See "STATE FINANCES--Local Governments."
Set forth below is a chart showing a General Fund Budget Summary for the budget year as originally projected by the 2004-05 Governor's Budget and as revised by the May Revision.
FIGURE 2
2004-05 General Fund Budget Summary
(Dollars in millions)
As of 2004-05 As of 2004-05
Governor's Budget May Revision
Prior Year Resources Available $ 1,219 $ 2,816
Revenues and Transfers 76,407 76,688
Expenditures 79,074 79,590
Use from Deficit Recovery Fund -3,012 -2,012
------- -------
Fund Balance $ 1,564 $ 1,927
Reserve for Liquidiation of Encumbrances $ 929 $ 929
Special Fund for Economic Uncertanties $ 635 $ 998
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The May Revision reflected the following major items and changes from fiscal year 2003-04:
* $4.0 billion increase in major revenues due to the improved economic
forecast;
* $577 million of transfers to the General Fund, resulting from the issuance
of pension obligation bonds in fiscal year 2004-05 to cover a portion of
the pension contributions;
* $500 million additional revenues as a result of the renegotiation of tribal
gaming compacts and the negotiation of new compacts with tribes that wish
to expand gaming activities;
* $125 million additional revenues from proposed fees on Medi-Cal managed
care plans (reduced in the May Revision from $300 million in the 2004-05
Governor's Budget);
* $60 million decrease for transportation transfers (one-time transfer in
2003-04 reduced in the May Revision from $855 million in the 2004-05
Governor's Budget);
* $2.3 billion decrease for tobacco bonds (one-time in 2003-04);
* $756 million decrease for one-time transfers and loans in 2003-04.
The May Revision projected General Fund expenditures for 2004-05 of $77.6 billion, essentially the same as the revised estimates for 2003-04. This reflected a total of $10.9 billion of General Fund expenditure solutions (excluding $2.0 billion of payment offsets from economic recovery bond proceeds), spending reductions from the level of expenditures that would have been required to comply with the Constitution and state law, federal government mandates, court orders, and to provide for cost of living adjustments and growth in enrollment, caseload, and population. These expenditure solutions, included, among others, the following major items and changes from fiscal year 2003-04:
* $2.040 billion for the proposal to rebase the Proposition 98 guarantee (see
"STATE FINANCES--Proposition 98");
* $1.136 billion for debt service savings reflecting the anticipated lower
cost of economic recovery bonds compared with debt service on fiscal
recovery bonds;
* $1.206 billion for the proposed suspension of the Transportation Investment
Fund transfer;
* $464 million of additional savings from anticipated collective bargaining
agreements which are dependent upon successful negotiation with the
collective bargaining units;
* $450 million of savings from the proposal (which would require legislative
approval) to use deposits from punitive damages awards to offset General
Fund costs in 2004-05;
* $352 million from the proposed issuance of pension obligation bonds in
fiscal year 2004-05 to cover a portion of the pension contributions (See,
"STATE INDEBTEDNESS AND OTHER OBLIGATIONS-Pension Obligation Bonds");
* $350 million for additional federal funds anticipated to be received in
2004-05;
* No Medi-Cal provider rate reductions (revised downward from $462 million in
the 2004-05 Governor's Budget);
* $1.624 billion for various spending reductions in social services programs;
* $216 million for spending reductions that would result from changes in the
correctional system (outside of employee compensation costs revised
downward from $400 million by the May Revision);
* $150 million for additional savings pursuant to Control Section 4.10 (which
gives the Department of Finance authority to reduce appropriations in
certain circumstances) of the 2003 Budget Act;
* $678 million for various spending reductions in higher education;
* $1.3 billion for the proposed State-Local agreement. See "Local
Governments."
Continuing "Structural Deficit"
In its May 17, 2004 "Overview of the 2004-05 May Revision," the Legislative Analyst's Office (LAO) projects that the May Revision as proposed would balance in 2004-05 and end the fiscal year with a modest reserve of $870 million. The LAO also stated that a $6 billion operating shortfall would re-emerge in 2005-06. Although this shortfall could be substantially offset through accessing carryover reserves and using the remaining Proposition 57 authorization, the state budget would still be modestly out of balance. The LAO further stated that following 2005-06, the state would again face major budget shortfalls, absent significant corrective actions. The LAO estimated that the 2006-07 shortfall would approach $8 billion, and that annual operating deficits above $6.5 billion would persist for the forecast period (through 2008-09).
The Administration expects that any operating deficit in 2005-06 and thereafter would be lower than projected by the LAO for the following reasons:
* Full savings that are expected from various budget reform proposals (such
as Medi-Cal and corrections) are not known at this time.
* The savings to be generated by the reorganization and other proposals being
developed by the California Performance Review have not been reflected in
the LAO's projection.
* The effect of the enacted workers' compensation reform has not been
factored into the LAO's projection.
The Administration proposes to use additional one-time revenues resulting from the renegotiation of tribal gaming compacts toward repayment of transfers from transportation special funds, to the extent those revenues are realized.
Current and Future Budgets. It cannot be predicted what actions will be taken in the future by the state Legislature and the Governor to deal with changing state revenues and expenditures. The state budget will be affected by national and state economic conditions and other factors. The State Budget for fiscal year 2004-05 has not been adopted as of June 30, 2004.
Ratings. Currently, the following ratings for the state of California general obligation bonds have been received from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch, Inc. ("Fitch"):
Fitch Moody's S&P
BBB A3 BBB
In January 2001, these ratings were "AA," "Aa2," and "AA," respectively. Rating agencies have cited the state's budget deficit and the absence of a budget plan that enacts fiscal reform, such as permanent tax increases or spending cuts to balance the budget, as the primary reason for the state's rating downgrades.
These ratings apply to the state only and are not indicative of the ratings assigned to local governments, such as counties, cities, school districts and other local agencies.
Any explanation of the significance of such ratings may be obtained only from the rating agency furnishing such ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely if, in the judgment of the particular rating agency, circumstances so warrant. The most recent rating information may be obtained from the rating agency furnishing such ratings or at the website of the Treasurer of the state, www.treasurer.ca.gov, under the heading "Credit Ratings."
Repayment of Energy Loans. The Department of Water Resources of the State ("DWR") borrowed $6.1 billion from the General Fund of the State for DWR's power supply program between January and June 2001. DWR issued approximately $11.25 billion in revenue bonds in several series and in the fall of 2002 used the net proceeds of the revenue bonds to repay outstanding loans from banks and commercial lenders in the amount of approximately $3.5 billion and a loan from the General Fund in the amount of $6.1 billion plus accrued interest of approximately $500 million.
The cost of the loans from the General Fund and the banks and commercial lenders financed DWR's power supply program costs during 2001 exceeded DWR's revenues from the sale of electricity. Since that time, the power supply program has become self-supporting, and no additional loans from the General Fund are authorized. As of January 1, 2003, the DWR's authority to enter into new power purchase contracts terminated, and the three major investor-owned electric utilities in the state resumed responsibility for obtaining electricity for their customers.
Tobacco Litigation Settlement. In 1998, the state signed a settlement agreement with the four major cigarette manufacturers. Under the settlement agreement, the tobacco manufacturers agreed to make payments to the state in perpetuity, which payments amount to a total of approximately $25 billion (subject to adjustments) over the first 25 years. Under a separate Memorandum of Understanding, half of the moneys will be paid to the state and half to local governments (all counties and the cities of San Diego, Los Angeles, San Francisco and San Jose).
The specific amount to be received by the state and local governments is subject to adjustment. Details in the settlement agreement allow reduction of the tobacco companies' payments because of certain types of federal legislation, or decreases in cigarette sales. Settlement payments can increase due to inflation or increases in cigarette sales.
During fiscal year 2001-02, the General Fund received $478 million in settlement payments. Of that amount, $76 million was deposited in the General Fund and $402 million was deposited into a special fund to pay certain health care costs. During fiscal year 2002-03, the General Fund received $474 million, all of which was deposited in the special fund.
Chapter 414, Statutes of 2002, as amended, allows the issuance of revenue bonds secured by the tobacco settlement revenues received by the state beginning in the 2003-04 fiscal year. An initial sale of 56.57% of the state's tobacco settlement revenues from July 1, 2003, onward, producing $2.5 billion in proceeds was completed in January 2003. A second sale of the remaining 43.43% of the state's tobacco settlement revenues, which produced $2.264 billion in proceeds, was completed in September 2003.
Economic Recovery Bonds. The California Economic Recovery Bond Act ("Proposition 57") was approved by the voters at the statewide primary election on March 2, 2004. Proposition 57 authorizes the issuance of up to $1.5 billion in economic recovery bonds to finance the negative General Fund reserve balance as of June 30, 2004, and other General Fund obligations undertaken prior to June 30, 2004. Repayment of the economic recovery bonds will be secured by a pledge of revenues from a one-quarter cent increase in the state's sales and use tax starting July 1, 2004. Fifty percent of each annual deposit, or up to $5 billion in the aggregate of future deposits in the reserve fund created by the Balanced Budget Amendment ("Proposition 58"), shall be used to repay the economic recovery bonds. In addition, as voter-approved general obligation bonds, the economic recovery bonds will be secured by the state's full faith and credit. However, moneys in the General Fund will only be used in the event the dedicated sales and use tax revenue is insufficient to repay the bonds.
The state has issued economic recovery bonds, resulting in the deposit of net proceeds to the General Fund of approximately $11.254 billion during the current fiscal year. The state may issue the remainder of authorized economic recovery bonds in future fiscal years.
Local Governments. The primary units of local government in California are the counties, ranging in population from 1,200 (Alpine) to approximately 10 million (Los Angeles). Counties are responsible for providing many basic services, including indigent healthcare, welfare, jails and public safety in unincorporated areas. There are also about 478 incorporated cities and thousands of special districts formed for education, utility and other services. The fiscal condition of local governments has been constrained since the enactment of "Proposition 13" in 1978 and other constitutional amendments, which reduced and limited the future growth of property taxes and limited the ability of local governments to impose "special taxes" (those devoted to a specific purpose) without two-thirds voter approval. Counties, in particular, have had fewer options to raise revenues than many other local governmental entities, and have been required to maintain many services.
State Funding. In the aftermath of Proposition 13, the state provided aid to local governments from the General Fund to make up some of the loss of property tax moneys, including taking over the principal responsibility for funding local K-12 schools and community colleges. During the recession of the early 1990s, the Legislature eliminated most of the remaining components of the post-Proposition 13 aid to local government entities other than K-12 education districts, by requiring cities and counties to transfer some of their property tax revenues to school districts. However, the Legislature also provided additional funding sources, such as sales taxes, and reduced certain mandates for local services funded by cities and counties. The 2004-5 Governor's Budget proposes to increase transfers to school districts to $1.3 billion with $135 million coming from community redevelopment agencies and the remainder from cities, counties and other special districts.
Instead of the 2004-05 Governor's Budget proposal to increase transfers to schools, the Administration and representatives from local government have reached an understanding (which remains subject to approval by the Legislature) on a proposal to revise the state-local fiscal relationship. This proposal, as
outlines in the May Revision, will reduce the VLF from 2% to 0.65% of the value of the vehicle. In order to protect local governments, the reduction in VLF revenue to cities and counties from this rate change will be replaced by an increase in the amount of property tax they receive.
Under the proposed agreement, for 2004-05 and 2005-06 only, the replacement property taxes that cities and counties receive would be reduced by $700 million. In future years, local governments would receive the full value of the VLF revenue that they would have received under current law. Also for these two fiscal years, the proposed agreement would require redevelopment agencies to shift $250 million in property tax revenue they would otherwise receive to schools, and special districts would shift $350 million to schools. As part of the proposed agreement, a constitutional amendment (which is currently being developed) would protect local governments' property, sales, and vehicle license fee revenues in future years. An initiative measure that also seeks to protect revenues for local governments has already qualified for the November 2004 ballot.
The state has also provided funding to counties and cities through various programs. The 2003 Budget Act and related legislation continue to provide assistance to local governments, including approximately $238.2 million for various local public safety programs, including the Citizens' Option for Public Safety ("COPS") program to support local front-line law enforcement and county juvenile justice and crime prevention programs. The 2003 Budget Act also provides $39 million for open space subvention reimbursements to cities and counties and $60 million in grants to County assessors to increase and enlarge property tax assessment activities. The 2004-05 Governor's Budget proposes to continue funding at these levels for the COPS, county juvenile justice and crime prevention, and property tax assessment grants programs in 2004-05. Nevertheless, the State's financial challenges may have an impact on whether these moneys are actually allocated to the local governments.
A program to offset a portion of the vehicle license fees ("VLF") paid by vehicle owners was established in 1998. This offset provided tax relief of $3.985 billion in 2002-03. Since 1999, the General Fund has "backfilled" the offset so that the tax relief did not result in a revenue loss to local governments. The legislation that established the VLF offset program also provided that if there were insufficient General Fund moneys to fully "backfill" the VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments are not disadvantaged. On June 20, 2003, it was determined that insufficient General Fund moneys were available to continue to fund any portion of the VLF offsets to local governments as of that date. Accordingly, the VLF paid by taxpayers returned on October 1, 2003 to the pre-1999 level. However, the offset suspension was rescinded by Governor Schwarzenegger on November 17, 2003, and offset payments to local governments have resumed. Local governments received "backfill" payments totaling $3.8 billion in fiscal year 2002-03. "Backfill" payments totaling $2.65 billion are anticipated to be paid to local governments in fiscal year 2003-04. Chapter 231, Statues of 2003, provides for the repayment in August 2006, of approximately $1.2 billion that was not received by locals during the time period between the suspension of the offsets and the implementation of higher fees. A case has been filed challenging the restoration of the VLF.
State Constitutional and Statutory Limitations. Article XIII A of the California Constitution (which resulted from the voter-approved Proposition 13 in 1978) limits the taxing powers of California public agencies. Article XIII A provides that the maximum ad valorem tax on real property cannot exceed one percent of the "full cash value" of the property and effectively prohibits the levying of any other ad valorem tax on real property for general purposes. However, on June 3, 1986, Proposition 46, an amendment to Article XIII A, was approved by the voters of the state of California, creating a new exemption under Article XIII A permitting an increase in ad valorem taxes on real property in excess of 1 percent for bonded indebtedness approved by two-thirds of the voters voting on the proposed indebtedness. The constitutionality of the practice of the Orange County assessor's office to increase or "recapture" the assessed values of real properties that temporarily decline and then increase in value, an assessment practice utilized by other county assessors in the state, has been legally challenged. (See "Constitutional and Statutory Limitations; Future Initiatives; Pending Litigation" below.)
On November 7, 2000, voters approved Proposition 39 called the "Smaller Classes, Safer Schools and Financial Accountability Act" (the "Smaller Classes Act"). Effective upon its passage, the Smaller Classes Act allows an alternative means of seeking voter approval for bonded indebtedness by 55 percent of the vote, rather than the two-thirds majority required under Section 18 of Article XVI of the California Constitution. The reduced 55 percent voter requirement applies only to schools and community college districts.
Article XIII B of the California Constitution limits the amount of appropriations of the state and of the local governments to the amount of appropriations of the entity for the prior year, adjusted for changes in the cost of living, population and the services that local governments have financial responsibility for providing. To the extent that the revenues of the state and/or local governments exceed their appropriations, the excess revenues must be rebated to the public either directly or through a tax decrease. Expenditures for voter-approved debt service costs are not included in the appropriations limit.
Because of the complexities of Article XIII B, the ambiguities and possible inconsistencies in its terms, the applicability of its exceptions and exemptions and the impossibility of predicting future appropriations, the Fund cannot predict the impact of this or related legislation on the bonds in the Fund's portfolios. Other Constitutional amendments affecting state and local taxes and appropriations have been proposed from time to time. If any such initiatives are adopted, the state could be pressured to provide additional financial assistance to local governments or appropriate revenues as mandated by such initiatives, potentially reducing resources available for other state programs, especially to the extent the Article XIII B spending limit would restrain the state's ability to fund such programs by raising taxes.
On November 5, 1996 voters approved Proposition 218 called the "Right to Vote on Taxes Act" which incorporates Articles XIII C and XIII D into the California Constitution. Those provisions enact limitations on the ability of local government agencies to impose or raise various taxes, fees, charges and assessments without voter approval. In addition, Article XIII C clarifies the right of local voters to reduce taxes, fees, assessments, or charges through local initiatives. Proposition 218 does not affect the state or its ability to levy or collect taxes.
The voters of California adopted a statutory initiative ("Proposition 62") at the November 4, 1986 election, which added Sections 53720 to 53730 to the Government Code of the state, and requires that all new local taxes be approved by the voters. Several courts have held that Proposition 62 does not apply to charter cities, but does apply to other local government entities such as non-charter cities, counties and school districts. However, Proposition 218, as a constitutional amendment, is applicable to charter cities and supersedes many of the provisions of Proposition 62.
On June 4, 2001, in Howard Jarvis Taxpayers Association v. City of La Habra, the California Supreme Court held that a local governmental entity's continued imposition and collection of a tax subject to the requirements of Proposition 62, without voter approval was a continuous violation of Proposition 62 and that the validity of a tax measure may be challenged within the statutory period after any collection of the tax, regardless of whether more than three years had passed since the tax measure was adopted. Thus, each time an unconstitutional tax is collected, the statute of limitations is triggered again. Various California local governments may be subject to challenge under the La Habra ruling. Should a challenge be successful, Proposition 62 provides that the portion of the one percent general ad valorem property tax levy allocated to that local government is reduced by $1 for every $1 in revenue attributable to the improperly imposed tax for each year that such tax is collected. The practical applicability of this provision has not been determined. Future litigation and legislation may resolve some or all of the issues raised by the City of La Habra decision.
Future Initiatives. Articles XIII A, XIII B, XIII C and XIII D and Propositions 39 and 62 and were each adopted as measures that qualified for the ballot pursuant to the state's initiative process. From time to time, other initiative measures could be adopted that could affect revenues of the state or public agencies within the state.
Pending Litigation. The state of California is a party to numerous legal proceedings, many of which normally occur in governmental operations. Information regarding some of the more significant litigation pending against the state would ordinarily be included in various public documents issued thereby, such as the official statements prepared in connection with the issuance of general obligation bonds of California. Such official statements may be found at the website of the California State Treasurer's Office, www.treasurer.ca.gov, under the heading "Bond Information."
Revenue Distribution. Certain Debt Obligations in the Portfolio may be obligations of issuers which rely in whole or in part on California state revenues for payment of these obligations. Property tax revenues and a portion of the state's General Fund surplus are distributed to counties, cities and their various taxing entities and the state assumes certain obligations theretofore paid out of local funds. Whether and to what extent a portion of the state's General Fund will be distributed in the future to counties, cities and their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may be obligations which are payable solely from the revenues of health care institutions. Certain provisions under federal and California law may adversely affect these revenues and, consequently, payment on those Debt Obligations.
Medicare is a federal governmental health insurance system under which health care institutions and other providers are paid directly for services provided to eligible elderly and disabled persons. General acute care hospitals are generally reimbursed for inpatient and other services provided to Medicare patients under the prospective payment system, under which Medicare pays a predetermined rate for each covered service. The actual cost of care may be more or less than such reimbursement rates. In recent years, Congress has adopted legislation reducing the rate of increases for reimbursement rates in order to reduce Medicare-related spending.
Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependents. Under Medicaid, the federal government provides grants to states that have medical assistance programs that are consistent with federal standards. Medi-Cal is the Medicaid program in California. The state of California selectively
contracts with general acute care hospitals to provide acute inpatient services to Medi-Cal patients. Except in areas of the state that have been excluded from contracting, a general acute care hospital generally will not qualify for payment for non-emergency acute inpatient services rendered to a Medi-Cal beneficiary unless it is a contracting hospital.
The Social Security Act requires that states pay for hospital inpatient services through the use of rates that the state finds are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities to provide care in conformity with applicable state and federal laws, regulations, and quality and safety standards. Under the regulations implementing the Medi-Cal program, the maximum inpatient reimbursement limit for hospital inpatient services is the lesser of (1) customary charges, (2) allowable costs determined in accordance with applicable Medicare standards and principles of reimbursement, and (3) an all-inclusive rate per discharge.
The financial challenges faced at the federal and the state levels and the resulting attempts to balance the federal and the state budgets have negatively impacted the reimbursement rates received by health care institutions under the Medicare and Med-Cal programs. No assurance can be given that reimbursement rates will cover the actual costs of providing services to Medicare and Medi-Cal patients.
In California, private health plans and insurers are permitted to contract directly with hospitals for services to beneficiaries on negotiated terms. Many PPOs and HMOs currently pay providers on a negotiated fee-for-service basis, or, for institutional care, on a fixed rate per day basis, which, in each case, is discounted from the typical charges for the care provided. The discounts offered are typically premised on a certain pattern and volume of utilization of the provider's services. Discounts offered to HMOs and PPOs may result in payment to the contracting hospital of less than actual cost and the volume of patients directed to a hospital under an HMO or PPO contract may vary significantly from projections. Often, HMO or PPO contracts are enforceable for a stated term, regardless of provider losses or of bankruptcy of the respective HMO or PPO. It is expected that failure to execute and maintain such PPO and HMO contracts would reduce a hospital's patient base or gross revenues. Conversely, participation may maintain or increase the patient base, but may result in reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the state pursuant to an insurance program implemented by the Office of Statewide Health Planning and Development for health facility construction loans. If a default occurs on insured Debt Obligations, the state Treasurer will issue debentures payable out of a reserve fund established under the insurance program or will pay principal and interest on an unaccelerated basis from unappropriated state funds. The Office of Statewide Health Planning and Development commissioned various studies commencing in December 1983, to evaluate the adequacy of the reserve fund established under the insurance program and based on certain formulations and assumptions found the reserve fund substantially underfunded. The most recent study, prepared in December 2000 by Milliman & Robertson, Inc., concluded, among other things, that the amounts on deposit in the fund were sufficient, assuming "normal and expected" conditions, and that the Health Facility Construction Loan Insurance Fund, as of June 30, 2000, should maintain a positive balance over the projection period of thirty years.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be obligations which are secured in whole or in part by a mortgage or deed of trust on real property. California has five principal statutory provisions which limit the remedies of a creditor secured by a mortgage or deed of trust. Two statutes limit the creditor's right to obtain a deficiency judgment, one limitation being based on the method of foreclosure and the other on the type of debt secured. Under the former, a deficiency judgment is barred when the foreclosure is accomplished by means of a nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred when the foreclosed mortgage or deed of trust secures certain purchase money obligations. Another California statute, commonly known as the "one form of action" rule, requires creditors secured by real property to exhaust their real property security by foreclosure before bringing a personal action against the debtor. The fourth statutory provision limits any deficiency judgment obtained by a creditor secured by real property following a judicial sale of such property to the excess of the outstanding debt over the fair value of the property at the time of the sale, thus preventing the creditor from obtaining a large deficiency judgment against the debtor as the result of low bids at a judicial sale. The fifth statutory provision gives the debtor the right to redeem the real property from any judicial foreclosure sale as to which a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real property, the creditor's nonjudicial foreclosure rights under the power of sale contained in the mortgage or deed of trust are subject to the constraints imposed by California law upon transfers of title to real property by private power of sale. During the three-month period beginning with the filing of a formal notice of default, the debtor is entitled to reinstate the mortgage by making any overdue payments. Under standard loan servicing procedures, the filing of the formal notice of default does not occur unless at least three full monthly payments have become due and remain unpaid. The power of sale is exercised by posting and publishing a notice of sale after expiration of the three-month reinstatement period, which notice of sale must be given at least 20 days before the scheduled sale date. The debtor may reinstate the mortgage, in
the manner described above, up to five business days prior to the scheduled sale date. Therefore, the effective minimum period for foreclosing on a mortgage could be in excess of seven months after the initial default. Such time delays in collections could disrupt the flow of revenues available to an issuer for the payment of debt service on the outstanding obligations if such defaults occur with respect to a substantial number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the issuer in the nonjudicial sale of property securing a mortgage for such private sale to constitute "state action," and could hold that the private-right-of-sale proceedings violate the due process requirements of the federal or state constitutions, consequently preventing an issuer from using the nonjudicial foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which finance the acquisition of single family home mortgages for low and moderate income mortgagors. These obligations may be payable solely from revenues derived from the home mortgages, and are subject to California's statutory limitations described above applicable to obligations secured by real property. Under California antideficiency legislation, there is no personal recourse against a mortgagor of a single family residence purchased with the loan secured by the mortgage, regardless of whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied dwellings may be prepaid at any time. Prepayment charges on such mortgage loans may be imposed only with respect to voluntary prepayments made during the first five years during the term of the mortgage loan, and then only if the borrower prepays an amount in excess of 20% of the original principal amount of the mortgage loan in a 12-month period; a prepayment charge cannot in any event exceed six months' advance interest on the amount prepaid during the 12-month period in excess of 20% of the original principal amount of the loan. This limitation could affect the flow of revenues available to an issuer for debt service on the outstanding debt obligations which financed such home mortgages.
FLORIDA
In recent years, Florida (referred to herein as the "state" or "Florida") has emerged as one of the world's fastest growing markets, experiencing an explosion of international growth as a major economic hub of the southeastern United States. In 2001, Florida's gross state product was $491.5 billion. Florida is a state characterized by rapid population growth and substantial capital needs which are being funded through frequent debt issuance and pay-as-you-go financing. Florida's economy is characterized by a large service sector, a dependence on the tourism and construction industries, and a large retirement population. The management of rapid growth has been the major challenge facing state and local governments. While attracting many senior citizens, Florida also offers a favorable business environment and growing employment opportunities that have continued to generate working-age population immigration. As this growth continues, particularly within the retirement population, the demand for both public and private services will increase, which may strain the service sector's capacity and impede the state's budget balancing efforts.
Florida has a proportionally greater number of persons of retirement age; a factor that makes Florida's property and transfer payment taxes a relatively more important source of state funding. Because transfer payments are typically less sensitive to the business cycle than employment income, they may act as a stabilizing force in weak economic periods.
Florida's tourism grew during the greater part of the 1990s and the year 2000 by 5 to 8 percent annually. However, the events of September 11, 2001 led to a decline in Florida's tourism. Florida's tourism is not expected to surpass year 2000 levels until 2004.
The ability of the state and its local units of government to satisfy its debt obligations may be affected by numerous factors which impact on the economic vitality of the state in general and the particular region of the state in which the issuer of the debt obligations is located. South Florida is particularly susceptible to international trade and currency imbalances and to economic dislocations in Central and South America, due to its geographical location and its involvement with foreign trade, tourism and investment capital. North and Central Florida are impacted by problems in the agricultural sector, particularly with regard to the citrus and sugar industries. Short-term adverse economic conditions may be created in these areas, and in the state as a whole, due to crop failures, severe weather conditions or other agriculture-related problems. The state economy also has historically been dependent on the tourism and construction industries and is therefore, sensitive to trends in those sectors.
MASSACHUSETTS
The Commonwealth of Massachusetts (referred to herein as the "Commonwealth") has a highly developed economy with a large service sector, particularly in health care, high technology, financial services and education. The economic downturn that began in 2001 has affected the high technology and financial services industries in Massachusetts and has resulted in increased unemployment and
reduced tax revenue to the Commonwealth. However, since 1994, the unemployment rate in Massachusetts has remained below the national average.
The Commonwealth collects a variety of taxes and receives revenues from other non-tax sources, including the federal government and various fees, fines, court revenues, assessments, reimbursements, interest earnings and transfers from its non-budgeted funds. In fiscal 2003 on a GAAP basis, approximately 66.5% of the Commonwealth's annual budgeted revenues were derived from state taxes. In addition, the federal government provided approximately 26.5% of such revenues, with the remaining 7.0% provided from departmental revenues and transfers from non-budgeted funds.
The Commonwealth faced significant declines in tax revenue receipts in 2002 and 2003. In 2004, tax revenue is projected to remain stable at this lower level or recover slowly. Budget shortfalls resulting from reduced tax revenue have required the Commonwealth to draw heavily upon accumulated reserve funds and to undertake reductions in spending on a broad variety of programs and services, including extending the state pension funding schedule, curtailing certain Medicaid benefits. Additional spending cuts have been proposed, including reductions of direct aid to local governments and further cutbacks in health and human services programs. Reserve funds remain available for appropriation if they are needed, but are not anticipated to be sufficient to balance the Commonwealth's budget in 2004 without additional spending reductions or tax increases. The financial statements of the Commonwealth are available at the web site of the Comptroller of the Commonwealth located at http://www.mass.gov/osc/Reports/reports.htm.
Municipal revenues consist of taxes on real and personal property, distributions from the Commonwealth under a variety of programs and formulas, local receipts (including motor vehicle excise taxes, local option taxes, fines, licenses and permits, charges for utility and other services and investment income) and appropriations from other available funds (including general and dedicated reserve funds). Following the enactment in 1980 of the tax limitation initiative petition commonly known as Proposition 21/2, local governments have been forced to rely less on property taxes and more on other revenues, principally distributions of revenue from the Commonwealth, to support local programs and services. As a result of comprehensive education reform legislation enacted in June 1993, a large portion of general revenue sharing funds are earmarked for public education and are distributed through a formula designed to provide more aid to the Commonwealth's poorer communities. There are also several specific local aid programs, such as school building construction and police education incentives.
The Commonwealth maintains a commercial paper program supported by lines and a letter of credit from commercial banks. The program allows for the periodic issuance of commercial paper as either bond anticipation notes or revenue anticipation notes for operating purposes. The overall capacity of the Commonwealth's commercial paper program is currently $1.0 billion. The Commonwealth engaged in short-term borrowing in anticipation of revenue receipts for operating purposes periodically in 2003 and 2004, and anticipates several cash flow borrowings for operating purposes during the remainder of 2004. The pattern of the Commonwealth's cash flow borrowings is largely the result of temporary cash imbalances caused by quarterly local aid payments to cities and towns, which total approximately $1.1 billion on the last day of each calendar quarter. All commercial paper of the Commonwealth issued for operating purposes in a fiscal year is required by state finance law to be paid not later than June 30 of such year.
The Commonwealth is authorized to issue three types of debt directly - general obligation debt, special obligation debt and federal grant anticipation notes. General obligation debt is secured by a pledge of the full faith and credit of the Commonwealth. Special obligation debt may be secured either with a pledge of receipts credited to the Highway Fund or with a pledge of receipts credited to the Convention Center Fund. Federal grant anticipation notes are secured by a pledge of federal highway construction reimbursements. As of April 1, 2004, the amount of Commonwealth long-term debt and debt related to general obligation contract assistance liabilities was $17.052 billion, consisting of approximately $14.194 billion of general obligation debt, $813 million of special obligation debt, $1.907 billion of federal grant anticipation notes and $137 million of debt related to general obligation contract assistance liabilities. Based on the United States census resident population estimate for Massachusetts for 2002, the per capita amount of such debt as of January 1, 2004 was $2,627.
The largest single component of the Commonwealth's capital program currently is the Central Artery/Ted Williams Tunnel Project, a major construction project that is expected to be completed in 2005. The total cost of the Central Artery/Ted Williams Tunnel Project was estimated to be $14.625 billion in the finance plan most recently submitted by the Commonwealth to federal oversight authorities. The federal government has capped its contribution to the project, and the full cost of future cost overruns, if any, will have to be paid by the Commonwealth or the Massachusetts Turnpike Authority.
In addition to the long-term liabilities described above, the Commonwealth is also authorized to pledge its credit in aid of and provide contractual support for certain independent authorities and political subdivisions within the Commonwealth.
These Commonwealth liabilities are classified as either general obligation contract assistance liabilities, budgetary contractual assistance liabilities or contingent liabilities. General obligation contract assistance liabilities arise from statutory requirements for payments by the Commonwealth to the Massachusetts Convention Center Authority, the Massachusetts Development Finance Agency and the Foxborough Industrial Development Financing Authority of 100% of the debt service of certain bonds issued by those authorities, as well as payments to the Massachusetts Water Pollution Abatement Trust and the Massachusetts Turnpike Authority that are not explicitly tied to debt service. Such liabilities constitute a pledge of the Commonwealth's credit for which a two-thirds vote of the Legislature is required. Budgetary contractual assistance liabilities arise from statutory requirements for payments by the Commonwealth under capital leases, including leases supporting certain bonds issued by the Chelsea Industrial Development Financing Authority and the Route 3 North Transportation Improvements Association and other contractual agreements, including a contract supporting certain certificates of participation issued for Plymouth County and the grant agreements underlying the school building assistance program. Such liabilities do not constitute a pledge of the Commonwealth's credit. Contingent liabilities relate to debt obligations of independent authorities and agencies of the Commonwealth that are expected to be paid without Commonwealth assistance, but for which the Commonwealth has some kind of liability if expected payment sources do not materialize.
NEW JERSEY
The ninth largest state in population, New Jersey (referred to herein as the "state" or "New Jersey") benefits from a diverse economic base. Centrally located in the Northeast, New Jersey is near many major cities such as New York, Boston, Washington D.C., and Philadelphia. The state's favorable location is bolstered by an extensive highway system, as well as air, land and water transportation systems and facilities. Various commercial and industrial businesses have headquarters or regional offices within New Jersey's borders, including substantial construction, pharmaceutical, manufacturing, chemical, financial and service industries.
The state's economic indicators, as of May 2004, compared to a year ago, showed personal income increasing 3.2%, new vehicle registrations decreasing 2.8%, authorized dwelling units increasing 23%, unemployment decreasing 10.6% and nonfarm payroll employment increasing 1.2%. New Jersey's large white collar population, in part, contributed to a state per capita income of $40,427, earning the state the second highest ranking for all states in the nation in 2003. The state's unemployment rate in May 2004 was 5.3% and has remained below the national rate throughout the year to date. For the year ending March 2004, the state added nearly 60,000 jobs, earning it a rank of 4th state in the nation for job creation. The state's economy grew 3.6% for the twelve-month period ending May 2004. Based upon such favorable factors, recent major economic indices predict continued modest growth for the state for the balance of 2004.
As a result of increased collections in most major state tax categories, the state has had higher than anticipated revenue growth during fiscal year 2004 and anticipates being able to accommodate an estimated $539 million in supplemental appropriations. At the end of fiscal 2002, New Jersey had just under $17.2 billion in outstanding long term indebtedness, consisting of an estimated $3.2 billion of general obligation bonds, $5.8 billion of revenue bonds, $5.3 billion of installment obligations, $1.3 billion of loans payable and $1.6 billion in various miscellaneous obligations. As of fiscal year 2002, the state's per capita share of general long-term bonded debt was $383.49, representing an increase of 2.6% from the prior fiscal year.
The state Constitution has a balanced budget measure which provides that no money shall be drawn from the State Treasury but for appropriations made by law and that no law appropriating money for any state purpose shall be enacted if the appropriations contained therein, together with all prior appropriations made for the same fiscal period, shall exceed the total amount of the revenue on hand and anticipated to be available to meet such appropriations during such fiscal period, as certified by the Governor.
In addition, the state Constitution has a debt limitation clause which provides that the state Legislature shall not, in any manner, create in any fiscal year a debt or liability of the state, which, together with any previous debts or liabilities, shall exceed at any time 1% of the total appropriations for such year, unless the same shall be authorized by a law for some single object or work distinctly specified therein, or shall have been approved by the voters.
The New Jersey Local Bond Law (N.J.S.A. Section 40A:2-1 et seq.) governs the issuance of bonds and notes by local units (including counties) for financing improvements. The statute provides that (i) the power and obligation to pay any and all bonds and notes issued pursuant to the Local Bond Law shall be unlimited, (ii) the county or municipality shall levy ad valorem taxes upon all taxable property therein for the payment of the principal of and interest on such bonds and notes, without limitation as to rate or amount, (iii) the proceeds shall be used essentially for capital projects having useful lives of not less than five years, and (iv) after issuance, all bonds and notes shall be conclusively presumed to be fully authorized and issued under all of the laws of the state, after an estoppel period, and not subject to suit as to legality.
The debt of any county or municipality is limited by the Local Bond Law to an amount equal to 2% of its equalized valuation basis. The equalized valuation basis of the county or municipality is set by statute as the average value of all taxable real property and improvements within its boundaries as annually determined by the state Board of Taxation for each of the three most recent years. Certain categories of debt are permitted by statute to be deducted for purposes of computing the statutory debt limit.
The debt limit of any county or municipality may be exceeded with the approval of the Local Finance Board, which is a state run entity. If all or any part of a proposed debt authorization would exceed its debt limit, any county or municipality must apply to the Local Finance Board for an extension of credit. If the Local Finance Board determines that a proposed debt authorization would materially impair the ability of any county or municipality to meet its obligations or to provide essential services, approval is denied.
Any county or municipality must report all new authorizations of debt or changes in previously authorized debt to the Division of Local Government Services. Through annual and supplemental debt statements, said Division monitors all local borrowing. Even though a county's or municipality's authorizations are within its debt limits, said Division is able to enforce state regulations as to the amounts and purposes for local borrowing.
NEW YORK
New York state (referred to herein as "state" or "New York") ended its 2002-2003 fiscal year in balance on a cash basis, with a reported closing balanced in the General Fund of $815 million.
The state has released its third quarterly update to its Annual Information Statement, dated January 26, 2004 (the "January Update"), which reflects the Governor's Executive Budget for the 2004-2005 fiscal year and other changes to its financial plan projections. The state financial plan, as updated in the January Update, projects balance on a cash basis for the 2003-2004 fiscal year, with a closing balance in the General Fund of $1.0 billion, which was subsequently revised in a report issued on April 29, 2004 (the "April Report") to $1.1 billion. The Governor's Executive Budget projects balance on a cash basis for the 2004-2005 fiscal year, with a closing balance in the General Fund of $964 million. The state financial plan also contains projections of a potential imbalance in the 2005-2006 fiscal year of $2.9 billion and in the 2006-2007 fiscal year of $4.3 billion, assuming implementation of the 2004-2005 Executive Budget recommendations and no funding for possible collective bargaining salary increases or productivity savings. In the April Report, the state noted that it had reached tentative collective bargaining agreements with several of the state's employee unions, and that the state's largest union had recently ratified the first of these agreements. In the April Report, the state projected that, if all of the state's employee unions approved comparable agreements, it would result in General Fund costs of roughly $350 million in the 2004-05 fiscal year growing to $1.4 billion by the end of the contract period in the 2006-07 fiscal year. The April Report further noted that, while the current state financial plan has no dedicated reserves for the costs of new labor agreements, additional 2004-05 revenues of between $150 million and $500 million above the Governor's Executive Budget projections, which had been identified in the consensus revenue agreement reached by the Legislature and the Governor in March 2004, could help to cover these costs.
The January Update identifies a number of risks, including costs that could materialize as a result of adverse rulings in pending litigation, increased school aid funding related to recent court rulings, future collective bargaining agreements with state employee unions and federal disallowances or other federal actions that could produce adverse effects on the state's projections of receipts and disbursements, as well as risks relating to the national and local economies, including unpredictable events such as a terror attack, the possibility of monetary tightening by the Federal Reserve Board or a decline in consumption growth or the dollar.
The Debt Reform Act of 2000, which applies to all new state-supported debt issued after March 31, 2000, imposes phased-in caps that limit new debt outstanding to 4% of personal income and new debt service costs to 5% of total government receipts. Pursuant to Section 23 of the State Financial Law, the state is required to calculate compliance with the caps annually and report the findings in the Financial Plan update most proximate to October 31. For the 2002-03 fiscal year, both caps are set at 1.65%. On October 30, 2003, the state reported that it was in compliance with both debt caps, with new debt outstanding at 1.21% of personal income and debt service at 0.52% of total governmental receipts. The January Update states that the debt reform projections accompanying the state's financial plan estimate that the state will remain in compliance with both debt caps throughout the projection period, with debt outstanding projected to be 2.46% of personal income and debt service to be 2.18% of total governmental receipts. The projected statutory caps for each measure would be 3.65% by 2008-09.
The fiscal stability of New York state is related at least in part to the fiscal stability of its public authorities. The state has numerous public authorities with various responsibilities, including those which finance, construct and/or operate revenue-producing public facilities. Public authorities generally pay their operating expenses and debt service costs from revenues generated by the
projects they finance or operate, such as tolls charged for the use of highways, bridges or tunnels, charges for public power, electric and gas utility services, rentals charged for housing units, and charges for occupancy at medical care facilities. Also, there are statutory arrangements providing for state local assistance payments otherwise payable to localities to be made under certain circumstances to public authorities. Although the state has no obligation to provide additional assistance to localities whose local assistance payments have been paid to public authorities under these arrangements, the affected localities may seek additional state assistance if local assistance payments are diverted. Some authorities also receive moneys from state appropriations to pay for the operating costs of certain of their programs.
For the 2003 fiscal year, New York City's (the "City") General Fund had an operating surplus of $1.422 billion before discretionary and other transfers, and achieved balanced operating results in accordance with GAAP, after discretionary and other transfers. The 2003 fiscal year is the twenty-third consecutive year that the City has achieved an operating surplus, before discretionary and other transfers, and balanced operating results, after discretionary and other transfers. The City's Financial Plan projects revenues and expenditures for the 2004 and 2005 fiscal years, balanced in accordance with GAAP and projects gaps of $3.7 billion, $4.5 billion and $3.7 billion for fiscal years 2006 through 2008, respectively, after implementation of a gap-closing program, a pay-as-you go expenditure program for capital costs and a proposed tax program which requires New York state and city legislative approval and consists of a property tax rebate and an earned income tax credit. The gap-closing actions include: (i) reduced agency expenditures or increased revenues totaling $312 million and $389 million in fiscal years 2004 and 2005, respectively, and approximately $190 million in each of fiscal years 2006 and 2007; and (ii) assumed additional federal assistance totaling $50 million in fiscal year 2005 and state assistance totaling $400 million in each of fiscal years 2005 through 2007, which require the approval of the federal and New York state governments. The gap-closing actions set forth in the Financial Plan are partially offset by a proposed property tax rebate for homeowners totaling between $250 million in each of fiscal years 2005 through 2007, a proposed earned income tax credit for parents with annual earnings below a specified amount totaling between $50 million and $60 million in each of fiscal years 2005 through 2007 and debt prepayments and a pay-as-you-go expenditure program for capital costs reflecting increased spending of $100 million in fiscal year 2004, for a total of $200 million in fiscal year 2004 for debt prepayment and increased spending of $200 million for pay-as-you-go capital costs in each of fiscal years 2005 through 2007.
The City has been largely reimbursed by the federal government for all of its direct costs for response and remediation of the World Trade Center site. In addition, New York State authorized New York City Transitional Finance Authority ("TFA") to have outstanding $2.5 billion of bonds ("Recovery Bonds") and notes ("Recovery Notes") to pay costs related to or arising from the September 11 attack ("Recovery Costs"), of which the TFA currently has outstanding approximately $2 billion. It is not possible to quantify at present with any certainty the long-term impact of the September 11 attack on the City and its economy.
Implementation of the Financial Plan is dependent upon the City's ability to market its securities successfully. Implementation of the Financial Plan is also dependent upon the ability to market the securities of the New York City Municipal Water Finance Authority (the "Water Authority") which issues debt secured by water and sewer revenues. The Financial Plan also reflects legislation enacted by the State Legislature, over the Governor's veto, pursuant to which the Local Government Assistance Corporation ("LGAC") is to make available to the City or its assignee $170 million annually. The City has stated that it intends to assign the $170 million annual payment to the Sales Tax Asset Receivable Corporation ("STAR Corp."), a local development corporation created to issue bonds to finance the cost of debt service on bonds of the Municipal Assistance Corporation for the City of New York ("MAC") otherwise payable from City sales tax revenues. The STAR Corp. financing would make available to the City approximately $1.0 billion in fiscal year 2005 and $500 million annually in fiscal years 2006 through 2008 by reducing the amount of City revenues retained by MAC for its debt service or reimbursing the City for revenues already retained in the 2004 fiscal year. The State and LGAC brought suit against the City the STAR Corp. challenging the constitutionality of the legislation and seeking to prevent the issuance of bonds by STAR Corp. The State Supreme Court granted the City's and STAR Corp.'s motion for summary judgment. Plaintiffs appealed that decision to the State Appellate Division which, on March 4, 2004, upheld the obligations of LGAC to make the $170 million annual payment. Plaintiffs appealed that decision to the State Court of Appeals which, on May 13, 2004, also upheld the obligation of LGAC to make such payments. On May 13, 2004, LGAC stated that it hopes the City and New York state will agree on an alternative plan that will allow the City to receive the full support it needs. The outcome of this dispute cannot be predicted with certainty.
In addition, the City issues revenue and tax anticipation notes to finance its seasonal working capital requirements. The success of projected public sales of City, Water Authority and other bonds and notes will be subject to prevailing market conditions. Future developments concerning the City and the public discussion of such developments, as well as prevailing market conditions, may affect the market for outstanding City general obligation bonds and notes.
OHIO
As described above, the Ohio Fund will invest most of its net assets in securities issued by or on behalf of (or in certificates of participation in lease-purchase obligations of) the state of Ohio (referred to herein as the "state" or "Ohio"), political subdivisions of the state, or agencies or instrumentalities of the state or its political subdivisions (Ohio Obligations). The Ohio Fund is therefore susceptible to general or particular economic, political or regulatory factors that may affect issuers of Ohio Obligations. The following information constitutes only a brief summary of some of the many complex factors that may have an effect. The information does not apply to "conduit" obligations on which the public issuer itself has no financial responsibility. This information is derived from official statements of certain Ohio issuers published in connection with their issuance of securities and from other publicly available information, and is believed to be accurate. No independent verification has been made of any of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is unrelated to that of obligations of the state itself, and the state has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with investment in particular Ohio Obligations or in those obligations of particular Ohio issuers. It is possible that the investment may be in particular Ohio Obligations, or in those of particular issuers, as to which those factors apply. However, the information below is intended only as a general summary, and is not intended as a discussion of any specific factors that may affect any particular obligation or issuer.
Much of this information is as of June 16, 2004, particularly debt figures and other statistics.
Ohio is the seventh most populous state. The Census count for 2000 was 11,353,140, up from 10,847,100 in 1990.
While diversifying more into the service and other non-manufacturing areas, the Ohio economy continues to rely in part on durable goods manufacturing largely concentrated in motor vehicles and machinery, including electrical machinery. As a result, general economic activity, as in many other industrially-developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an important segment of the economy, with over half the state's area devoted to farming and a significant portion of total employment in agribusiness.
In earlier years, the state's overall unemployment rate was commonly somewhat higher than the national figure. For example, the reported 1990 average monthly state rate was 5.7%, compared to the 5.5% national figure. However, then through 1998 the annual state rates were below the national rates (4.3% vs. 4.5% in 1998), were again slightly higher in 1999 (4.3% vs. 4.2%) and 2000 (4.0% vs. 4.0%), lower in 2001 (4.2% vs. 4.7%) and in 2002 (5.7% vs. 5.8%) and higher in 2003 (6.1% vs. 6.0%). In March 2004, both the state and national monthly unemployment rate was 5.7%. The unemployment rate and its effects vary among geographic areas of the state.
There can be no assurance that future national, regional or state-wide economic difficulties, and the resulting impact on state or local government finances generally, will not adversely affect the market value of Ohio Obligations held in the Ohio Fund or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those Obligations.
The state operates on the basis of a fiscal biennium for its appropriations and expenditures, and is precluded by law from ending its July 1 to June 30 fiscal year or fiscal biennium in a deficit position. Most state operations are financed through the General Revenue Fund (GRF), for which the personal income and sales-use taxes are the major sources. Growth and depletion of GRF ending fund balances show a consistent pattern related to national economic conditions, with the ending fiscal year balance reduced during less favorable and increased during more favorable economic periods. The state has well-established procedures for, and has timely taken, necessary actions to ensure resource/expenditure balances during less favorable economic periods such as the current fiscal biennium. Those procedures include general and selected reductions in appropriations spending.
Recent biennium ending GRF balances were:
Biennium Fund Balance Cash Balance
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1992-93 $111,013,000 $ 393,634,000
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1994-95 928,019,000 1,312,234,000
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1996-97 834,933,000 1,367,750,000
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1998-99 976,778,000 1,512,528,000
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2000-01 219,414,000 817,069,000
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2002-03 52,338,000 396,539,000
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Actions have been and may be taken by the state during less favorable economic periods to ensure resource/expenditure balances (particularly in the GRF), some of which are described below. None of those actions were or are being applied to appropriations or expenditures needed for debt service or lease payments relating to any state obligations.
The appropriations acts for the 2004-05 biennium include all necessary appropriations for debt service on state obligations and for lease payments relating to lease obligations issued by the Ohio Building Authority and the Treasurer of state, and previously by the Ohio Public Facilities Commission.
The following is a selective general discussion of state finances, particularly GRF receipts and expenditures, for the recent and the current bienniums.
2000-01. The state's financial situation varied substantially in the 2000-01 biennium. The first fiscal year (2000) of the biennium ended with a GRF cash balance of $1,506,211,000 and a fund balance of $855,845,000. A transfer of $49,200,000 from the balance increased the BSF to $1,002,491,000 (or 5% of GRF revenue for the preceding fiscal year). An additional $610,400,000 was transferred to the State Income Tax Reduction Fund.
In the middle of the second year of the biennium, the state enacted supplemental appropriations of $645.3 million to address shortfalls in its Medicaid and disability assistance programs. The state's share of this additional funding was $247.6 million, with $125 million coming from fiscal year 2001 GRF spending reductions and the remainder from available GRF moneys. The reductions were implemented by OBM prior to March 1, 2001 by a 1 to 2% cut applying to most state departments and agencies. Expressly excluded from the reductions, in addition to debt service and rental payments relating to obligations, were elementary and secondary education.
In March 2001, new lowered revenue estimates for fiscal year 2001 and for fiscal years 2002 and 2003 were announced. Based on indications that the Ohio economy continued to be affected by the national economic downturn, GRF revenue estimates for fiscal year 2001 were reduced by $288,000,000. In addition, OBM projected higher than previously anticipated Medicaid expenditures. Among the more significant steps taken to ensure the positive GRF ending fund balance at June 30, 2001 were further reductions in expenditures and appropriations spending (with the same exceptions mentioned above for debt service and education) and authorization to transfer by June 30, 2001 from the BSF to the GRF amounts necessary to ensure an ending GRF fund balance of $188,200,000. The state ended fiscal year 2001 with a GRF fund balance of $219,414,000, making that transfer unnecessary.
2002-03. Ongoing and rigorous consideration has been and continues to be given by the Governor and the General Assembly to revenues and expenditures for fiscal years 2002-03, primarily as a result of continuing economic conditions. Budgetary pressures have been primarily due to continuing lower than previously anticipated levels of receipts from certain major revenue sources.
Consideration came in four general time frames - the June 2001 biennial appropriation act, late fall and early winter 2001, late spring and summer 2002 and late winter/spring 2003. Significant remedial steps have included authorization to draw down and use the entire BSF balance, increased cigarette taxes, and use of tobacco settlement moneys previously earmarked for other purposes.
The biennial GRF appropriations act passed in June 2001 provided for biennial GRF expenditures of approximately $45.1 billion without increases in any major state taxes. Some of the major program funding increases over the original appropriations for the preceding 2000-01 biennium were: Medicaid, 29%; primary and secondary education, 17%; adult and juvenile corrections, 6.2%; mental health and mental retardation, 2.8%; and higher education, 2.4%.
That original appropriations act provided for the following uses of certain reserves, aimed at achieving fiscal year and biennium ending positive GRF fund balances, based on then current estimates and projections:
* Transfer of up to $150,000,000 from the BSF to the GRF for increased
Medicaid costs.
* An additional $10,000,000 transfer from the BSF to an emergency purposes
fund.
* Transfer to the GRF in fiscal year 2002 of the entire $100,000,000 balance
in the Family Services Stabilization Fund.
The Ohio economy continued to be negatively affected by the national economic downturn and by national and international events, and in October 2001 OBM lowered its GRF revenue estimates. Based on reduced revenue collections in certain categories (particularly personal income taxes and, at that time, sales taxes), OBM then projected GRF revenue shortfalls of $709,000,000 for fiscal year 2002 and $763,000,000 for current fiscal year 2003. Executive and legislative actions were taken based on those new estimates, including:
* The Governor promptly ordered reduced appropriations spending by most state agencies (expressly excepted were appropriations for or relating to debt service on state obligations), and limits on hiring and major purchases. Reductions were at the annual rate of 6% for most state agencies (including higher education institutions), with lesser reductions for correctional and other institutional agencies, and with exemptions for primary and secondary education and the adjutant general.
December 2001 legislation, the more significant aspects of which included:
* Authorizing transfer of up to $248,000,000 from the BSF to the GRF during
the current biennium. This was in addition to the $160,000,000 in transfers
from the BSF provided for in the original appropriations act (and would
reduce the BSF balance to approximately $604,000,000).
* Reallocating to the GRF a $260,000,000 portion of tobacco settlement
receipts in fiscal years 2002 and 2003, intended to be replenished from
settlement receipts in fiscal years 2013 and 2014.
* Reducing appropriation spending authorizations for the legislative and
judicial branches.
* Making certain tax-related changes (including accelerating the time for
certain payments).
* Authorizing Ohio's participation in a multi-state lottery game, estimated
to generate $41,000,000 in fiscal year 2003. This participation has begun,
although litigation has sought, to date unsuccessfully, to enjoin the
authorization on state constitutional grounds.
Continuing economic conditions, among other factors, then led OBM in the spring of 2002 to project a higher than previously estimated GRF revenue shortfall. Among areas of continuing concern were lower than anticipated levels of receipts from personal income and corporate franchise taxes. These updated GRF shortfall estimates were approximately $763,000,000 in fiscal year 2002 and $1.15 billion in fiscal year 2003. Further executive and legislative actions were taken for fiscal year 2002 and will be taken as necessary to ensure a positive GRF fund balance for fiscal year 2002 and the biennium. In addition to further administrative and management steps, such as additional restraints on spending, those prior actions included legislation that provides for among other things:
* Authorization of additional transfers to the GRF from the BSF of its entire
previously unappropriated balance ($607,000,000) as needed in fiscal years
2002 and 2003, and of $50,800,000 of unclaimed funds to the GRF.
* $50,000,000 reduction in the fiscal year 2002 ending GRF balance (to
$100,000,000 from its previously budgeted level of $150,000,000).
* Increased cigarette tax by 31c per pack (to a total 55c a pack), estimated
by OBM to produce approximately $283,000,000 in fiscal year 2003.
* Transfers to the GRF of $345,000,000 from tobacco settlement money received
in fiscal years 2002 and 2003. That amount had previously been earmarked
and appropriated for elementary and secondary school facilities
construction; moneys for that purpose will instead by provided by way of
$345,000,000 in additionally authorized general obligation bonds.
* Extension of the state income tax to Ohio-based trusts (a "sunset"
provision ends this tax December 31, 2004), and exemption of certain Ohio
business taxes from recent federal tax law "economic stimulus changes" by
modifying existing state law tie-ins to the federal tax base. The
combination was and is estimated by OBM to produce approximately
$283,000,000 in fiscal year 2003.
* Selective additional appropriation cuts for certain departments.
Certain other provisions of the legislation are aimed at the future, rather than the current biennium, including the indexing of state income tax brackets to the Gross Domestic Product beginning in July 2005.
Several categories of fiscal year 2002 GRF tax receipts were below those receipts in the prior fiscal year. Overall, GRF tax receipts in fiscal year 2002 were 1.1% below those in fiscal year 2001. Fiscal year 2002 nevertheless did end with positive GRF balances of $108,306,000 (fund) and $619,217,000 (cash). This was accomplished by the remedial steps described above, including the significant transfers from the BSF ($534,300,000) and from tobacco settlement moneys ($289,600,000). The fiscal year ending BSF balance was $427,904,000, with
all but $65,255,000 of that balance already committed and appropriated to GRF use if needed in fiscal year 2003.
On July 1, 2002, the first day of the new fiscal year, the Governor issued an executive order directing a total of approximately $375,000,000 in GRF spending cutbacks for fiscal year 2003 (based on prior appropriations) by agencies and departments in his administration, as well as limitations on hiring, travel and major purchases. This cutback order reflected and was consistent with prior budget balancing discussions between the Governor and General Assembly. Annual cutbacks ranged from generally 7.5% to 15%, with allocation of amounts and manners determined by the OBM Director in consultation with the affected agencies and departments. Excluded from those cutbacks were elementary and secondary education, higher education, alcohol and drug addiction services, and the adjutant general. Also expressly excluded are appropriations for debt service including lease rental contracts and all state office building rent, and ad valorem property tax relief payments (made to local taxing entities).
Based on continuing reduced revenue collections (particularly, personal income taxes and sales tax receipts for the holidays) and projected additional Medicaid spending of $40,000,000, OBM in late January announced an additional GRF revenue shortfall of $720,000,000 for fiscal year 2003. The Governor ordered immediate additional reductions in appropriations spending expected to aggregate $121,600,000 of GRF savings through the end of the fiscal year (expressly excepted were appropriations for or relating to debt service on state obligations). The Governor also proposed for the General Assembly's prompt consideration the following additional revenue enhancements, transfers and expenditure reduction for fiscal year 2003 requiring legislative authorization to achieve the indicated financial effects as estimated by OBM:
* A 2.5% reduction in local government fund distributions to most
subdivisions and local libraries, producing an estimated $30,000,000
savings. This reduction is in addition to the prior local government fund
distribution adjustments noted below.
* Transfers to the GRF from unclaimed funds ($35,000,000) and various rotary
funds ($21,400,000).
* A one-month acceleration in sales tax collections by vendors filing
electronically, to produce $286,000,000.
* An additional increase in the cigarette tax of 45 cents per pack (to a
total of $1.00 a pack), to produce approximately $140,000,000.
* A doubling of the current taxes on spirituous liquor and beer and wine, to
net an additional $18,700,000.
The Governor proposed enactment of these legislative authorizations by March 1 in order to produce the indicated financial effects by the June 30 end of the fiscal year and biennium. The General Assembly gave its final approval on February 25 to legislation authorizing the first three elements (see above) of the Governor's proposal, but that legislation did not include the proposed additional taxes on cigarettes and spirituous liquor and beer and wine.
OBM projected at the time that the Governor's proposal to the General Assembly and the additional expenditure reductions ordered by the Governor in January, coupled with the previously authorized transfer to the GRF of the uncommitted balance in the BSF ($65,255,000), would result in positive GRF fund balance at June 30, 2003. To offset the General Assembly's enactment of legislation that did not include the proposed additional taxes on cigarettes and liquor, beer and wine, the Governor on March 25 ordered additional reductions in GRF appropriations spending aggregating $142.5 million for the balance of fiscal year 2003. Included are reductions (generally at an annualized rate of 2.5%) of $90.6 million in state foundation and parity aid to school districts and an additional $9.3 million in Department of Education administration spending, $39.2 million in instructional support to higher education institutions, and other selected reductions totaling $3.4 million. The Governor also identified approximately $20 million in excess food stamp administration funds available to offset the need for further expenditure reductions. Expressly excepted from those reductions are appropriations for or relating to debt service on state obligations.
Based on the Administration's continuing monitoring of revenues, and as an anticipated step in the 2004-05 biennial budget and appropriations process, OBM reported revised revenue estimates to the Conference Committee on June 11, 2003. Those estimates reduced fiscal year 2003 revenues downward by an additional $200,000,000 over OBM's January 2003 adjusted baseline, based primarily on updated income and sales tax receipts through May 31. The Governor and OBM are addressing this additional fiscal year 2003 revenue shortfall through additional expenditure controls, and by drawing upon $193,000,000 of federal block grant aid available to the state prior to June 30 under a federal law which took effect on May 28, 2003.
The state ended the 2002-03 biennium with a GRF fund and cash balances of $52,338,000 and $396,539,000, respectively, and a balance in the BSF of $180,705,000.
Additional appropriations actions during the biennium, affecting most subdivisions and local libraries in the state, relate to the various local government assistance funds. The original appropriations act capped the amount to be distributed in fiscal years 2002 and 2003 to essentially the equivalent monthly payment amounts in fiscal years 2000 and 2001. Subsequent legislation amended the level to the lesser of those prior fiscal year amounts or the amount that would have been distributed under the standard formula.
Current Biennium. The GRF appropriations bill for the Fiscal Year 2004-05 biennium (beginning July 1, 2003) was passed by the General Assembly on June 19, 2003 and promptly signed (with selective vetoes) by the Governor June 26. Necessary GRF debt service and lease-rental appropriations for the entire biennium were requested in the Governor's proposed budget, incorporated in the related appropriations bill as introduced and in the bill's versions as passed by the House and the Senate, and in the Act as passed and signed. (The same is true for the separate transportation and public safety and Bureau of Workers' Compensation appropriations acts containing lease-rental appropriations for certain OBA-financed ODOT, DPS and BWC projects.)
The Act provides for total GRF biennial expenditures of approximately $48.8 billion. Those authorized GRF expenditures for Fiscal Year 2004 are approximately 5.8% higher than the actual Fiscal Year 2003 expenditures (taking into account Fiscal Year 2003 expenditure reductions), and for Fiscal Year 2005 are approximately 3.5% higher than for Fiscal Year 2004. The following are examples of increases in authorized GRF biennial expenditures compared with actual 2002-03 expenditures in major program categories: primary and secondary education 5.1%; higher education 4.4%; mental health and mental retardation 4.1%; Medicaid 19.9%; and adult and juvenile corrections 5.7%.
The above expenditure levels reflect among other expenditure controls in the Act: Medicaid cost containment measures including pharmacy cost management initiatives, limited expenditure growth for institutional services and implementation of managed care for higher-cost populations; continued phase-out of certain tangible personal property tax relief payments to local governments; the closing by consolidation of three institutional facilities during the biennium; adjustments in eligibility guidelines for subsidized child care from 185% to 150% of the federal poverty level and freezing certain reimbursement rates; no compensation increases for most State employees in Fiscal Year 2004 and limited one-time increases in Fiscal Year 2005; and continued limitation on local government assistance fund distributions to most subdivisions and local libraries to the lesser of the equivalent monthly payments in Fiscal Years 2000 and 2001 or the amount that would have been distributed under the standard formula.
The GRF expenditure authorizations for the biennium also reflect and are supported by revenue enhancement actions contained in the Act including:
* A one-cent increase in the state sales tax (to six percent) for the
biennium (expiring June 30, 2005), projected to generate approximately
$1.25 billion in each Fiscal Year to which it applies. On December 15,
2003, initiative petitions were filed with the Ohio Secretary of state
proposing an earlier reduction (back to five percent) of the state sales
tax. If the Secretary of State certifies the sufficiency of the petition
signatures for this initiative, the proposal will be forwarded for General
Assembly action within four months. If the General Assembly takes no
action, or acts to reject or passes the law in amended form, the
petitioners may collect additional signatures to submit the proposal to the
voters at the November 2004 general election, with the proposed early
reduction to take effect 30 days thereafter if approved by the voters.
* Expansion of the sales tax base to include dry-cleaning/laundry services,
towing, personal care and other services, and satellite television,
projected in the aggregate to produce approximately $69,000,000 annually.
(The inclusion of satellite television in the sales tax base, projected to
produce approximately $21,000,000 annually, is subject to a legal
challenge.)
* Moving local telephone companies from the public utility tax base to the
corporate franchise and sales tax, projected to produce approximately
$29,000,000 annually.
* Elimination of the sales tax exemption for WATS and 800 telecom services
coupled with the enactment of a more limited exemption for call centers,
projected to produce approximately $64,000,000 annually.
* Adjustments in the corporate franchise tax through the adoption of the
Uniform Division of Income for Tax Purposes Act (UDITPA) for apportionment
of business income among states, and an increase in the corporate
alternative minimum tax, projected in the aggregate to produce
approximately $35,000,000 annually.
The Act also authorizes and OBM plans to transfer into the general revenue fund on or before June 30, 2004 up to $242,800,000 of proceeds received from the national tobacco settlement. In addition, the Act reflects the draw down during the biennium of an additional $582,000,000 of federal block grant and Medicaid assistance aid made available to the State under a federal law effective May 28, 2003.
Based on regular monthly monitoring of revenues and expenditures, OBM on March 8, 2004 announced revised GRF revenue projections for Fiscal Years 2004 and 2005 based primarily on reduced revenue collections from personal income taxes. In response to OBM reducing its GRF revenue projection by $247,100,000 (1.02%) for Fiscal Year 2004 and by $372,700,000 (1.48%) for Fiscal Year 2005, the Governor on March 8 ordered Fiscal Year 2004 expenditure reductions of approximately $100,000,000, and expects to implement reductions aggregating approximately $200,000,000 for Fiscal Year 2005 including a reduction of $50,000,000 in State spending on Medicaid reflecting an increased Federal share of certain Medicaid services. Those annualized reductions are one percent in Fiscal Year 2004 and two percent in Fiscal Year 2005 for corrections, youth services, mental health, and mental retardation and developmental disabilities; and four percent in Fiscal Year 2004 and six percent in Fiscal Year 2005 for other departments and agencies. Expressly excluded from those reductions are debt service and lease rental payments relating to state obligations, state basic aid to elementary and secondary education, instructional subsidies and scholarships for public higher education, in-home care for seniors and certain job creation programs. OBM currently anticipates the balance of those revenue reductions will be offset by GRF expenditure lapses and, for Fiscal Year 2005, elimination of an anticipated $100,000,000 year-end transfer to the BSF while maintaining a one-half percent year-end GRF fund balance.
Litigation pending in the Ohio Court of Claims contests the Ohio Department of Human Services (ODHS, now Ohio Department of Job and Family Services(ODJFS)) former Medicaid financial eligibility rules for married couples when one spouse is living in a nursing facility and the other resides in the community. ODHS promulgated new eligibility rules effective January 1, 1996. ODHS appealed an order of the federal court directing it to provide notice to persons potentially affected by the former rules from 1990 through 1995, and the Court of Appeals ruled in favor of ODHS; plaintiff's petition for certiorari was not granted by the U.S. Supreme Court. As to the Court of Claims case, it is not possible to state the period (beyond the current fiscal year) during which necessary additional Medicaid expenditures would have to be made. Plaintiffs have estimated total additional Medicaid expenditures at $600,000,000 for the retroactive period and, based on current law, it is estimated that the state's share of those additional expenditures would be approximately $240,000,000. The Court of Appeals has certified the class action and notice has been sent to the members of the class. Trial for liability only was completed in the Court of Claims in January 2003 and all post-trial briefs have been filed with that Court. In March 2004, the trial court issued a decision finding no liability with respect to ODJFS. The plaintiff class has filed an appeal from that decision to the Franklin County Court of Appeals. That appeal is currently pending.
The incurrence or assumption of debt by the state without a popular vote is, with limited exceptions, prohibited by the state Constitution. The state may incur debt to cover casual deficits or to address failures in revenues or to meet expenses not otherwise provided for, but limited in amount to $750,000. The Constitution expressly precludes the state from assuming the debts of any county, city, town or township, or of any corporation. (An exception in both cases is for debts incurred to repel invasion, suppress insurrection, or defend the state in war.) The Constitution provides that "Except the debts above specified . . . no debt whatever shall hereafter be created by, or on behalf of the state."
By 17 constitutional amendments approved from 1921 to present, Ohio voters have authorized the incurrence of state general obligation (GO) debt and the pledge of taxes or excises to its payment. All related to capital facilities financing, except for three that funded bonuses for veterans and one that funded coal technology research and development. Currently, tax-supported debt is authorized to be incurred for the following purposes: highways, local infrastructure, coal development, natural resources, higher education, common schools, and conservation. Although supported by the general obligation pledge, highway debt is backed by a pledge of and has always been paid from the state's motor fuel taxes and other highway user receipts that are constitutionally restricted in use to highway related purposes.
A 1999 constitutional amendment provides an annual debt service "cap" applicable to future issuances of state general obligation bonds and other state direct obligations payable from the GRF or net state lottery proceeds. Generally, new bonds may not be issued if future fiscal year debt service on those new and the then outstanding bonds of those categories would exceed 5% of the total estimated GRF revenues plus net state lottery proceeds during the fiscal year of issuance. Those direct obligations of the state include, for example, special obligation bonds issued by the Ohio Building Authority and the Treasurer of state, and previously by the Ohio Public Facilities Commission (OPFC), as described below and that are paid from GRF appropriations, but exclude bonds such as highway bonds that are paid from highway user receipts. Pursuant to the amendment and implementing legislation, the Governor has designated the OBM Director as the state official to make the 5% determinations and certifications. Application of the cap may be waived in a particular instance by a three-fifths vote of each house of the General Assembly and may be changed by future constitutional amendments.
In addition to its issuance of highway bonds, the state has also financed selected highway infrastructure projects by entering into agreements that call for payments to be made from federal transportation funds allocated to the state, subject to biennial appropriations by the General Assembly. Annual state payments under those agreements reach a maximum of $79,602,448 in Fiscal Year 2005. In the event of any insufficiency in those anticipated federal allocations to make payments on state bonds, the payments are to be made from any lawfully
available federal moneys appropriated to ODOT for the purpose, and in the case of continued insufficiency the ODOT Director is to request a General Assembly appropriation for the purpose.
State agencies also have participated in office building and non-highway transportation projects that have local as well as state use and benefit, in connection with which the state has entered into lease-purchase agreements with terms ranging from 7 to 20 years. Certificates of participation (COPs) have been issued that represent fractionalized interests in or are payable from the state's anticipated payments. The number and amount of COPs issued in connection with those agreements have varied and will continue to vary. The maximum annual payment under those agreements, primarily made from GRF appropriations, is $3,265,375 in Fiscal Year 2023. Payments by the state are subject to biennial appropriations by the General Assembly with the lease terms subject to renewal if appropriations are made. Generally, the OBM Director's approval of such agreements is required, particularly if COPs are to be publicly-offered in connection with those agreements.
A statewide economic development program assists the financing of facilities and equipment for industry, commerce, research and distribution, including technology innovation, by providing loans and loan guarantees. The law authorizes the issuance of state bonds and notes secured by a pledge of portions of the state profits from liquor sales. The General Assembly has authorized the issuance of these obligations with a general maximum of $500,000,000 to be outstanding at any one time (excluding bonds issued to meet guarantees, if any). The aggregate amount from the liquor profits to be used in any fiscal year in connection with these bonds (except for bonds issued to meet guarantees, if any) may not exceed $45,000,000. The total of unpaid guaranteed loan amounts and unpaid principal of direct loans may not exceed $800,000,000. A 1996 issue of $168,740,000 of taxable bonds refunded outstanding bonds and provided additional loan moneys for facilities and equipment. $101,980,000 of taxable forward purchase bonds were issued in 1998 to refund, as of 2006, term bonds of the 1996 issue stated to mature in 2016 and 2021. The state, in July 2003, issued $50,000,000 in bonds for Innovation Ohio projects and in November 2003, issued $50,000,000 in bonds for research and development projects. Pursuant to a 2000 constitutional, the state has issued a first series of $50,000,000 of bonds for revitalization purposes that are also payable from state liquor profits. The maximum annual debt service on all state bonds payable from state liquor profits is $26,777,576 in Fiscal Year 2009.
Certain state agencies issue revenue bonds that are payable from revenues from or relating to revenue producing facilities, such as those issued by the Ohio Turnpike Commission. By judicial interpretation, such revenue bonds do not constitute "debt" under the constitutional provisions described above. The Constitution authorizes state bonds for certain housing purposes (issued by the Ohio Housing Finance Agency) to which tax moneys may not be obligated or pledged.
Litigation, similar to that in other states, has been pending in Ohio courts since 1991 questioning the constitutionality of Ohio's system of school funding and compliance with the constitutional requirement that the state provide a "thorough and efficient system of common schools". On December 11, 2002, the Ohio Supreme Court, in a 4-3 decision on a motion to reconsider its own decision rendered in September 2001, concluded (as it had in its 1997 and 2000 opinions in that litigation) that the state did not comply with that requirement, even after again noting and crediting significant state steps in recent years.
In its prior decisions, the Court stated as general base threshold requirements that every school district have enough funds to operate, an ample number of teachers, sound and safe buildings, and equipment sufficient for all students to be afforded an educational opportunity.
With particular respect to funding sources, the Court concluded in 1997 and 2000 decisions that property taxes no longer may be the primary means of school funding in Ohio.
On March 4, 2003, the plaintiffs filed with the original trial court a motion to schedule and conduct a conference to address compliance with the orders of the court in that case, the state petitioned the Supreme Court to issue a writ prohibiting that conference on compliance, and the trial court subsequently petitioned the Supreme Court for guidance as to the proper course to follow. On May 16, 2003, the Supreme Court granted that writ and ordered the dismissal of the motion before the trial court. And on October 20, 2003, the United States Supreme Court declined to accept the plaintiff's subsequent petition requesting further review of the case.
The General Assembly has taken several steps, including significantly increasing state funding for public schools, as discussed below. In addition, at the November 1999 election electors approved a constitutional amendment authorizing the issuance of state general obligation debt for school buildings and for higher education facilities. December 2000 legislation addressed certain mandated programs and reserves, characterized by the plaintiffs and the Court as "unfunded mandates."
Under the current financial structure, Ohio's 612 public school districts and 49 joint vocational school districts receive a major portion (but less than 50%) of their operating moneys from state subsidy appropriations (the primary portion of which is known as the Foundation Program) distributed in accordance with statutory formulas that take into account both local needs and local taxing capacity. The Foundation Program amounts have steadily increased in recent years, including small aggregate increases even in those fiscal years in which appropriations cutbacks were imposed.
School districts also rely upon receipts from locally voted taxes. In part because of provisions of some state laws, such as that partially limiting the increase (without further vote of the local electorate) in voted property tax collections that would otherwise result from increased assessed valuations, some school districts have expressed varying degrees of difficulty in meeting mandated and discretionary increased costs. Local electorates have largely determined the total moneys available for their schools. Locally elected boards of education and their school administrators are responsible for managing school programs and budgets within statutory requirements.
The state's present school subsidy formulas are structured to encourage both program quality and local taxing effort. Until the late 1970's, although there were some temporary school closings, most local financial difficulties that arose were successfully resolved by the local districts themselves by some combination of voter approval of additional property tax levies, adjustments in program offerings, or other measures. For more than 20 years, requirements of law and levels of state funding have sufficed to prevent school closings for financial reasons, which in any case are prohibited by current law.
To broaden the potential local tax revenue base, local school districts also may submit for voter approval income taxes on the district income of individuals and estates. Many districts have submitted the question, and income taxes are currently approved in 127 districts.
Original state basic aid appropriations for the 1992-93 biennium of $9.5 billion provided for 1.5% and 4.8% increases in the two fiscal years of the biennium over appropriations in the preceding biennium. The reduction in appropriations spending for Fiscal Year 1992 included a 2.5% overall reduction in annual Foundation Program appropriations, and a 6% reduction in other primary and secondary education programs. The reductions were in varying amounts, and had varying effects, with respect to individual districts; there were no reductions for the 172 districts with the lowest per pupil tax valuations. Foundation payments were excluded from the Governor's Fiscal Year 1993 cutback order.
Subsequent biennial school funding state appropriations from the GRF and Lottery Profits Education Fund (but excluding federal and other special revenue funds) were:
1994-95 - $8.9 billion provided for 2.4% and 4.6% increases, respectively, in state aid in the biennium's two Fiscal Years.
1996-97 - $10.1 billion representing a 13.6% increase over the preceding biennium total.
1998-99 - $11.6 billion (18.3% over the previous biennium).
2000-01 - $13.3 billion (15% over the previous biennium).
2002-03 - $15.2 billion (17% over the previous biennium before the expenditure reductions).
State appropriations for the purpose made for the 2004-05 biennium were $15.7 billion (3.3% over the previous biennium), and represented an increase of 0.01% in Fiscal Year 2004 over 2003 and 2.2% in Fiscal Year 2005 over 2004 when compared to original state appropriations.
Those total state 2004-05 biennial appropriations excluded non-GRF and federal appropriations, but include appropriations from the GRF and the lottery profits education fund (LPEF). The amount of lottery profits transferred to the LPEF totaled $686,020,000 in Fiscal Year 2000, $655,036,000 in Fiscal Year 2001, $635,150,000 in Fiscal Year 2002, and $671,352,000 in Fiscal Year 2003. Ohio participation in the multi-state lottery commenced in May 2002. A constitutional provision requires that net lottery profits be paid into LPEF to be used solely for the support of elementary, secondary, vocational and special education purposes, including application to debt service on general obligation bonds to finance common school facilities.
In response to the 1997 Ohio Supreme Court decision holding certain provisions for local school district borrowing unconstitutional, the General Assembly created the school district solvency assistance program. Beginning in Fiscal Year 1999, local school districts in fiscal emergency status as certified by the Auditor of State could apply for an advancement of future year Foundation Program distributions. The amount advanced was then deducted, interest free, from the district's foundation payments over the following two-year period. Six school districts received a total of approximately $12,100,000 in solvency assistance advancements during Fiscal Year 1999, with another six districts receiving a total of approximately $8,657,000 in Fiscal Year 2000. This solvency assistance program was held to be not in compliance with the Constitution by the Supreme Court. In Fiscal Year 2001 four districts received approximately $3,800,000 under a restructured solvency assistance program. The program was
further modified in December 2000 to allow districts that experience an unforeseen catastrophic event to apply for a grant. In Fiscal Year 2002, three districts received catastrophic grants totaling $2,569,970 and one district received a solvency advance in the amount of $421,000. In Fiscal Year 2003, three districts received solvency advances in the amount of $8,742,000 and no districts received catastrophic grants.
Legislation was enacted in 1996 to address school districts in financial straits. It is similar to that for municipal "fiscal emergencies" and "fiscal watch", but is particularly tailored to certain school districts and their then existing or potential fiscal problems. There are currently nine school districts in fiscal emergency status and eight in fiscal watch status. New legislation has created a third, more preliminary, category of "fiscal caution." A current listing of school districts in each status is on the Internet at http://www.auditor.state.oh.us.
Ohio's 943 incorporated cities and villages rely primarily on property and municipal income taxes to finance their operations. With other subdivisions, they also receive local government support and property tax relief moneys from state resources.
For those few municipalities and school districts that on occasion have faced significant financial problems, there are statutory procedures for a joint state/local commission to monitor the fiscal affairs and for development of a financial plan to eliminate deficits and cure any defaults. (Similar procedures have recently been extended to counties and townships.) Ten municipalities and one township are in "fiscal emergency" status and seven municipalities in preliminary "fiscal watch" status.
At present the state itself does not levy ad valorem taxes on real or tangible personal property. Those taxes are levied by political subdivisions and other local taxing districts. The Constitution has since 1934 limited the amount of the aggregate levy of ad valorem property taxes on particular property, without a vote of the electors or a municipal charter provision to 1% of true value in money, and statutes limit the amount of that aggregate levy without a vote or charter provision to 10 mills per $1 of assessed valuation -- commonly referred to in the context of Ohio local government finance as the "ten-mill limitation."
PENNSYLVANIA
The General Fund, the state of Pennsylvania's (referred to herein as the "Commonwealth", the "state" or "Pennsylvania") largest fund, receives all tax receipts, revenues, non-tax federal grants and reimbursements that are not specified by law to be deposited elsewhere. Debt service on all obligations, except those issued for highway purposes or for the benefit of other special revenue funds, is payable from the General Fund. The General Fund closed fiscal year 2003 with a balance of $2,257.7 million.
Greater than projected growth in the national economy during the second half of 2003 contributed to Commonwealth revenues through December 2003 exceeding the budget estimate, certified in March 2003, for fiscal year 2004. Actual Commonwealth revenues through December 2003 were approximately $458 million, or 3%, over the estimate prepared in March 2003. The Governor's proposed fiscal year 2004 budget request to the General Assembly included significant expenditure reductions and revenue enhancements. On March 20, 2003, the Governor signed the fiscal year 2004 budget into law while utilizing the line item veto authority to veto $4,111.3 million in line item appropriations relating to Commonwealth contributions to public education. On December 23, 2003, upon passage by the General Assembly, the Governor signed the remainder of fiscal year 2004 budget into law, including the previously vetoed appropriations for public education. The additional fiscal year 2004 budget items enacted on December 23 included significant revenue and expenditure enhancements as well as a revision to the fiscal year 2004 revenue estimate. The continuation of greater than projected growth in the national economy through the first quarter of 2004 continues to impact the revenue estimates incorporated in the enacted budget for fiscal year 2004. Consequently, actual revenues through April 2004 are $368 million, or 2%, above estimate. The Commonwealth has not officially revised its fiscal year 2004 estimate for General Fund revenues in response to actual receipts, but based on recent trends, expectations are that actual fiscal year 2004 revenues may be at least approximately $368 million above estimate.
The Commonwealth is permitted by its Constitution to incur the following types of debt: (i) debt to suppress insurrection or rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii) debt for capital projects subject to an aggregate debt limit of 1.75 times the annual average tax revenues of the preceding five fiscal years; and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt except tax anticipation notes must be amortized in substantial and regular amounts.
Debt service on Commonwealth general obligation debt is paid from appropriations out of the General Fund except for debt issued for highway purposes, which is paid from the Motor License Fund appropriations. Net outstanding general obligation debt totaled $6,767.2 million at June 30, 2003, a net increase of $707.9 million from June 30, 2002. Over the ten-year period ended June 30, 2003,
total net outstanding general obligation debt increased at an annual rate of 3%. Within the most recent five-year period, outstanding general obligation debt has increased at an annual rate of 7.5%.
Certain state-created agencies have statutory authorization to incur debt for which state appropriations to pay debt service thereon is not required. The debt of these agencies is supported by assets of or revenues derived from the various projects financed; it is not an obligation of the state. Some of these agencies, however, are indirectly dependent on state appropriations. State-related agencies and their outstanding debt as of June 30, 2003 include the Delaware River Joint Toll Bridge Commission ($158.5 million), the Delaware River Port Authority ($1,304 million), the Pennsylvania Economic Development Financing Authority ($1,609.8 million), the Pennsylvania Energy Development Authority ($62.6 million), the Pennsylvania Higher Education Assistance Agency ($3,783.99 million), the Pennsylvania Higher Education Facilities Authority ($4,286.1 million), the Pennsylvania Industrial Development Authority ($531.8 million), the Pennsylvania Infrastructure Investment Authority ($117.4 million), the Pennsylvania Turnpike Commission ($2,132 million), and the State Public School Building Authority ($666.6 million).
The only obligations of state-created agencies in Pennsylvania which bear a moral obligation of the state are those issued by the Pennsylvania Housing Finance Agency, a state-created agency which provides housing for lower and moderate income families in the Commonwealth, which had $2,483.1 million in bonds outstanding at June 30, 2003, and the Hospitals and Higher Education Facilities Authority of Philadelphia which issued $21.1 million in bonds in 1993. In July 2003, the Hospitals and Higher Education Authority issued its $13.32 million Series 2003 Bonds to refund the 1993 bonds.
Pennsylvania is currently involved in certain litigation where adverse decisions could have an adverse impact on its ability to pay debt service. In 1978, the General Assembly approved a limited waiver of sovereign immunity. Damages for any loss are limited to $250,000 for each person and $1,000,000 for each accident. The Supreme Court of Pennsylvania has held that the limitation is constitutional. Approximately 3,500 suits against the Commonwealth remain open. Tort claim payments for the Department of Transportation, are paid from departmental and agency operating and program appropriations. Tort claim payments for the Department of Transportation are paid from an appropriation from the Motor License Fund. The Motor License Fund tort claim appropriation for fiscal year 2004 is $20 million. In addition, Unisys Corporation v. Commonwealth involves a challenge on constitutional and statutory grounds to the statutory three-factor appointment formula used for the apportionment of capital stock value in the franchise tax.
On October 25, 2002, the Pennsylvania Supreme Court issued a decision upholding the Commonwealth's statutory appointment formula. Unisys filed a petition for certiorari to the U.S. Supreme Court which was denied. The decision in this matter denied relief to the taxpayer because it failed to carry its burden of proof and did not resolve the underlying issue. Thus, the decision has very limited applicability to the numerous cases pending which raise the identical issue and which collectively involve undetermined but significant dollars.
Northbrook Life Insurance Co. is the lead case in potential litigation with the entire insurance industry that does business in Pennsylvania, in which the Pennsylvania Department of Revenue's application of portions of the Life and Health Guarantee Association Act of 1982 is being challenged. County of Allegheny v. Commonwealth of Pennsylvania involves litigation regarding the state of constitutionality of the statutory scheme for county funding of the judicial system. Powell v. Ridge involves a challenge to Pennsylvania's system for funding public schools on the grounds that such system has the effect of discriminating on the basis of race in violation of Title VI of the Civil Rights Act of 1964. Since June 23, 2003, the case has been in civil suspense for a variety of reasons. Most recently, the court continued the stay of proceedings until the U.S. Court of Appeals for the Third Circuit and the U.S. Supreme Court decided other cases that likely would directly affect the plaintiff's claims. Those decisions have no been issued and make clear that the plaintiff's claims, as currently pled, are not viable. However, the Commonwealth anticipates that one or more plaintiff's may seek to amend the complaint in an effort to state a claim under Title VI of the Civil Rights Act. PPG Industries v. Commonwealth involves the successful challenge in the Pennsylvania Supreme Court that the manufacturing exemption to the Pennsylvania capital stock/ franchise tax discriminates against interstate commerce in violation of the Commerce Clause of the U.S. Constitution. Accordingly, the court ordered the manufacturing exemption severed from the capital stock/franchise tax and that the Commonwealth provide a retrospective remedy to affected taxpayers. The retrospective remedy announced by the Commonwealth on April 29, 2002 appears to be revenue neutral and satisfactory for in-state manufacturers. However, out-of-state manufacturers have appealed, involving an undetermined but significant dollar amount and those appeals remain pending.
The specific litigation matters described above are provided as an example only and do not compromise a complete listing of material ongoing or pending litigation involving the Commonwealth of Pennsylvania, its agencies, subdivisions and instrumentalities.
PUERTO RICO, THE U.S. VIRGIN ISLANDS AND GUAM
Puerto Rico. Puerto Rico has a diversified economy dominated by the manufacturing and service sectors. The North American Free Trade Agreement ("NAFTA"), which became effective January 1, 1994, has led to loss of lower wage jobs such as textiles, but economic growth in other areas, particularly tourism, pharmaceuticals, construction and the high technology areas have compensated for that loss.
The Commonwealth of Puerto Rico 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. Section
936 of the Code has provided a tax credit for certain qualified U.S.
corporations electing "possessions corporation" status. However, in 1993,
Section 936 was amended to provide for two alternative limitations on the
Section 936 credit attributable to certain active business income. The first
limitation was based on the economic activity of the Section 936 possessions
corporation. The second limited the credit to a specified percentage of the
credit allowed under prior law. In 1996, Section 936 credit was repealed except
that the credit attributable to possessions source business income with respect
to certain existing credit claimants was subjected to a phase out over a ten
year period (subject to additional caps).
Also in 1996, a new Section 30A was added to the Code. Section 30A permits a
"qualifying domestic corporation" that meets certain gross income tests to claim
a credit against the federal income tax in an amount equal to the portion of the
tax which is attributable to the taxable income from sources outside of the
United States, from the active conduct of a trade or business in Puerto Rico or
from the sale of substantially all the assets used in such a trade or business.
Section 30A will be phased out by January 1, 2006.
During the mid and late 1990s the Commonwealth of Puerto Rico benefited from a robust U.S. economy, more aggressive tax collections and low oil prices. This created an expanded employment base, job growth, reduction in unemployment, increase in tourism spending, real GDP growth in the 3.1% to 3.5% range and significant increases in General Fund cash balances from fiscal year end 1997 to fiscal year end 1999. These factors, combined with minimal negative impact to date from the 1996 federal legislation phasing out Section 936 tax benefits to Puerto Rico subsidiaries of U.S. Corporations, created a positive outlook for the credit in the late 1990s. Despite the fact that there have been some high profile U.S. companies that have left the island partially due to the Section 936 phase out, many corporations have elected to convert to controlled foreign corporation (CFC) status, which allows them to delay federal income taxes until the income is distributed to U.S. shareholders.
In fiscal year 2000, the outlook on the credit turned negative due to the slowdown in the U.S. economy (88% of Puerto Rico's exports go to the U.S.), uncertainty regarding increasing oil prices, failure of the government to reign in health care costs, expense overruns in education and a decreasing rate of employment growth. As a result, the General Fund recorded a $268 million deficit in fiscal year 2000 due to increased education and health care spending.
A new administration, the Popular Democratic Party that favors Puerto Rico's commonwealth status over a potential statehood status, took office in January, 2001. It was not long before they realized the presence of continued fiscal stress and estimated a fiscal year 2001 budget shortfall of $700 million. The shortfall was stated to be caused by weakened revenue growth due to the slowing pace of employment and a softening U.S. economy.
On May 30, 2001, S&P downgraded the Commonwealth of Puerto Rico to an A- from an A due to continued years of operating deficits and the use of borrowing to cover the deficits. Puerto Rico continued to use deficit financing and cash transfers from other accounts to fill budget deficits of $250 million, $400 million and $230 million for fiscal years 2002, 2003 and 2004, respectively. Another deficit is forecasted for fiscal year 2005. In fiscal year 2006, the Commonwealth hopes to balance the budget with a new sales tax which reportedly has bipartisan support. S&P put Puerto Rico on creditwatch with a negative outlook in March, 2003. Moody's rates Puerto Rico a Baa1 with a negative outlook.
The U.S. Virgin Islands. The United States Virgin Islands ("USVI") is heavily reliant on the tourism industry, with roughly 43% of non-agricultural employment in tourist-related trade and services. The tourism industry is economically sensitive and is adversely affected by the recession in the United States and Europe. The attacks of September 11, 2001 also had an adverse affect on tourism. For 2001, air passengers to the USVI were down 2.9% after increasing 12% in 2000. However, supported by an increase in cruise passengers, total visitors increased by 4.4% in 2001. 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. The last major hurricane to impact the USVI was Hurricane Marilyn on September 15, 1995. 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 and rated special tax debt outstanding). In addition, eventual elimination of the Section 936 tax credit for those companies with operations in USVI may lead to slower growth in the future.
Guam. The U.S. territory of Guam derives a substantial portion of its economic base from Japanese tourism. With a reduced U.S. military presence on the island, Guam has relied more heavily on tourism in past years. During 1998, the Japanese recession combined with the impact of typhoon Paka resulted in a budget deficit of $21 million. Based on these factors, S&P downgraded Guam's rating to BBB- from BBB with a negative outlook on May 26, 1999. Although total visitors improved in 1999 and 2000, they were weakened by economic slowdowns and the effects of the September 11th terrorist attacks in 2001. In 2002 Guam was hit with two major typhoons and impacted by the global economic slowdown. These negative trends have had an unfavorable effect on Guam's financial position with consistent general fund deficits from 1997-2002 with the exception of a small surplus in 2000. Guam also has a high debt burden with outstanding debt per capita of $2,700 and debt service representing 16% of expenditures. These factors caused S&P to downgrade Guam's rating to BB (below investment grade) from BBB- on March 25, 2002. Due to continued economic weakness and the negative effects of the typhoons in 2002, S&P further downgraded Guam's debt to B from BB on May 6, 2003. Guam is not rated by Moody's.
APPENDIX E
RATINGS
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 a particular date.
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. Evaluation of these bonds is dependent on the investment adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating service may not reflect the effect of recent developments on the issuer's ability to make interest and principal payments.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during other good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
Municipal Short-Term Obligations
MIG/VMIG Ratings U.S. Short-Term Ratings: In municipal debt issuance, there are three rating categories for short-term obligations that are considered investment grade. These ratings are designated as Moody's Investment Grade (MIG) and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents Moody's evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody's evaluation of the degree of risk associated with the demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
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.
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.
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.
CC: The rating CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but debt service payments are continued.
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 or the taking of a similar action 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: NR indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
Municipal Notes
S&P note ratings reflect the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined to possess very strong characteristics will be given a plus(+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
Fitch Ratings
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 obligor's 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.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a project or the occurrence of a specific event.
Investment Grade Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse change could cause these securities to be rated below investment grade.
APPENDIX F
EATON VANCE FUNDS
PROXY VOTING POLICY AND PROCEDURES
I. Overview
The Boards of Trustees (the "Boards") of the Eaton Vance Funds (the "Funds") recognize that it is their fiduciary responsibility to actively monitor the Funds' operations. The Boards have always placed paramount importance on their oversight of the implementation of the Funds' investment strategies and the overall management of the Funds' investments. A critical aspect of the investment management of the Funds continues to be the effective assessment and voting of proxies relating to the Funds' portfolio securities. While the Boards will continue to delegate the day-to-day responsibilities relating to the management of the proxy-voting process to the relevant investment adviser or sub-adviser, if applicable, of the Fund (or its underlying portfolio in the case of a master-feeder arrangement), the Boards have determined that it is in the interests of the Funds' shareholders to adopt these written proxy voting policy and procedures (the "Policy"). For purposes of this Policy the term "Fund" shall include a Fund's underlying portfolio in the case of a master-feeder arrangement and the term "Adviser" shall mean the adviser to a Fund or its sub-adviser if a sub-advisory relationship exists.
II. Delegation of Proxy Voting Responsibilities
Pursuant to investment advisory agreements between each Fund and its Adviser, the Adviser has long been responsible for reviewing proxy statements relating to Fund investments and, if the Adviser deems it appropriate to do so, to vote proxies on behalf of the Funds. The Boards hereby formally delegate this responsibility to the Adviser, except as otherwise described in this Policy. In so doing, the Boards hereby adopt on behalf of each Fund the proxy voting policies and procedures of the Adviser(s) to each Fund as the proxy voting policies and procedures of the Fund. The Boards recognize that the Advisers may from time to time amend their policies and procedures. The Advisers will report material changes to the Boards in the manner set forth in Section IV below. In addition, the Boards will annually review and approve the Advisers' proxy voting policies and procedures.
III. Delegation of Proxy Voting Disclosure Responsibilities
The Securities and Exchange Commission (the "Commission") recently enacted certain new reporting requirements for registered investment companies. The Commission's new regulations require that funds (other than those which invest exclusively in non-voting securities) make certain disclosures regarding their proxy voting activities. The most significant disclosure requirement for the Funds is the duty pursuant to Rule 30b1-4 promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"), to file Form N-PX no later than August 31/st/ of each year beginning in 2004.
Under Form N-PX, each Fund will be required to disclose, among other things, information concerning proxies relating to the Fund's portfolio investments, whether or not the Fund (or its Adviser) voted the proxies relating to securities held by the Fund and how it voted in the matter and whether it voted for or against management.
The Boards hereby delegate to each Adviser the responsibility for recording, compiling and transmitting in a timely manner all data required to be filed on Form N-PX to Eaton Vance Management, which acts as administrator to each of the Funds (the "Administrator"), for each Fund that such Adviser manages. The Boards hereby delegate the responsibility to file Form N-PX on behalf of each Fund to the Administrator.
IV. Conflicts of Interest
The Boards expect each Adviser, as a fiduciary to the Fund(s) it manages, to put the interests of each Fund and its shareholders above those of the Adviser. In the event that in connection with its proxy voting responsibilities a conflict of interest arises between a Fund's shareholders and the Fund's Adviser or the Administrator (or any of their affiliates) or any affiliated person of the Fund, the Adviser, to the extent it is aware or reasonably should have been aware of the conflict, will refrain from voting any proxies related to companies giving rise to such conflict until it notifies and consults with the appropriate Board(s) concerning the conflict.
Once the Adviser notifies the relevant Board(s) of the conflict, the Board(s) shall convene a meeting of the Boards' Fund Special Committee (the "Committee") to review and consider all relevant materials related to the proxies involved. In considering such proxies, the Adviser shall make available all materials requested by the Committee and make reasonably available appropriate personnel to discuss the matter with the Committee upon the Committee's request. The
Committee will instruct the Adviser on the appropriate course of action. If the Committee is unable to meet and the failure to vote a proxy would have a material adverse impact on the Fund(s) involved, each Adviser will have the right to vote such proxy, provided that it discloses the existence of the conflict to the Committee at its next meeting.
V. Reports
The Administrator shall make copies of each Form N-PX filed on behalf of the Funds available for the Boards' review upon the Boards' request. The Administrator (with input from the Adviser for the relevant Fund(s)) shall also provide any reports reasonably requested by the Boards regarding the proxy voting records of the Funds.
Each Adviser shall annually report any material changes to such Adviser's proxy voting policies and procedures to the relevant Board(s) and the relevant Board(s) will annually review and approve the Adviser's proxy voting policies and procedures. Each Adviser shall report any changes to such Adviser's proxy voting policies and procedures to the Administrator prior to implementing such changes in order to enable the Administrator to effectively coordinate the Funds' disclosure relating to such policies and procedures.
APPENDIX G
EATON VANCE MANAGEMENT
BOSTON MANAGEMENT AND RESEARCH
PROXY VOTING POLICIES AND PROCEDURES
I. Introduction
Eaton Vance Management, Boston Management and Research and Eaton Vance Investment Counsel (each an "Adviser" and collectively the "Advisers") have each adopted and implemented policies and procedures that each Adviser believes are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with its fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended. The Advisers' authority to vote the proxies of their clients is established by their advisory contracts or similar documentation, such as the Eaton Vance Funds Proxy Voting Policies and Procedures. These proxy policies and procedures reflect the Securities and Exchange Commission ("SEC") requirements governing advisers and the long-standing fiduciary standards and responsibilities for ERISA accounts set out in the Department of Labor Bulletin 94-2 C.F.R. 2509.94-2 (July 29, 1994).
II. Overview
Each Adviser manages its clients' assets with the overriding goal of seeking to provide the greatest possible return to such clients consistent with governing laws and the investment policies of each client. In pursuing that goal, each Adviser seeks to exercise its clients' rights as shareholders of voting securities to support sound corporate governance of the companies issuing those securities with the principle aim of maintaining or enhancing the companies' economic value.
The exercise of shareholder rights is generally done by casting votes by proxy at shareholder meetings on matters submitted to shareholders for approval (for example, the election of directors or the approval of a company's stock option plans for directors, officers or employees). Each Adviser is adopting the formal written guidelines described in detail below and will utilize such guidelines in voting proxies on behalf of its clients. These guidelines are designed to promote accountability of a company's management and board of directors to its shareholders and to align the interests of management with those of shareholders.
In seeking to ensure a level of consistency and rationality in the proxy voting process, the guidelines contained in these policies and procedures are designed to address the manner in which certain matters that arise regularly in proxies will generally be voted. However, each Adviser takes the view that these guidelines should not be used as mechanical instructions for the exercise of this important shareholder right. Except in the instance of routine matters related to corporate administrative matters which are not expected to have a significant economic impact on the company or its shareholders (on which the Advisers will routinely vote with management), the Advisers will review each matter on a case-by-case basis and reserve the right to deviate from these guidelines when they believe the situation warrants such a deviation. In addition, no set of guidelines can anticipate all situations that may arise. In special cases, the Proxy Administrator (the person specifically charged with the responsibility to review and vote proxies on behalf of each Adviser's clients) may seek insight from the Adviser's analysts, portfolio managers and/or Chief Equity Investment Officer on how a particular proxy proposal will impact the financial prospects of a company, and vote accordingly. The guidelines are just that: guidelines rather than hard and fast rules, simply because corporate governance issues are so varied.
III. Proxy Voting Guidelines
The following guidelines relate to the types of proposals that are most frequently presented in proxy statements to shareholders. Absent unusual circumstances, each Adviser will utilize these guidelines when voting proxies on behalf of its clients.
A. Election of Board of Directors
The Advisers believe that a Board of Directors should primarily be independent, not have significant ties to management and consist of members who are all elected annually. In addition, the Advisers believe that important Board committees (e.g., audit, nominating and compensation committees) should be entirely independent. In general,
* The Advisers will support the election of directors that result in a
Board made up of a majority of independent directors.
* The Advisers will support the election for independent directors to
serve on the audit, compensation, and/or nominating committees of a
Board of Directors.
* The Advisers will hold all directors accountable for the actions of
the Board's committees. For example, the Advisers will consider
withholding votes for nominees who have recently approved compensation
arrangements that the Advisers deem excessive or propose equity-based
compensation plans that unduly dilute the ownership interests of
shareholders.
* The Advisers will support efforts to declassify existing Boards, and
will vote against proposals by companies to adopt classified Board
structures.
* The Advisers will vote against proposals for cumulative voting,
confidential stockholder voting and the granting of pre-emptive
rights.
B. Approval of Independent Auditors
The Advisers believe that the relationship between the company and its auditors should be limited primarily to the audit engagement and closely allied audit-related and tax services, although non-audit services may be provided so long as they are consistent with the requirements of the Sarbanes-Oxley Act and, if required, have been approved by an independent audit committee. The Advisers will also consider the reputation of the auditor and any problems that may have arisen in the auditor's performance of services.
C. Executive Compensation
The Advisers believe that appropriately designed equity-based compensation plans, approved by shareholders, can be an effective way to align the interests of shareholders and the interests of management, employees, and directors. However, the Advisers are opposed to plans that substantially dilute shareholders' ownership interests in the company or have objectionable structural features.
* The Advisers will generally vote against plans where total potential
dilution (including all equity-based plans) seems likely to exceed 15% of
shares outstanding over ten years and extends longer than ten years.
* The Advisers will generally vote against plans if annual option grants
exceed 2% of shares outstanding.
These total and annual dilution thresholds are guidelines, not ceilings, and when assessing a plan's impact on client shareholdings the Advisers will consider other factors such as specific industry practices, company and stock performance and management credibility. The Proxy Administrator may consult with the relevant analyst(s) or portfolio manager(s) or, if appropriate, the Chief Equity Investment Officer, to determine when or if it may be appropriate to exceed these guidelines.
* The Advisers will typically vote against plans that have any of the following structural features :
* Ability to re-price underwater options without shareholder approval.
* The unrestricted ability to issue options with an exercise price below
the stock's current market price.
* Automatic share replenishment ("evergreen") feature.
* The Advisers are supportive of measures intended to increase long-term stock ownership by executives. These may include:
* Requiring senior executives to hold a minimum amount of stock in the
company (frequently expressed as a certain multiple of the executive's
salary).
* Using restricted stock grants instead of options.
* Utilizing phased vesting periods or vesting tied to company specific
milestones or stock performance.
* The Advisers will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value.
In assessing a company's executive compensation plan, the Advisers will weigh all components of the plan. For example, the grant of stock options to executives of a company in a particular year may appear excessive if that grant goes above 2% of the shares outstanding of the company. However, such grants may be appropriate if the senior management of the company has accepted significantly reduced cash compensation for the year in lieu of receiving a greater number of options.
D. Corporate Structure Matters/Anti-Takeover Defenses
As a general matter, the Advisers oppose anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions. In general,
* Because a classified board structure prevents shareholders from electing a
full slate of directors annually, the Advisers will typically vote against
proposals to create classified boards and vote in favor of shareholder
proposals to declassify a board.
* The Advisers will vote for proposals to subject shareholder rights plans
("poison pills") to a shareholder vote.
* The Advisers will vote for shareholder proposals that seek to eliminate
supermajority voting requirements and oppose proposals seeking to implement
supermajority voting requirements.
* The Advisers will generally vote against proposals to authorize preferred
stock whose voting, conversion, dividend and other rights are determined at
the discretion of the board of directors when the stock is issued, when
used as an anti-takeover device. However, such "blank check" preferred
stock may be issued for legitimate financing needs and the Adviser may vote
for proposals to issue such preferred stock when it believes such
circumstances exist.
* The Advisers will vote for proposals to lower barriers to shareholder
action (for example, limiting rights to call special meetings or act by
written consent).
* The Advisers will vote against proposals for a separate class of stock with
disparate voting rights.
* The Advisers will consider on a case-by-case basis on board approved
proposals regarding changes to a company's capitalization; however, the
Advisers will generally vote in favor of proposals authorizing the issuance
of additional common stock (except in the case of a merger, restructuring
or another significant corporate event which will be handled on a
case-by-case basis), provided that such issuance does not exceed three
times the number of currently outstanding shares.
E. State of Incorporation/Offshore Presence
Under ordinary circumstances, the Advisers will not interfere with a choice to reincorporate or reorganize a company in a different jurisdiction, provided that management's decision has been approved by the board of directors. The Advisers recognize that there may be benefits to reincorporation (such as tax benefits and more developed business laws in the jurisdiction of reincorporation). Each proposal to reincorporate in offshore tax havens will be reviewed on a case-by-case basis to determine whether such actions are in the best interests of the shareholders of the company, including the Advisers' clients.
F. Environmental/Social Policy Issues
The Advisers believe that "ordinary business matters" are primarily the responsibility of management and should be approved solely by the company's board of directors. The Advisers recognize that certain social and environmental issues raised in shareholder proposals are the subject of vigorous public debate and many are the subject of legal statutes or regulation by federal and/or state agencies. The Advisers generally support management on these types of proposals, although they may make exceptions where they believe a proposal has substantial economic implications. The Advisers expect that the companies in which they invest their clients' assets will act as responsible corporate citizens.
G. Circumstances Under Which The Advisers Will Abstain From Voting
The Advisers will seek to vote all proxies for clients who have delegated the responsibility to vote such proxies to the Advisers. Under certain circumstances, the costs to their clients associated with voting such proxies would far outweigh the benefit derived from exercising the right to vote. In those circumstances, the Advisers will make a case-by-case determination on whether or not to vote such proxies. In the case of countries which required so-called "share blocking," the Adviser may also abstain from voting. The Advisers will not seek to vote proxies on behalf of their clients unless they have agreed to take on that responsibility on behalf of a client. Finally, the Advisers may be required to abstain from voting on a particular proxy in a situation where a conflict exists between the Adviser and its client. The policy for resolution of such conflicts is described below in Section V.
IV. Recordkeeping
The Advisers will maintain records relating to the proxies they vote on behalf of their clients in accordance with Section 204-2 of the Investment Advisers Act of 1940, as amended. Those records will include:
* A copy of the Advisers' proxy voting policies and procedures;
* Proxy statements received regarding client securities (if such proxies
are available on the SEC's EDGAR system or a third party undertakes to
promptly provide a copy of such documents to the Advisers, the
Advisers do not need to retain a separate copy of the proxy
statement);
* A record of each vote cast;
* A copy of any document created by the Advisers that was material to
making a decision on how to vote a proxy for a client or that
memorializes the basis for such a decision; and
* Each written client request for proxy voting records and the Advisers'
written response to any client request (whether written or oral) for
such records.
All records described above will be maintained in an easily accessible place for five years and will be maintained in the offices of the Advisers for two years after they are created.
V. Identification and Resolution of Conflicts with Clients
As fiduciaries to their clients, each Adviser puts the interests of its clients ahead of its own. In order to ensure that relevant personnel of the Advisers are able to identify potential conflicts of interest, each Adviser will take the following steps:
* Quarterly, the Eaton Vance Legal and Compliance Departments will seek
information from the department heads of each department of the
Advisers and of Eaton Vance Distributors, Inc. ("EVD") (an affiliate
of the Advisers and principal underwriter of the Eaton Vance Funds).
Each department head will be asked to provide a list of significant
clients or prospective clients of the Advisers or EVD. For example, a
department head would report the fact that EVD was in discussions with
a corporate client considering management of the corporation's 401(k)
plan assets.
* A representative of the Legal and Compliance Departments will compile
a list of the companies identified (the "Conflicted Companies") and
provide that list to the Proxy Administrator.
* The Proxy Administrator will compare the list of Conflicted Companies
with the names of companies for which he or she expects to receive or
has received proxy statements (the "Proxy Companies"). If a Conflicted
Company is also a Proxy Company, the Proxy Administrator will report
that fact to the Eaton Vance Chief Legal Officer and the Chief Equity
Investment Officer.
The Chief Legal Officer and Chief Equity Investment Officer will then determine if a conflict of interest exists between the relevant Adviser and its client. If they determine that a conflict exists, they or their designees will take the following steps to seek to resolve such conflict prior to voting any proxies relating to these Conflicted Companies.
* For clients other than a Fund, if the Proxy Administrator expects to
vote the proxy of the Conflicted Company strictly according to the
guidelines contained in these Proxy Voting Policies and Procedures
(the "Policies"), she will (i) inform the Chief Legal Officer and
Chief Equity Investment Officer (or their designees) of that fact,
(ii) vote the proxies and (iii) record the existence of the conflict
and the resolution of the matter.
* If (i) the client involved is a Fund, or (ii) the Proxy Administrator
intends to vote in a manner inconsistent with the guidelines contained
herein or, if the issues raised by the proxy are not contemplated by
these Policies, and the matters involved in such proxy could have a
material economic impact on the client(s) involved, the Adviser will
seek instruction on how the proxy should be voted from:
* The client, in the case of an individual or corporate client;
* In the case of a Fund, its board of directors, or any committee
identified by the board; or
* The adviser, in situations where the Adviser acts as a
sub-adviser to such adviser.
The Adviser will provide all reasonable assistance to each party to enable such party to make an informed decision.
If the client, fund board or adviser, as the case may be, fails to instruct the Adviser on how to vote the proxy, the Adviser will generally abstain from voting in order to avoid the appearance of impropriety. If however, the failure of the Adviser to vote its clients' proxies would have a material adverse economic impact on the Advisers' clients' securities holdings in the Conflicted Company, the Adviser may vote such proxies in order to protect its clients' interests. In either case, the Proxy Administrator will record the existence of the conflict and the resolution of the matter.
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 2005
EATON VANCE
NATIONAL LIMITED MATURITY
MUNICIPALS
FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
1-800-262-1122
This Statement of Additional Information ("SAI") provides general information about the Fund. The Fund is a diversified, open-end management investment company. The Fund is a series of Eaton Vance Investment Trust (the "Trust"). Capitalized terms used in this SAI and not otherwise defined have the meanings given to them in the prospectus. This SAI contains additional information about:
Page Page
Strategies and Risks 2 Purchasing and Redeeming Shares 18
Investment Restrictions 8 Sales Charges 19
Management and Organization 9 Performance 21
Investment Advisory and Taxes 23
Administrative Services 14 Portfolio Securities
Other Service Providers 17 Transactions 25
Calculation of Net Asset Value 17 Financial Statements 27
Appendix A: Class A Fees, Performance and Ownership 28
Appendix B: Class B Fees, Performance and Ownership 30
Appendix C: Class C Fees, Performance and Ownership 32
Appendix D: Ratings 34
Appendix E: Eaton Vance Funds Proxy Voting Policies and Procedures 38
Appendix F: Adviser Proxy Voting Policies 40
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This SAI is NOT a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by the Fund's prospectus dated August 1, 2005, as supplemented from time to time, which is incorporated herein by reference. This SAI should be read in conjunction with the prospectus, which may be obtained by calling 1-800-225-6265.
(c) 2005 Eaton Vance Management
The following defined terms may be used herein: "SEC" for the Securities and Exchange Commission; "CFTC" for the Commodities Futures Trading Commission; "Code" for the Internal Revenue Code of 1986, as amended; "1940 Act" for the Investment Company Act of 1940, as amended; and "NASD" for the National Association of Securities Dealers, Inc.
During the fiscal year ended March 31, 2005, the Fund invested all of its assets in a registered open-end management investment company that had the same investment objectives and policies as the Fund (a "Portfolio"). On October 8, 2004, the Fund withdrew its pro rata share of the Portfolio's net assets and began investing directly in securities. There were no changes in the Fund's investment objectives or policies as the result of this change in investment structure. The Fund is expected to pay similar fees and transaction-related expenses as reported herein for its Portfolio.
STRATEGIES AND RISKS
Primary strategies are defined in the prospectus. The following is a description of the various investment practices that may be engaged in, whether as a primary or secondary strategy, and a summary of certain attendant risks. The investment adviser(s) may not buy any of the following instruments or use any of the following techniques unless it believes that doing so will help achieve the investment objective(s).
Municipal Obligations. Municipal obligations are issued to obtain funds for various public and private purposes. Municipal obligations include bonds as well as tax-exempt commercial paper, project notes and municipal notes such as tax, revenue and bond anticipation notes of short maturity, generally less than three years. While most municipal bonds pay a fixed rate of interest semi-annually in cash, there are exceptions. Some bonds pay no periodic cash interest, but rather make a single payment at maturity representing both principal and interest. Bonds may be issued or subsequently offered with interest coupons materially greater or less than those then prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of municipal obligations, the interest 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 Fund will rely on an opinion of the issuer's counsel (when available) and will not undertake any independent verification of the basis for the opinion.
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) are 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).
The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. Issuers of general obligation bonds include states, counties, cities, towns and regional districts. The proceeds of these obligations are used to fund a wide range of public projects including the construction or improvement of schools, highways and roads, water and sewer systems and a variety of other public purposes. The basic security of general obligation bonds is the issuer's pledge of its faith, credit, and taxing power for the payment of principal and interest. The taxes that can be levied for the payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a particular facility or group of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Revenue bonds have been issued to fund a wide variety of capital projects including: electric, gas, water, sewer and solid waste disposal systems; highways, bridges and tunnels; port, airport and parking facilities; transportation systems; housing facilities, colleges and universities and hospitals. Although the principal security behind these bonds varies widely, many provide additional security in the form of a debt service reserve fund whose monies may be used to make principal and interest payments on the issuer's obligations. Housing finance authorities have a wide range of security including partially or fully insured, rent subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. In addition to a debt service reserve fund, some authorities provide further security in the form of a state's ability (without legal obligation) to make up deficiencies in the debt service reserve fund. Lease rental revenue bonds issued by a state or local authority for capital projects are normally secured by annual lease rental payments from the state or locality to the authority sufficient to cover debt service on the authority's obligations. Such payments are usually subject to annual appropriations by the state or locality. Industrial development and pollution control bonds, although nominally issued by municipal authorities, are in most cases revenue bonds and are generally not secured by the taxing power of the municipality, but are usually secured by the revenues derived by the authority from payments of the industrial user or users. The Fund 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 Fund anticipates that it would, under normal circumstances, dispose of any equity securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and interest on a municipal obligation are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions the power or ability of any person or entity to pay when due principal of and interest on a municipal obligation may be materially affected or interest and principal previously paid may be required to be refunded. There have been recent instances of defaults and bankruptcies involving municipal obligations which were not foreseen by the financial and investment communities. The Fund 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 Fund as a result of any such event, and the Fund may also manage (or engage other persons to manage) or otherwise deal with any real estate, facilities or other assets so acquired. The Fund 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 Fund. The Fund will incur additional expenditures in taking protective action with respect to portfolio obligations in (or anticipated to be in) default and assets securing such obligations.
The yields on municipal obligations will be dependent on a variety of factors, including purposes of issue and source of funds for repayment, general money market conditions, general conditions of the municipal bond market, size of a particular offering, maturity of the obligation and rating of the issue. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the municipal obligations which they undertake to rate. It should be emphasized, however, that ratings are based on judgment and are not absolute standards of quality. Consequently, municipal obligations with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield. In addition, the market price of such obligations will normally fluctuate with changes in interest rates, and therefore the net asset value of the Fund will be affected by such changes.
State and Sector Concentration. The Fund may invest 25% or more of its total assets in municipal obligations whose issuers are located in the same state or in municipal obligations in certain sectors. Municipal obligations of issuers located in a single state may be adversely affected by economic developments (including insolvency of an issuer) and by legislation and other governmental activities in that state. There could be economic, business or political developments or court decisions that adversely affect all municipal obligations in the same sector. In particular, investments in revenue bonds might involve (without limitation) the following risks.
Hospital bond ratings are often based on feasibility studies which contain projections of expenses, revenues and occupancy levels. Among the influences affecting a hospital's gross receipts and net income available to service its debt are demand for hospital services, the ability of the hospital to provide the services required, management capabilities, economic developments in the service area, efforts by insurers and government agencies to limit rates and expenses, confidence in the hospital, service area economic developments, competition, availability and expense of malpractice insurance, Medicaid and Medicare funding and possible federal legislation limiting the rates of increase of hospital charges.
Electric utilities face problems in financing large construction programs in an inflationary period, cost increases and delay occasioned by safety and environmental considerations (particularly with respect to nuclear facilities), difficulty in obtaining fuel at reasonable prices, and in achieving timely and adequate rate relief from regulatory commissions, effects of energy conservation and limitations on the capacity of the capital market to absorb utility debt.
Industrial development bonds ("IDBs") are normally secured only by the revenues from the project and not by state or local government tax payments, they are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, IDBs are sensitive to the risk of a slowdown in the economy.
Tobacco bonds are secured by a single source of revenue, installment payments made by tobacco companies stemming from the settlement of lawsuits brought against them by various states. These payments are not generally fixed but rather are tied to the volume of the company's U.S. sales of cigarettes. Tobacco bonds are subject to several risks, including the risk that cigarette consumption declines or that a tobacco company defaults on its obligation to make payments to the state.
In addition, with respect to the airline industry, there are a number of major carriers that are experiencing significant operation problems. These problems include, but are not limited to, bankruptcy filings, competition from low cost carriers, labor and union conflicts, increasing costs associated with terrorism,
increasing jet fuel prices and decreasing yields per passenger. United Airlines is currently in bankruptcy, and recent court rulings associated with the bankruptcy have been split on determining whether certain special facility "lease-backed" debt issuances are considered loans and not leases, significantly impacting the return potential of "lease-backed" airline bonds if the rulings stand.
Duration. In pursuing its investment objective the Fund seeks to maintain a dollar weighted average portfolio duration of between three and nine years. Duration represents the dollar weighted average maturity of expected cash flows (i.e., interest and principal payments) on one or more debt obligations, discounted to their present values. The duration of an obligation is usually not more than its stated maturity and is related to the degree of volatility in the market value of the obligation. Maturity measures only the time until a bond or other debt security provides its final payment; it does not take into account the pattern of a security's payments over time. Duration takes both interest and principal payments into account and, thus, in the investment adviser's opinion, is a more accurate measure of a municipal obligation's sensitivity to changes in interest rates. In computing the duration of its portfolio, the Fund will have to estimate the duration of debt obligations that are subject to prepayment or redemption by the issuer, based on projected cash flows from such obligations.
Credit Quality. While municipal obligations rated investment grade or below and comparable unrated municipal obligations may have some quality and protective characteristics, these characteristics can be expected to be offset or outweighed by uncertainties or major risk exposures to adverse conditions. Lower rated and comparable unrated municipal obligations are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to greater price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated municipal obligations are also more likely to react to real or perceived developments affecting market and credit risk than are more highly rated obligations, which react primarily to movements in the general level of interest rates.
Municipal obligations held by the Fund which are rated below investment grade but which, subsequent to the assignment of such rating, are backed by escrow accounts containing U.S. Government obligations may be determined by the investment adviser to be of investment grade quality for purposes of the Fund's investment policies. The Fund may retain in its portfolio an obligation whose rating drops after its acquisition, including defaulted obligations, if such retention is considered desirable by the investment adviser; provided, however, that holdings of obligations rated below Baa or BBB will be less than 35% of net assets and holdings rated below B will be less than 10% of net assets. In the event the rating of an obligation held by the Fund is downgraded, causing the Fund to exceed this limitation, the investment adviser will (in an orderly fashion within a reasonable period of time) dispose of such obligations as it deems necessary in order to comply with the Fund's credit quality limitations. In the case of a defaulted obligation, the Fund may incur additional expense seeking recovery of its investment. See "Portfolio of Investments" in the "Financial Statements" incorporated by reference into this SAI with respect to any defaulted obligations held by the Fund.
When the Fund invests in lower rated or unrated municipal obligations, the achievement of the Fund's goals is more dependent on the investment adviser's ability than would be the case if the Fund were investing in municipal obligations in the higher rating categories. In evaluating the credit quality of a particular issue, whether rated or unrated, the investment adviser may 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 may also purchase structured derivative products with greater or lesser credit risk than the underlying bonds. Such bonds may be rated investment grade, as well as below investment grade. For a description of municipal bond ratings, see Appendix D.
Municipal Leases. The Fund may invest in municipal leases and participations therein, which arrangements frequently involve special risks. Municipal leases are obligations in the form of a lease, installment purchase or conditional sales contract (which typically provide for the title to the leased asset to pass to the governmental issuer) which is issued by state or local governments to acquire equipment and facilities. Interest income from such obligations is generally exempt from local and state taxes in the state of issuance. "Participations" in such leases are undivided interests in a portion of the total obligation. Participations entitle their holders to receive a pro rata share of all payments under the lease. The obligation of the issuer to meet its obligations under such leases is often subject to the appropriation by the appropriate legislative body, on an annual or other basis, of funds for the payment of the obligations. Investments in municipal leases are thus subject to the risk that the legislative body will not make the necessary appropriation and the issuer will not otherwise be willing or able to meet its obligation.
Certain municipal lease obligations owned by the Fund may be deemed illiquid for the purpose of the Fund's 15% limitation on investments in illiquid securities, unless determined by the investment adviser, pursuant to guidelines adopted by the Trustees, to be liquid securities for 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 obligation; (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, including the time needed to dispose of the obligation, the method of soliciting offers, and the mechanics of transfer. In addition, the investment adviser will consider factors unique to particular lease obligations affecting the marketability thereof. These include the general creditworthiness of the issuer, the importance of the equipment, property or facility covered by the lease or contract to the municipality, and the likelihood that the marketability of the obligation will be maintained throughout the time the obligation is held by the Fund. In the event the Fund acquires an unrated municipal lease obligation, the investment adviser will be responsible for determining the credit quality of such obligation on an ongoing basis, including an assessment of the likelihood that the lease may or may not be cancelled.
Zero Coupon Bonds. Zero coupon bonds are debt obligations which do not require the periodic payment of interest and are issued at a significant discount from face value. The discount approximates the total amount of interest the bonds will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. The Fund 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 that income for each taxable year. Thus, the Fund may have to sell other investments to obtain cash needed to make income distributions.
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 Fund's commitment and are subject to certain conditions such as the issuance of satisfactory legal opinions. The Fund 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 Fund to buy such securities on a settlement date that could be several months or several years in the future. The Fund may also purchase instruments that give the Fund the option to purchase a municipal obligation when and if issued.
The Fund 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 Fund enters into the purchase commitment. When the Fund 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 Fund 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 Fund 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 Fund's net asset value than if it solely set aside cash to pay for when-issued securities.
Redemption, Demand and Put Features and Put Options. Issuers of municipal obligations reserve the right to call (redeem) the bond. If an issuer redeems securities held by the Fund during a time of declining interest rates, the Fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. Also, some bonds may have "put" or "demand" features that allow early redemption by the bondholder. Longer term fixed-rate bonds may give the holder a right to request redemption at certain times (often annually after the lapse of an intermediate term). These bonds are more defensive than conventional long term bonds (protecting to some degree against a rise in interest rates) while providing greater opportunity than comparable intermediate term bonds, because the Fund may retain the bond if interest rates decline.
Liquidity and Protective Put Options. The Fund may enter into a separate agreement with the seller of the security or some other person granting the Fund the right to put the security to the seller thereof or the other person at an agreed upon price. The Fund 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 Fund or that selling institutions will be willing to permit the Fund to exercise a put to hedge against rising interest rates. The Fund does not expect to assign any value to any separate put option which may be acquired to facilitate portfolio liquidity, inasmuch as the value (if any) of the put will be reflected in the value assigned to the associated security; any put acquired for hedging purposes would be valued in good faith under methods or procedures established by the Trustees after consideration of all relevant factors, including its expiration date, the price volatility of the associated security, the difference between the market price of the associated security and the exercise price of the put, the creditworthiness of the issuer of the put and the market prices of comparable put options. Interest income generated by certain bonds having put or demand features may be taxable.
Variable Rate Obligations. The Fund 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 which are frequently secured by letters of credit or other 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 purposes of complying with the diversification requirements set forth in Section 5(b) of the 1940 Act and Rule 5b-2 thereunder. The Fund would anticipate using these bonds as cash equivalents pending longer term investment of its funds.
Inverse Floaters. The Fund 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 and income 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 a portfolio when short-term interest rates rise, and increase the interest paid to the Fund when short-term interest rates fall. Inverse floaters have varying degrees of liquidity, and the market for these securities is 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.
Under certain circumstances, the Fund may enter into a so-called shortfall and forebearance agreement with the sponsor of an inverse floater held by the Fund. Such agreements commit the Fund to reimburse the sponsor of such inverse floater, upon the termination of the trust issuing the inverse floater, the difference between the liquidation value of the underlying security (which is the basis of the inverse floater) and the principal amount due to the holders of the floating rate security issued in conjunction with the inverse floater. Under the standard terms of an inverse floater, the Fund would not be required to make such a reimbursement. If the Fund chooses not to enter into such an agreement, the inverse floater will be terminated and the Fund may incur a loss. Although entering into such an agreement exposes the Fund to the risk that it may have to make a reimbursement of the type described above, the Fund can receive higher interest payments than it would under a typical inverse floater and would be able to defer recognizing a loss on the inverse floater covered by the shortfall and forebearance agreement.
Interest Rate Swaps and Forward Rate Contracts. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of fixed rate payments for floating rate
payments. The Fund will only enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. The Fund may also
enter forward rate contracts. Under these contracts, the buyer locks in an
interest rate at a future settlement date. If the interest rate on the
settlement date exceeds the lock rate, the buyer pays the seller the difference
between the two rates. If the lock rate exceeds the interest rate on the
settlement date, the seller pays the buyer the difference between the two rates.
Any such gain received by the Fund would be taxable.
If the other party to an interest rate swap or forward rate contract defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive. The net amount of the excess, if any, of the Fund's obligations over its entitlements will be maintained in a segregated account by the Fund's custodian. The Fund will not enter into any interest rate swap or forward rate contract unless the claims-paying ability of the other party thereto is considered to be investment grade by the investment adviser. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. These instruments are traded in the over-the-counter market.
Illiquid Obligations. At times, a substantial portion of the Fund's assets may be invested in securities as to which the Fund, 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 Fund 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 Fund's net asset value. Illiquid securities may also include those legally restricted as to resale, and securities eligible for resale pursuant to Rule 144A thereunder. Rule 144A securities may be treated as liquid securities if the investment adviser determines that such treatment is warranted. Even if determined to be liquid, holdings of these securities may increase the level of Fund illiquidity if eligible buyers become uninterested in purchasing them.
The secondary market for some municipal obligations issued within a state (including issues which are privately placed with the Fund) is less liquid than that for taxable debt obligations or other more widely traded municipal obligations. The Fund will not own illiquid securities if more than 15% of its net assets would be invested in securities that are not readily marketable. No established resale market exists for certain of the municipal obligations in which the Fund 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 Fund may be unable to dispose of these municipal obligations at times when it would otherwise wish to do so at the prices at which they are valued.
Securities Lending. The Fund may lend up to 30% of the value of its total assets (including borrowings) or such other amount as is permitted under relevant law. The Fund may seek to earn income by lending portfolio securities to broker-dealers or other institutional borrowers. 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. In the judgment of the investment adviser the loans will be made only to organizations whose credit quality or claims paying ability is considered to be at least investment grade and the investment adviser will periodically monitor the financial condition of such organizations while any loans are outstanding. In addition, loans will only be made when the investment adviser believes the expected returns, net of administrative expenses and any finders' fees, justify the attendant risk. Securities loans currently are required to be secured continuously by collateral in cash, cash equivalents (such as money market instruments) or other liquid securities held by the custodian and maintained in an amount at least equal to the market value of the securities loaned. Distributions of any income realized from securities loans will be taxable as ordinary income.
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 Fund (or of securities that the Fund expects to purchase). To hedge against changes in rates or as a substitute for the purchase of securities, the Fund 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 Fund are traded on exchanges or boards of trade that are licensed and regulated by the CFTC and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant exchange. The Fund may purchase and write call and put options on futures contracts which are traded on a United States exchange or board of trade. The Fund 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 Fund's custodian for the benefit of the futures commission merchant through whom the Fund 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 Fund from closing out positions and limiting its losses.
The Fund will engage in futures and related options transactions for either hedging or non-hedging purposes. The Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or which it expects to purchase. The Fund 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. The Fund has claimed an exclusion from the definition of a Commodity Pool Operator ("CPO") under the Commodity Exchange Act and therefore are not subject to registration or regulation as a CPO.
Asset Coverage. To the extent required by SEC guidelines, the Fund will only engage in transactions that expose it to an obligation to another party if it owns either (1) an offsetting ("covered") position for the same type of financial asset, or (2) cash or liquid securities, segregated with its custodian, with a value sufficient at all times to cover its potential obligations not covered as provided in (1). Assets used as cover or segregated with the custodian cannot be sold while the position(s) requiring cover is open unless replaced with other appropriate assets. As a result, if a large portion of assets is segregated or committed as cover, it could impede portfolio management or the ability to meet redemption requests or other current obligations.
Temporary Investments. Under unusual market conditions, the Fund may invest temporarily in cash or cash equivalents. Cash equivalents are highly liquid, short-term securities such as commercial paper, time deposits, certificates of deposit, short-term notes and short-term U.S. Government obligations. These securities may be subject to federal income, state income and/or other taxes.
Portfolio Turnover. The Fund 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). The Fund cannot accurately predict its portfolio turnover rate, but it is anticipated that the annual portfolio turnover rate will generally not exceed 100% (excluding turnover of securities having a maturity of one year or less). A 100% annual turnover rate could occur, for example, if all the securities held by the Fund were replaced once in a period of one year. A high turnover rate (100% or more) necessarily involves greater expenses to the Fund.
Diversified Status. The Fund and Portfolio are each a "diversified" investment company under the 1940 Act. This means that with respect to 75% of its total assets (1) it may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. Government obligations) and (2) it may not own more than 10% of the outstanding voting securities of any one issuer (which generally is inapplicable because debt obligations are not voting securities). With respect to no more than 25% of its total assets, investments are not subject to the foregoing restrictions.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, which as used in this SAI means the lesser of (a) 67% of the shares of the Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b) more than 50% of the outstanding shares of the Fund. Accordingly, the Fund may not:
(1) Borrow money or issue senior securities except as permitted by the
1940 Act;
(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 (including limited partnership interests
in real estate but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of companies
which invest or deal in real estate or securities which are secured by
real estate);
(5) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities; or
(6) Make loans to any person except by (a) the acquisition of debt
instruments and making portfolio investments, (b) entering into
repurchase agreements and (c) lending portfolio securities.
In connection with Restriction (1) above, the 1940 Act currently permits investment companies to borrow money so long as there is 300% asset coverage of the borrowing (i.e., borrowings do not exceed one-third of the investment company's total assets after subtracting liabilities other than the borrowings). There is no current intent to borrow money, except for the limited purposes described in the prospectus.
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 following nonfundamental investment policies have been adopted by the Fund. A policy may be changed by the Trustees with respect to the Fund without approval by the Fund's shareholders. The Fund will not:
* make short sales of securities or maintain a short position, unless at
all times when a short position is open (i) 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 or
(ii) it holds in a segregated account cash or other liquid securities
(to the extent required under the 1940 Act) in an amount equal to the
current market value of the securities sold short, and unless not more
than 25% of its net assets (taken at current value) is held as
collateral for such sales at any one time; or
* invest more than 15% of net assets in investments which are not readily marketable, including restricted securities and repurchase agreements maturing in more than seven days. Restricted securities for the purposes of this limitation do not include securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 and commercial paper issued pursuant to Section 4(2) of said Act that the Board of Trustees, or its delegate, determines to be liquid. Any such determination by a delegate will be made pursuant to procedures adopted by the Board. When investing in Rule 144A securities, the level of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.
The Fund will not invest 25% or more of its total assets in any one industry. For purposes of the foregoing policy, securities of the U.S. Government, its agencies, or instrumentalities are not considered to represent industries. Municipal obligations backed by the credit of a governmental entity are also not considered to represent industries. However, municipal obligations backed only by the assets and revenues of non-governmental users may for this purpose be deemed to be issued by such non-governmental users. The foregoing 25% limitation would apply to these issuers. As discussed in the prospectus and this SAI, the Fund may invest more than 25% of its total assets in certain economic sectors, such as revenue bonds, housing, hospitals and other health care facilities, and industrial development bonds. The Fund reserves the right to invest more than 25% of total assets in each of these sectors.
For purposes of the Fund's investment restrictions and diversification status, the determination of the "issuer" of a municipal obligation will be made by the Fund's 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 acquisition by the Fund of such security or asset. Accordingly, any later increase or decrease resulting from a change in values, assets or other circumstances or any subsequent rating change made by a rating service (or as determined by the investment adviser if the security is not rated by a rating agency), will not compel the Fund to dispose of such security or other asset. However, the Fund must always be in compliance with the borrowing policy and limitation on investing in illiquid securities set forth above. If a sale of securities is required to comply with the 15% limit on illiquid securities, such sales will be made in an orderly manner with consideration of the best interests of shareholders.
MANAGEMENT AND ORGANIZATION
Fund Management. The Trustees of the Trust are responsible for the overall management and supervision of the affairs of the Trust. The Trustees and officers of the Trust 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. Trustees and officers of the Trust hold indefinite terms of office. The "noninterested Trustees" consist of those Trustees who are not "interested persons" of the Trust, as that term is defined under the 1940 Act. The business address of each Trustee and officer is The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton Vance Corp., "EV" refers to Eaton Vance Inc. and "EVD" refers to Eaton Vance Distributors, Inc. EVC and EV are the corporate parent and trustee, respectively, of Eaton Vance and BMR. EVD is the principal underwriter of the Fund (see "Principal Underwriter" under "Other Service Providers").
Number of
Portfolios in
Fund Complex Other
Position(s) with the Term of Office and Principal Occupations(s) Overseen By Directorships
Name and Date of Birth Trust/Portfolio Length of Service During Past Five Years Trustee(1) Held
---------------------- -------------------- ------------------ ------------------------ ------------- -------------
INTERESTED TRUSTEE
JAMES B. HAWKES Vice President Vice President Chairman, President and 197 Director of EVC
11/9/41 and Trustee and Trustee Chief Executive Officer of
since 1985 BMR, Eaton Vance, EVC and
EV; Director of EV; Vice
President and Director of
EVD. Trustee and/or officer
of 197 registered investment
companies in the Eaton Vance
Fund Complex. Mr. Hawkes is
an interested person because
of his positions with BMR,
Eaton Vance EVC and EV, which
are affiliates of the Trust
and the Portfolio.
9
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Number of
Portfolios in
Fund Complex Other
Position(s) with the Term of Office and Principal Occupations(s) Overseen By Directorships
Name and Date of Birth Trust/Portfolio Length of Service During Past Five Years Trustee(1) Held
---------------------- -------------------- ------------------ ------------------------ ------------- -------------
NONINTERESTED TRUSTEES
BENJAMIN C. ESTY Trustee Since 2005 Professor, Harvard University 135 None
1/2/63 Graduate School of Business
Administration (since 2003).
Formerly, Associate Professor,
Harvard University Graduate
School of Business
Administration (2000-2003).
SAMUEL L. HAYES, III Chairman of the Trustee since Jacob H. Schiff Professor of 197 Director of
2/23/35 Board and Trustee 1986 and Investment Banking Emeritus, Tiffany & Co.
Chairman of Harvard University Graduate (specialty
the Board School of Business retailer) and
since 2005 Administration. Telect, Inc.
(telecommunication
services company)
WILLIAM H. PARK Trustee Since 2003 President and Chief Executive 197 None
9/19/47 Officer, Prizm Capital
Management, LLC (investment
management firm) (since
(2002). Executive Vice
President and Chief
Financial Officer, United
Asset Management Corporation
(a holding company owning
institutional investment
management firms)
(1982-2001).
RONALD A. PEARLMAN Trustee Since 2003 Professor of Law, Georgetown 197 None
7/10/40 University Law Center (since
1999). Tax Partner, Covington
& Burling, Washington, DC
(1991-2000).
NORTON H. REAMER Trustee Trustee since President, Chief Executive 197 None
9/21/35 1985 Officer and a Director of
Asset Management Finance
Corp. (a specialty finance
company serving the
investment management
industry) (since October
2003). President, Unicorn
Corporation (an investment
and financial advisory
services company) (since
September 2000). Formerly,
Chairman and Chief Operating
Officer, Hellman, Jordan
Management Co., Inc. (an
investment management
company) (2000-2003).
Formerly, Advisory Director
of Berkshire Capital
Corporation (investment
banking firm) (2002-2003).
Formerly Chairman of the
Board, United Asset
Management Corporation (a
holding company owning
institutional investment
management firms) and
Chairman, President and
Director, UAM Funds (mutual
funds) (1980-2000).
LYNN A. STOUT Trustee Since 1998 Professor of Law, University 197 None
9/14/57 of California at Los Angeles
School of Law (since July
2001). Formerly, Professor of
Law, Georgetown University
Law Center.
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RALPH F. VERNI Trustee Since 2005 Consultant and private 135 Director of W.P.
1/26/43 investor (since 2000). Formerly Carey & Company LLC
President and Chief Executive (manager of real
Officer, Redwood Investment estate investment
Systems, Inc. (software trusts)
developer (2000). Formerly,
President and Chief Executive
Officer, State Street Research
& Management (investment
adviser), SSRM Holdings (parent
of State Street Research &
Management), and SSR Realty
(institutional realty manager)
(1992-2000).
|
(1) Includes both master and feeder funds in a master-feeder structure.
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
Position(s) with the Term of Office and
Name and Date of Birth Trust/Portfolio Length of Service Principal Occupations(s) During Past Five Years
---------------------- -------------------- ------------------ -----------------------------------------------
THOMAS J. FETTER President Since 1990 Vice President of Eaton Vance and BMR. Officer of 124
8/20/43 registered investment companies managed by Eaton Vance or BMR.
WILLIAM H. AHERN, JR. Vice President Since 1997 Vice President of Eaton Vance and BMR. Officer of 78 registered
7/28/59 investment companies managed by Eaton Vance or BMR.
ROBERT B. MACINTOSH Vice President Vice President Vice President of Eaton Vance and BMR. Officer of 124
1/22/57 since 1993 registered investment companies managed by Eaton Vance or BMR.
ALAN R. DYNNER Secretary Since 1997 Vice President, Secretary and Chief Legal Officer of BMR, Eaton
10/10/40 Vance, EVD, EV and EVC. Officer of 197 registered investment
companies managed by Eaton Vance or BMR.
10
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JAMES L. O'CONNOR Treasurer of the Since 1988 Vice President of Eaton Vance, BMR and EVD. Officer of 121 4/1/45 Trust registered investment companies managed by Eaton Vance or BMR. PAUL M. O'NEIL Chief Compliance Since 2004 Vice President of Eaton Vance and BMR. Officer of 197 7/11/53 Officer registered investment companies managed by Eaton Vance or BMR. |
The Board of Trustees of the Trust have several standing Committees, including the Governance Committee, the Audit Committee and the Special Committee. The Governance, the Audit and the Special Committees are each comprised of only noninterested Trustees. The former Contract Review Subcommittee of the Special Committee was comprised of only noninterested Trustees.
Messrs. Hayes, Park, Pearlman, Reamer and Ms. Stout are members of the Governance Committee of the Board of Trustees of the Trust and the Portfolio. Ms. Stout currently serves as chairperson of the Governance Committee. The purpose of the Governance Committee is to consider, evaluate and make recommendations to the Board of Trustees with respect to the structure, membership and operation of the Board of Trustees and the Committees thereof, including the nomination and selection of noninterested Trustees and a Chairperson of the Board of Trustees and the compensation of such persons. During the fiscal year ended March 31, 2005, the Governance Committee convened six times.
The Governance Committee will, when a vacancy exists or is anticipated, consider any nominee for noninterested Trustee recommended by a shareholder if such recommendation is submitted in writing to the Governance Committee, contains sufficient background information concerning the candidate, including evidence the candidate is willing to serve as a noninterested Trustee if selected for the position, and is received in a sufficiently timely manner.
Messrs. Reamer (Chairman), Hayes, Park, Verni and Ms. Stout are members of the Audit Committee of the Board of Trustees of the Trust and the Portfolio. The Board of Trustees has designated Messrs. Hayes, Park and Reamer, each a noninterested Trustee, as audit committee financial experts. The Audit Committee's purposes are to (i) oversee the Fund's accounting and financial reporting processes, its internal control over financial reporting, and, as appropriate, the internal control over financial reporting of certain service providers; (ii) oversee or, as appropriate, assist Board oversight of the quality and integrity of the Fund's financial statements and the independent audit thereof; (iii) oversee, or, as appropriate, assist Board oversight of, the Fund's compliance with legal and regulatory requirements that relate to the Fund's accounting and financial reporting, internal control over financial reporting and independent audits; (iv) approve prior to appointment the engagement and, when appropriate, replacement of the independent registered public accounting firm, and, if applicable, nominate the independent registered public accounting firm to be proposed for shareholder ratification in any proxy statement of a Fund; (v) evaluate the qualifications, independence and performance of the independent registered public accounting firm and the audit partner in charge of leading the audit; and (vi) prepare, as necessary, audit committee reports consistent with the requirements of Rule 306 of Regulation S-K for inclusion in the proxy statement of a Fund. During the fiscal year ended March 31, 2005, the Audit Committee convened five times.
Messrs. Hayes (Chairman), Esty, Park, Pearlman and Reamer and Ms. Stout are
currently members of the Special Committee of the Board of Trustees of the
Trust. Prior to February 9, 2004, the Special Committee's members were Messrs.
Hayes (Chairman), Park, Pearlman and Reamer. Prior to February 9, 2004, the
purpose of the Special Committee was to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Trust, including investment advisory,
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, or investors
therein. On February 9, 2004, the Special Committee adopted a new charter and
expanded its membership to include Ms. Stout. Under its new charter, the
purposes of the Special Committee are to consider, evaluate and make
recommendations to the Board of Trustees concerning the following matters: (i)
contractual arrangements with each service provider to the Fund, including
advisory, sub-advisory, transfer agency, custodial and fund accounting,
distribution services and administrative services; (ii) any and all other
matters in which any service provider (including Eaton Vance or any affiliated
entity thereof) has an actual or potential conflict of interest with the
interests of the Fund, or investors therein; and (iii) any other matter
appropriate for review by the noninterested Trustees, unless the matter is
within the responsibilities of the Audit Committee or the Governance Committee.
In addition, pursuant to its revised charter, the Special Committee established
a Contract Review Subcommittee to perform certain functions, including to
request and evaluate, not less frequently than annually, such information as may
reasonably be necessary to allow the Subcommittee to evaluate the terms of each:
(a) proposed new or amended or existing contracts for the provision of services
by any investment adviser, sub-adviser, underwriter, administrator and any
affiliate of the foregoing; and (b) plan of distribution pursuant to Rule 12b-1
under the 1940 Act.Share Ownership. The following table shows the dollar range
of equity securities beneficially owned by each Trustee in the Fund and in all Eaton Vance Funds overseen by the Trustee as of December 31, 2004. Interests in the Portfolio cannot be purchased by a Trustee.
Aggregate Dollar Range of Equity
Dollar Range of Securities Owned in All Registered
Equity Securities Funds Overseen by Trustee in the
Name of Trustee Owned in the Fund Eaton Vance Fund Complex
--------------- ----------------- ------------------------
INTERESTED TRUSTEES
James B. Hawkes None over $100,000
NONINTERESTED TRUSTEES
Benjamin C. Esty** None None
Samuel L. Hayes, III None over $100,000
William H. Park None over $100,000
Ronald A. Pearlman None over $100,000
Norton H. Reamer None over $100,000
Lynn A. Stout None over $100,000*
Ralph F. Verni** None None
|
* Includes shares which may be deemed to be beneficially owned through a Trustee Deferred Compensation Plan.
** Messrs. Esty and Verni were elected as Trustees on April 29, 2005 and thus had no beneficial ownership of securities in the Fund or in the Eaton Vance Fund Complex as of December 31, 2004.
As of December 31, 2004, no noninterested Trustee or any of their immediate family members owned beneficially or of record any class of securities of EVC, EVD or any person controlling, controlled by or under common control with EVC or EVD.
During the calendar years ended December 31, 2003 and December 31, 2004, no noninterested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any person
controlling, controlled by or under common control with EVC or EVD;
2. Any direct or indirect material interest in any transaction or series
of similar transactions with (i) the Trust or any Fund; (ii) another
fund managed by EVC, distributed by EVD or a person controlling,
controlled by or under common control with EVC or EVD; (iii) EVC or
EVD; (iv) a person controlling, controlled by or under common control
with EVC or EVD; or (v) an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Trust or any Fund;
(ii) another fund managed by EVC, distributed by EVD or a person
controlling, controlled by or under common control with EVC or EVD;
(iii) EVC or EVD; (iv) a person controlling, controlled by or under
common control with EVC or EVD; or (v) an officer of any of the above.
During the calendar years ended December 31, 2003 and December 31, 2004, no officer of EVC, EVD or any person controlling, controlled by or under common control with EVC or EVD served on the Board of Directors of a company where a noninterested Trustee of the Trust or any of their immediate family members served as an officer.
Trustees of the Fund 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 Fund 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 Fund's assets, liabilities, and net income per share, and will not obligate the Fund to retain the services of any Trustee or obligate the Fund to pay any particular level of compensation to the Trustee. The Trust does not have a retirement plan for Trustees.
The fees and expenses of the Trustees of the Trust are paid by the Fund (and other series of the Trust). (A Trustee of the Trust who is a member of the Eaton Vance organization receives no compensation from the Trust). During the fiscal
year ended March 31, 2005, the Trustees of the Trust earned the following compensation in their capacity as Trustees from the Trust. Prior to October 8, 2004 the Fund invested all of its assets in a corresponding Portfolio. During the fiscal year ended March 31, 2005, the Trustees of the Portfolios earned the following compensation in their capacity as Portfolio Trustees. For the year ended December 31, 2004, the Trustees earned the following compensation in their capacities as Trustees of the funds in the Eaton Vance fund complex(1):
Source of Jessica M. Samuel L. William H. Ronald A. Norton H. Lynn A. Compensation Bibliowicz(7) Hayes Park Pearlman Reamer Stout ------------ ------------- ----- ---- -------- ------ ----- Trust(2) $ $ $ (3) $ $ $ (4) Portfolio (3) (4) Total (5) (6) |
(1) As of August 1, 2005, the Eaton Vance fund complex consists of registered
investment companies or series thereof. Messrs. Esty and Verni were elected
as Trustees on April 29, 2005, and thus did not receive fees for the period
shown in the table above.
(2) The Trust consisted of 8 Funds as of March 31, 2005.
(3) Includes cumulative $ of deferred compensation from Trust and Portfolio.
(4) Includes cumulative $ of deferred compensation from Trust and Portfolio.
(5) Includes $ of deferred compensation.
(6) Includes $ of deferred compensation.
(7) Ms. Bibliowicz resigned as a Trustee effective April 15, 2004.
Organization. The Fund is a series of the Trust, which was organized under Massachusetts law as a business trust on October 23, 1985 and is operated as an open-end management investment company. Prior to October 8, 2004, the Fund invested all of its assets in a corresponding Portfolio.
The Trust may issue an unlimited number of shares of beneficial interest (no par value per share) in one or more series (such as the Fund). The Trustees of the Trust have divided the shares of the Fund into multiple classes. Each class represents an interest in the Fund, but is subject to different expenses, rights and privileges. The Trustees have the authority under the Declaration of Trust to create additional classes of shares with differing rights and privileges. When issued and outstanding, shares are fully paid and nonassessable by the Trust. Shareholders are entitled to one vote for each full share held. Fractional shares may be voted proportionately. Shares of the Fund will be voted together except that only shareholders of a particular class may vote on matters affecting only that class. Shares have no preemptive or conversion rights and are freely transferable. In the event of the liquidation of the Fund, shareholders of each class are entitled to share pro rata in the net assets attributable to that class available for distribution to shareholders.
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 or her from that office either by a written declaration filed with the Trust's custodian or by votes cast at a meeting called for that purpose. The By-laws further provide that under certain circumstances the shareholders may call a meeting to remove a Trustee and that the Trust is required to provide assistance in communication with shareholders about such a meeting.
The Trust's Declaration of Trust may be amended by the Trustees when authorized
by vote of a majority of the outstanding voting securities of the Trust, the
financial interests of which are affected by the amendment. The Trustees may
also amend the Declaration of Trust without the vote or consent of shareholders
to change the name of the Trust or any series or to make such other changes
(such as reclassifying series or classes of shares or restructuring the Trust)
as do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable federal or
state laws or regulations. The Trust's By-laws provide that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with any litigation or proceeding in which they may be involved
because of their offices with the Trust. However, no indemnification will be
provided to any Trustee or officer for any liability to the Trust or
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
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.
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 Fund shareholders and the Trust's By-laws provide that the Trust shall assume the defense on behalf of any Fund shareholders. The Declaration of Trust also contains provisions limiting the liability of a series or class to that series or class. Moreover, the Trust's By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such liability. The assets of the Fund are readily marketable and will ordinarily substantially exceed its liabilities. In light of the nature of the Fund's business and the nature of its assets, management believes that the possibility of the Fund's liability exceeding its assets, and therefore the shareholder's risk of personal liability, is remote.
Proxy Voting Policy. The Boards of Trustees of the Trust adopted a proxy voting policy and procedure (the "Fund Policy"), pursuant to which the Trustees have delegated proxy voting responsibility to the investment adviser and adopted the proxy voting policies and procedures of the investment adviser (the "Policies"), which are described below. The Trustees will review the Fund's proxy voting records from time to time and will annually consider approving the Policies for the upcoming year. In the event that a conflict of interest arises between the Fund's shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund, the investment adviser will generally refrain from voting the proxies related to the companies giving rise to such conflict until it consults with the Board's Special Committee except as contemplated under the Fund Policy. The Board's Special Committee will instruct the investment adviser on the appropriate course of action.
The Policies are designed to promote accountability of a company's management to its shareholders and to align the interests of management with those shareholders. The investment adviser will generally support company management on proposals relating to environmental and social policy issues, on matters regarding the state of organization of the company and routine matters related to corporate administration which are not expected to have a significant economic impact on the company or its shareholders. On all other matters, the investment adviser will review each matter on a case-by-case basis and reserves the right to deviate from the Policies' guidelines when it believes the situation warrants such a deviation. The Policies include voting guidelines for matters relating to, among other things, the election of directors, approval of independent auditors, executive compensation, corporate structure and anti-takeover defenses. The investment adviser may abstain from voting from time to time where it determines that the costs associated with voting a proxy outweigh the benefits derived from exercising the right to vote.
In addition, the investment adviser will monitor situations that may result in a conflict of interest between the Fund's shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund by maintaining a list of significant existing and prospective corporate clients. The investment adviser's personnel responsible for reviewing and voting proxies on behalf of the Fund will report any proxy received or expected to be received from a company included on that list to members of senior management of the investment adviser identified in the Policies. Such members of senior management will determine if a conflict exists. If a conflict does exist, the investment adviser will seek instruction on how to vote from the Special Committee. For a copy of the Fund Policy and investment adviser Policies, see Appendix E and Appendix F, respectively. Information on how the Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30 is available (1) without charge, upon request, by calling 1-800-262-1122, and (2) on the Securities and Exchange Commission's website at http://www.sec.gov.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Investment Advisory Services. The investment adviser manages the investments and affairs of the Fund and provides related office facilities and personnel subject to the supervision of the Trust's Board of Trustees. The investment adviser furnishes investment research, advice and supervision, furnishes an investment program and determines what securities will be purchased, held or sold by the Fund and what portion, if any, of the Fund's assets will be held uninvested. The Investment Advisory Agreement requires the investment adviser to pay the salaries and fees of all officers and Trustees of the Trust who are members of the investment adviser's organization and all personnel of the investment adviser performing services relating to research and investment activities.
For a description of the compensation that the Fund pays the investment adviser, see the prospectus. The following table sets forth the net assets of the Fund and the advisory fees earned during the periods April 1, 2004 to October 8, 2004 and October 9, 2004 to March 31, 2005 and the fiscal years ended March 31, 2004 and March 31, 2003.
Advisory Fee Paid for Fiscal Years/Period Ended
Net Assets at -----------------------------------------------
March 31, 2005 March 31, 2005 October 8, 2004 March 31, 2004 March 31, 2003
-------------- -------------- --------------- -------------- --------------
$ $ $971,890 $708,283
|
The Investment Advisory Agreement with the investment adviser 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 Trust 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 Trust or by vote of a majority of the outstanding voting securities of the Fund. 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 Fund, and the Agreement will terminate automatically in the event of its assignment. The Agreement provides that the investment adviser may render services to others. The Agreement also provides that the investment adviser shall not be liable for any loss incurred in connection with the performance of its duties, or action taken or omitted under the 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.
Portfolio Manager. The portfolio manager of the Fund is William H. Ahern, Jr. The portfolio manager manages other investment companies and/or investment accounts in addition to the Fund. The following table shows, as of December 31, 2004, the number of accounts the portfolio manager managed in each of the listed categories and the total assets in the accounts managed within each category. The table also shows the number of accounts with respect to which the advisory fee is based on the performance of the account, if any, and the total assets in those accounts.
Number of Total Assets of Number of Accounts Total Assets of Accounts
All Accounts All Accounts* Paying a Performance Fee Paying a Performance Fee*
------------ --------------- ------------------------ -------------------------
Registered Investment Companies 18 $1,719.0 0 $0
Other Pooled Investment Vehicles 0 0 0 $0
Other Accounts 110 $78.9 0 $0
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* In millions of dollars. For registered investment companies, assets represent net assets of all open-end investment companies and gross assets of all closed-end investment companies.
Mr. Ahern did not own any Fund shares as of the Fund's most recent fiscal year ended March 31, 2005. Interests in a Portfolio cannot be purchased by a portfolio manager.
It is possible that conflicts of interest may arise in connection with the portfolio manager's management of the Fund's investments on the one hand and the investments of other accounts for which the portfolio manager is responsible for on the other. For example, the portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Fund and other accounts he advises. In addition due to differences in the investment strategies or restrictions between the Fund and the other accounts, the portfolio manager may take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by the portfolio manager may compensate the investment adviser based on the performance of the securities held by that account. The existence of such a performance based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities. Whenever conflicts of interest arise, the portfolio manager will endeavor to exercise his discretion in a manner that he believes is equitable to all interested persons.
Compensation Structure. Compensation of the investment adviser's portfolio managers and other investment professional has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) annual stock-based compensation consisting of options to purchase shares of EVC's nonvoting common stock and/or restricted shares of EVC's nonvoting common stock. The investment adviser's investment professionals also receive certain retirement, insurance and other benefits that are broadly available to all the investment adviser's employees. Compensation of the investment adviser's investment professionals is reviewed primarily on an annual basis. Cash bonuses, stock-based compensation awards, and adjustments in base salary are typically paid or put into effect at or shortly after the October 31st fiscal year-end of EVC.
Method to Determine Compensation. The investment adviser compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities and the total return performance of managed funds and accounts versus appropriate peer groups or benchmarks. Performance is normally based on periods ending on the September 30th preceding fiscal year-end. Fund performance is evaluated primarily versus peer groups of funds as determined by Lipper Inc. and/or Morningstar, Inc. In evaluating the performance of a fund and its manager, primary emphasis is normally placed on three-year performance, with secondary consideration of performance over longer and shorter periods. For funds that are tax-managed or otherwise have an objective of after-tax returns, performance is measured net of taxes. For other funds, performance is evaluated on a pre-tax basis. In addition to rankings within peer groups of funds on the basis of absolute performance, consideration may also be given to risk-adjusted performance. For funds with an investment objective other than total return (such as current income), consideration will also be given to the fund's success in achieving its objective. For managers responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis, based on averages or weighted averages among managed funds and accounts. Funds and accounts that have performance-based advisory fees are not accorded disproportionate weightings in measuring aggregate portfolio manager performance.
The compensation of portfolio managers with other job responsibilities (such as heading an investment group or providing analytical support to other portfolios) will include consideration of the scope of such responsibilities and the managers' performance in meeting them.
The investment adviser seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. The investment adviser participates in investment-industry compensation surveys and utilizes survey data as a factor in determining salary, bonus and stock-based compensation levels for portfolio managers and other investment professionals. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of the investment adviser and its parent company. The overall annual cash bonus pool is based on a substantially fixed percentage of pre-bonus operating income. While the salaries of the investment adviser's portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in manager performance and other factors as described herein. For a high performing portfolio manager, cash bonuses and stock-based compensation may represent a substantial portion of total compensation.
Administrative Services. As indicated in the prospectus, Eaton Vance serves as administrator of the Fund, but currently receives no compensation for providing administrative services to the Fund. Under its Administrative Services Agreement, Eaton Vance has been engaged to administer the Fund's affairs, subject to the supervision of the Trustees of the Trust, and shall furnish office space and all necessary office facilities, equipment and personnel for administering the affairs of the Fund.
Sub-Transfer Agency Services. Eaton Vance also serves as sub-transfer agent for the Fund. As sub-transfer agent, Eaton Vance performs the following services directly on behalf of the Fund: 1) provides call center services to financial intermediaries and shareholders; 2) answers written inquiries related to shareholder accounts (matters relating to portfolio management, distribution of shares and other management policy questions will be referred to the Fund); 3) furnishes an SAI to any shareholder who requests one in writing or by telephone from the Fund; and 4) processes transaction requests received via telephone. For the transfer agency services it provides, Eaton Vance receives an aggregate annual fee equal to the lesser of $2.5 million or the actual expenses incurred by Eaton Vance in the performance of those services. This fee is paid to Eaton Vance by the Fund's transfer agent from fees it receives from the Eaton Vance funds. The Fund will pay a pro rata share of such fee. For the fiscal year ended March 31, 2005, the transfer agent accrued for or paid to Eaton Vance $ for sub-transfer agency services performed on behalf of the Fund.
Information About BMR and Eaton Vance. BMR and Eaton Vance are business trusts organized under Massachusetts law. Eaton Vance, Inc. ("EV") serves as trustee of BMR and Eaton Vance. EV and Eaton Vance are wholly-owned subsidiaries of Eaton Vance Corporation ("EVC"), a Maryland corporation and publicly-held holding company. BMR is an indirect subsidiary of EVC. EVC through its subsidiaries and affiliates engages primarily in investment management, administration and marketing activities. The Directors of EVC are James B. Hawkes, Thomas E. Faust Jr., John G.L. Cabot, Leo I. Higdon, Jr., Vincent M. O'Reilly, Winthrop H. Smith, Jr. and Ralph Z. Sorenson. All shares of the outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the Voting Trustees of which are Messrs. Hawkes, Faust, Jeffrey P. Beale, Alan R. Dynner, Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M. Steul, Payson F. Swaffield, Michael W. Weilheimer, and Wharton P. Whitaker (all of whom are officers of Eaton Vance). The Voting Trustees have unrestricted voting rights for the election of Directors of EVC. All of the outstanding voting trust receipts issued under said Voting Trust are owned by certain of the officers of BMR and Eaton Vance who are
also officers, or officers and Directors of EVC and EV. As indicated under "Management and Organization", all of the officers of the Trust (as well as Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance organization.
Code of Ethics. The investment adviser, principal underwriter, and the Fund have adopted Codes of Ethics governing personal securities transactions. Under the Codes, Eaton Vance employees may purchase and sell securities (including securities held or eligible for purchase by the Fund) subject to the provisions of the Codes and certain employees are also subject to pre-clearance, reporting requirements and other procedures.
Expenses. Each Fund is responsible for all expenses not expressly stated to be payable by another party (such as expenses required to be paid pursuant to an agreement with the investment adviser or the principal underwriter). In the case of expenses incurred by the Trust, the Fund is responsible for its pro rata share of those expenses. The only expenses of the Fund allocated to a particular class are those incurred under the Distribution or Service Plan applicable to that class, the fee paid to the principal underwriter for handling repurchase transactions and certain other class-specific expenses.
OTHER SERVICE PROVIDERS
Principal Underwriter. Eaton Vance Distributors, Inc. ("EVD"), The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109, is the principal underwriter of the Fund. The principal underwriter acts as principal in selling shares under a Distribution Agreement with the Trust. The expenses of printing copies of prospectuses used to offer shares and other selling literature and of advertising are borne by the principal underwriter. The fees and expenses of qualifying and registering and maintaining qualifications and registrations of the Fund and its shares under federal and state securities laws are borne by the Fund. The Distribution Agreement as it applies to Class A shares is renewable annually by the Board of Trustees of the Trust (including a majority of the noninterested Trustees), may be terminated on six months' notice by either party and is automatically terminated upon assignment. The Distribution Agreement as it applies to Class B and Class C shares 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 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 Class B and Class C shares or on six months' notice by the principal underwriter and is automatically terminated upon assignment. The principal underwriter distributes shares on a "best efforts" basis under which it is required to take and pay for only such shares as may be sold. The Trust has authorized the principal underwriter to act as its agent in repurchasing shares at a rate of $2.50 for each repurchase transaction handled by the principal underwriter. EVD is an indirect, wholly-owned subsidiary of EVC. Mr. Hawkes is a Vice President and Director, Mr. Dynner is a Vice President, Secretary and Clerk and Mr. O'Connor is a Vice President of EVD.
Custodian. Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, Massachusetts 02116, serves as custodian to the Fund. IBT has custody of all cash and securities of the Fund, maintains the general ledger of the Fund and computes the daily 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 Fund's investments, receives and disburses all funds and performs various other ministerial duties upon receipt of proper instructions from the Trust. IBT provides services in connection with the preparation of shareholder reports and the electronic filing of such reports with the SEC. EVC and its affiliates and their officers and employees from time to time have transactions with various banks, including IBT. It is Eaton Vance's opinion that the terms and conditions of such transactions were not and will not be influenced by existing or potential custodial or other relationships between the Fund and such banks.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 200 Berkeley Street, Boston, Massachusetts 02116, is the independent registered public accounting firm of the Fund, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation of filings with the SEC.
Transfer Agent. PFPC Inc., P.O. Box 9653, Providence, RI 02940-9653, serves as transfer and dividend disbursing agent for the Fund.
CALCULATION OF NET ASSET VALUE
The net asset value of Fund is computed by IBT (as agent and custodian for Fund) by subtracting the liabilities of the Fund from the value of its total assets. The Fund will be closed for business and will not price its shares on the following business holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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 Fund, and such obligations, including those purchased on a when-issued basis, will normally be valued on the basis of valuations furnished by a pricing service. The pricing service uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities, various relationships between securities, and yield to maturity in determining value. Taxable obligations for which price quotations are readily available normally will be valued at the mean between the latest available bid and asked prices. Open futures positions on debt securities are valued at the most recent settlement prices, unless such price does not reflect the fair value of the contract, in which case the positions will be valued by or at the direction of the Trustees. Other assets are valued at fair value using methods determined in good faith by or at the direction of the Trustees considering relevant factors, data and information including the market value of freely tradable securities of the same class in the principal market on which such securities are normally traded.
PURCHASING AND REDEEMING SHARES
Additional Information About Purchases. Fund shares are offered for sale only in states where they are registered. Fund shares are continuously offered through investment dealers which have entered into agreements with the principal underwriter. Shares of the Fund are sold at offering price, which is the net asset value plus the initial sales charge, if any. The Fund receives the net asset value. The Fund's principal underwriter receives the sales charge, all or a portion of which may be reallowed to the investment dealers responsible for selling Fund shares. The sales charge table in the prospectus is applicable to purchases of the Fund alone or in combination with purchases of certain other funds offered by the principal underwriter, made at a single time by (i) an individual, or an individual, his or her spouse and their children under the age of twenty-one, purchasing shares for his or their own account, and (ii) a trustee or other fiduciary purchasing shares for a single trust estate or a single fiduciary account. The table is also presently applicable to (1) purchases of Class A shares pursuant to a written Statement of Intention; or (2) purchases of Class A shares pursuant to the Right of Accumulation and declared as such at the time of purchase. See "Sales Charges".
In connection with employee benefit or other continuous group purchase plans, the Fund may accept initial investments of less than $1,000 on the part of an individual participant. In the event a shareholder who is a participant of such a plan terminates participation in the plan, his or her shares will be transferred to a regular individual account. However, such account will be subject to the right of redemption by the Fund as described below.
Suspension of Sales. The Trust may, in its absolute discretion, suspend, discontinue or limit the offering of one or more of its classes of shares at any time. In determining whether any such action should be taken, the Trust's management intends to consider all relevant factors, including (without limitation) the size of the Fund or class, the investment climate and market conditions, the volume of sales and redemptions of shares, and (if applicable) the amount of uncovered distribution charges of the principal underwriter. The Class B and Class C Distribution Plans may continue in effect and payments may be made under the Plans following any such suspension, discontinuance or limitation of the offering of shares; however, there is no contractual obligation to continue any Plan for any particular period of time. Suspension of the offering of shares would not, of course, affect a shareholder's ability to redeem shares.
Additional Information About Redemptions. The right to redeem shares of the Fund can be suspended and the payment of the redemption price deferred when the Exchange is closed (other than for customary weekend and holiday closings), during periods when trading on the Exchange is restricted as determined by the SEC, or during any emergency as determined by the SEC which makes it impracticable for the Fund to dispose of its securities or value its assets, or during any other period permitted by order of the SEC for the protection of investors.
Due to the high cost of maintaining small accounts, the Trust reserves the right to redeem accounts with balances of less than $750. Prior to such a redemption, shareholders will be given 60 days' written notice to make an additional purchase. However, no such redemption would be required by the Trust if the cause of the low account balance was a reduction in the net asset value of shares. No CDSC will be imposed with respect to such involuntary redemptions.
While normally payments will be made in cash for redeemed shares, the Trust, subject to compliance with applicable regulations, has reserved the right to pay the redemption price of shares of the Fund, either totally or partially, by a distribution in kind of readily marketable securities. The securities so distributed would be valued pursuant to the valuation procedures described in this SAI. If a shareholder received a distribution in kind, the shareholder could incur brokerage or other charges in converting the securities to cash.
Systematic Withdrawal Plan. The transfer agent will send to the shareholder regular monthly or quarterly payments of any permitted amount designated by the shareholder based upon the value of the shares held. The checks will be drawn from share redemptions and hence, may require the recognition of taxable gain or loss. Income dividends and capital gains distributions in connection with withdrawal plan accounts will be credited at net asset value as of the record date for each distribution. Continued withdrawals in excess of current income will eventually use up principal, particularly in a period of declining market prices. A shareholder may not have a withdrawal plan in effect at the same time he or she has authorized Bank Automated Investing or is otherwise making regular purchases of Fund shares. The shareholder, the transfer agent or the principal underwriter may terminate the withdrawal plan at any time without penalty.
SALES CHARGES
Dealer Commissions. The principal underwriter may, from time to time, at its own expense, provide additional incentives to investment dealers 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 investment dealers 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 investment dealers. The principal underwriter may allow, upon notice to all investment dealers with whom it has agreements, discounts up to the full sales charge during the periods specified in the notice. During periods when the discount includes the full sales charge, such investment dealers may be deemed to be underwriters as that term is defined in the Securities Act of 1933.
Sales Charge Waivers. Class A shares may be sold at net asset value to current and retired Directors and Trustees of Eaton Vance funds and portfolios; to clients (including custodial, agency, advisory and trust accounts) and current and retired officers and employees of Eaton Vance, its affiliates and other investment advisers of Eaton Vance sponsored funds; to officers and employees of IBT and the transfer agent; to persons associated with law firms, consulting firms and others providing services to Eaton Vance and the Eaton Vance funds; and to such persons' spouses, parents, siblings and lineal descendants and their beneficial accounts. Such shares may also be issued at net asset value (1) in connection with the merger (or similar transaction) of an investment company (or series or class thereof) or personal holding company with the Fund (or class thereof), (2) to investors making an investment as part of a fixed fee program whereby an entity unaffiliated with the investment adviser provides multiple investment services, such as management, brokerage and custody, and (3) to investment advisors, financial planners or other intermediaries who place trades for their own accounts or the accounts of their clients and who charge a management, consulting or other fee for their services; clients of such investment advisors, financial planners or other intermediaries who place trades for their own accounts if the accounts are linked to the master account of such investment advisor, financial planner or other intermediary on the books and records of the broker or agent. Class A shares may also be sold at net asset value to registered representatives and employees of investment dealers and bank employees who refer customers to registered representatives of investment dealers. Class A shares are offered at net asset value to the foregoing persons and in the foregoing situations because either (i) there is no sales effort involved in the sale of shares or (ii) the investor is paying a fee (other than the sales charge) to the investment dealer involved in the sale. Any new or revised sales charge or CDSC waiver will be prospective only.
Statement of Intention. If it is anticipated that $100,000 or more of Class A shares and shares of other funds exchangeable for Class A shares of another Eaton Vance fund will be purchased within a 13-month period, the Statement of Intention section of the account application should be completed so that shares may be obtained at the same reduced sales charge as though the total quantity were invested in one lump sum. Shares eligible for the right of accumulation (see below) as of the date of the Statement and purchased during the 13-month period will be included toward the completion of the Statement. If you make a Statement of Intention, the transfer agent is authorized to hold in escrow sufficient shares (5% of the dollar amount specified in the Statement) which can be redeemed to make up any difference in sales charge on the amount intended to be invested and the amount actually invested. A Statement of Intention does not obligate the shareholder to purchase or the Fund to sell the full amount indicated in the Statement.
If the amount actually purchased during the 13-month period is less than that indicated in the Statement, the shareholder will be requested to pay the difference between the sales charge applicable to the shares purchased and the sales charge paid under the Statement of Intention. If the payment is not received in 20 days, the appropriate number of escrowed shares will be redeemed in order to realize such difference. If the total purchases during the 13-month period are large enough to qualify for a lower sales charge than that applicable to the amount specified in the Statement, all transactions will be computed at the expiration date of the Statement to give effect to the lower sales charge. Any difference will be refunded to the shareholder in cash or applied to the purchase of additional shares, as specified by the shareholder. This refund will be made by the investment dealer and the principal underwriter. If at the time of the recomputation, the investment dealer for the account has changed, the adjustment will be made only on those shares purchased through the current investment dealer for the account.
Right of Accumulation. Under the right of accumulation, the applicable sales charge level is calculated by aggregating the dollar amount of the current purchase and the value (calculated at the maximum current offering price) of any Class A, Advisers Class, Class B, Class C, Class I and/or Class R shares of the Fund or other Eaton Vance funds, as well as shares of Eaton Vance Money Market Fund, owned by the shareholder. Shares of Eaton Vance Cash Management Fund and Eaton Vance Tax Free Reserves cannot be accumulated for purposes of this privilege. The sales charge on the shares being purchased will then be applied at the rate applicable to the aggregate. Shares purchased by an individual, his or her spouse and their children under the age of twenty-one, including shares held for the benefit of any such persons in trust or fiduciary accounts (including retirement accounts) or omnibus or "street name" accounts, will be
combined for the purpose of determining whether a purchase will qualify for the right of accumulation and if qualifying, the applicable sales charge level. For any such discount to be made available at the time of purchase a purchaser or his or her investment dealer must provide the principal underwriter (in the case of a purchase made through an investment dealer) or the transfer agent (in the case of an investment made by mail) with sufficient information to permit verification that the purchase order qualifies for the accumulation privilege. Confirmation of the order is subject to such verification. The right of accumulation privilege may be amended or terminated at any time as to purchases occurring thereafter.
Exchange Privilege. In addition to exchanges into the same class of another Eaton Vance fund, Class B shares may be exchanged for shares of a money market fund sponsored by an investment dealer and approved by the principal underwriter (an "investment dealer fund"). The CDSC will not be charged to the shareholder when the shares are exchanged for shares of the investment dealer fund, however, the shareholder will receive no credit toward the completion of the CDSC period for the time that the shareholder holds the exchanged shares of the investment dealer fund. If a shareholder redeems the exchanged shares of the investment dealer fund and does not invest the proceeds into Class B shares of an Eaton Vance fund, the shareholder will be subject to any CDSC applicable at the time the shareholder received the exchanged shares of the investment dealer fund.
Conversion Feature. Class B shares held for the longer of (i) four years or (ii) the time at which the CDSC applicable to such shares expires will automatically convert to Class A shares. For purposes of this conversion, all distributions paid on Class B shares which the shareholder elects to reinvest in Class B shares will be considered to be held in a separate sub-account. Upon the conversion of Class B shares not acquired through the reinvestment of distributions, a pro rata portion of the Class B shares held in the sub-account will also convert to Class A shares. This portion will be determined by the ratio that the Class B shares being converted bears to the total of Class B shares (excluding shares acquired through reinvestment) in the account. This conversion feature is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that the conversion is not taxable for federal income tax purposes.
Distribution and Service Plans
The Trust has in effect a Service Plan (the "Class A Plan") for the Fund's Class A shares that is designed to meet the service fee requirements of the sales charge rule of the NASD. (Management believes service fee payments are not distribution expenses governed by Rule 12b-1 under the 1940 Act, but has chosen to have the Plan approved as if that Rule were applicable.) The Class A Plan provides that Class A shares of the Fund may make service fee payments for personal services and/or the maintenance of shareholder accounts to the principal underwriter, investment dealers and other persons in amounts not exceeding 0.25% of its average daily net assets for any fiscal year. Class A service fees are paid quarterly in arrears. For the service fees paid by Class A shares, see Appendix A.
The Trust also has in effect a compensation-type Distribution Plan (the "Class B
and Class C Plans") pursuant to Rule 12b-1 under the 1940 Act for the Fund's
Class B and Class C shares. On each sale of shares (excluding reinvestment of
distributions) a Class will pay the principal underwriter amounts representing
(i) sales commissions equal to 3% (in the case of Class B) and 6.25% (in the
case of Class C) of the amount received by the Fund for each Class share sold
and (ii) interest at the rate of 1% over the prime rate then reported in The
Wall Street Journal applied to the outstanding amounts owed to the principal
underwriter, so-called "uncovered distribution charges". Each Class pays the
principal underwriter a distribution fee, accrued daily and paid monthly, at an
annual rate not exceeding 0.75% of its average daily net assets to finance the
distribution of its shares. Such fees compensate the principal underwriter for
the sales commissions paid by it to investment dealers on the sale of shares,
for other distribution expenses (such as personnel, overhead, travel, printing
and postage) and for interest expenses. The principal underwriter currently pays
an up-front sales commission (except on exchange transactions and reinvestments)
of 3.0% of the purchase price of Class B shares and 0.85% of the purchase price
of Class C shares, and an up-front service fee of 0.15% on Class C shares.
Distribution fees paid by a Class and CDSCs paid to the Fund by redeeming Class
shareholders reduce the outstanding uncovered distribution charges of the Class.
Whenever there are no outstanding uncovered distribution charges of a Class, the
Class discontinues payment of distribution fees.
The Trustees of the Trust believe that each 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 have benefitted and will continue to benefit the Fund and its shareholders. The Eaton Vance organization will profit by reason of the operation of the Class B and Class C Plan through an increase in Fund assets and if at any point in time the aggregate amounts received by the principal underwriter pursuant to the Plans and from CDSCs have exceeded the total expenses incurred in distributing Class B and Class C shares. Because payments to the principal underwriter under the Class B and Class C Plans are limited, uncovered distribution charges (sales expenses of the principal underwriter plus interest, less the above fees and CDSCs received by it) may exist indefinitely. For sales commissions, CDSCs and uncovered distribution charges, see Appendix B and Appendix C.
The Class B and Class C Plans also authorize the payment of service fees to the principal underwriter, investment dealers and other persons in amounts not exceeding 0.25% of its average daily net assets for personal services, and/or the maintenance of shareholder accounts. For Class B, this fee is paid quarterly in arrears based on the value of shares sold by such persons. For Class C, investment dealers currently receive (a) a service fee (except on exchange transactions and reinvestments) at the time of sale equal to 0.15% of the purchase price of Class C shares sold by such dealer, and (b) monthly service fees approximately equivalent to 1/12 of 0.15% of the value of Class C shares sold by such dealer. During the first year after a purchase of Class C shares, the principal underwriter will retain the service fee as reimbursement for the service fee payment made to investment dealers at the time of sale. For the service fees paid, see Appendix B and Appendix C.
The Plans continue 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 "Plan Trustees") and (ii) all of the Trustees then in office. Each Plan may be terminated at any time by vote of a majority of the Plan Trustees or by a vote of a majority of the outstanding voting securities of the applicable Class. Each 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 Plans may not be amended to increase materially the payments described therein without approval of the shareholders of the affected Class and the Trustees. So long as a Plan is in effect, the selection and nomination of the noninterested Trustees shall be committed to the discretion of such Trustees. The current Plans were initially approved by the Trustees, including the Plan Trustees, on June 23, 1977. The Trustees of the Trust who are "interested" persons of the Trust have an indirect financial interest in the Plans because their employers (or affiliates thereof) receive distribution and/or service fees under the Plans or agreements related thereto.
PERFORMANCE
Performance Calculations. Average annual total return before deduction of taxes ("pre-tax 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 (i) that all distributions are reinvested at net asset value on the reinvestment dates during the period, (ii) the deduction of the maximum of any initial sales charge from the initial $1,000 purchase, (iii) a complete redemption of the investment at the end of the period, and (iv) the deduction of any applicable CDSC at the end of the period.
Average annual total return after the deduction of taxes on distributions is calculated in the same manner as pre-tax return except the calculation assumes that any federal income taxes due on distributions are deducted from the distributions before they are reinvested. Average annual total return after the deduction of taxes on distributions and taxes on redemption also is calculated in the same manner as pre-tax return except the calculation assumes that (i) any federal income taxes due on distributions are deducted from the distributions before they are reinvested and (ii) any federal income taxes due upon redemption are deducted at the end of the period. After-tax returns are based on the highest federal income tax rates in effect for individual taxpayers as of the time of each assumed distribution and redemption (taking into account their tax character), and do not reflect the impact of state and local taxes. In calculating after-tax returns, the net value of any federal income tax credits available to shareholders is applied to reduce federal income taxes payable on distributions at or near year-end and, to the extent the net value of such credits exceeds such distributions, is then assumed to be reinvested in additional Fund shares at net asset value on the last day of the fiscal year in which the credit was generated or, in the case of certain tax credits, on the date on which the year-end distribution is paid. For pre-tax and after-tax total return information, see Appendix A, Appendix B and Appendix C.
In addition to the foregoing total return figures, the Fund may provide pre-tax and after-tax annual and cumulative total return, as well as the ending redeemable cash value of a hypothetical investment. If shares are subject to a sales charge, total return figures may be calculated based on reduced sales charges or at net asset value. These returns would be lower if the full sales charge was imposed. After-tax returns may also be calculated using different tax rate assumptions and taking into account state and local income taxes as well as federal taxes.
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 the maximum of any initial 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 based on prescribed methods, reduced by accrued expenses for the period with the resulting number being divided by the average daily number of shares outstanding and entitled to receive distributions during the period. Yield figures do not reflect the deduction of any applicable CDSC, but assume the maximum of any initial sales charge. (Actual yield may be affected by variations in sales charges on investments.) A tax-equivalent yield is computed by using the tax-exempt yield and dividing by one minus a stated tax rate. The
stated tax rate will reflect the federal income tax applicable to investors in a particular tax bracket and may reflect certain assumptions relating to tax exemptions and deductions. The tax-equivalent yield will differ for investors in other tax brackets or for whom the assumed exemptions and deductions are not available. Tax-equivalent yield is designed to show the approximate yield a taxable investment would have to earn to produce an after-tax yield equal to the tax-exempt yield.
Disclosure of Portfolio Holdings and Related Information. The Board of Trustees has adopted policies and procedures (the "Policies") with respect to the disclosure of information about portfolio holdings of the Fund. Pursuant to the Policies, information about portfolio holdings of the Fund may not be disclosed to any party except as follows:
* Disclosure made in filings with the SEC and posted on the Eaton Vance
website: In accordance with rules established by the SEC, the Fund
sends semiannual and annual reports to shareholders that contain a
complete list of portfolio holdings as of the end of the second and
fourth fiscal quarters, respectively, within 60 days of quarter-end.
The Fund also discloses complete portfolio holdings as of the end of
the first and third fiscal quarters on Form N-Q, which is filed with
the SEC within 60 days of quarter-end. The Fund's complete portfolio
holdings as reported in annual and semiannual reports and on Form N-Q
(which includes a list of the Portfolio's holdings) are available for
viewing on the SEC website at http://www.sec.gov and may be reviewed
and copied at the SEC's public reference room (information on the
operation and terms of usage of the SEC public reference room is
available at http://www.sec.gov/info/edgar/prrrules.htm or by calling
1-800-SEC-0330). Generally within 5 business days of filing with the
SEC, the Fund's portfolio holdings as reported in annual and
semiannual reports and on Form N-Q also are available on Eaton Vance's
website at www.eatonvance.com and are available upon request at no
additional cost by contacting Eaton Vance at 1-800-225-6265.
* Disclosure of certain Portfolio characteristics: The Fund may also
post information about certain portfolio characteristics (such as top
ten holdings and asset allocation information) as of each calendar
quarter end on the Eaton Vance website approximately ten business days
after quarter-end. Such information is also available upon request by
contacting Eaton Vance at 1-800-225-6265.
* Confidential disclosure for a legitimate Fund purpose: Portfolio
holdings may be disclosed, from time to time as necessary, for a
legitimate business purpose of the Fund, believed to be in the best
interests of the Fund and its shareholders, provided there is a duty
or an agreement that the information be kept confidential. The
Policies permit disclosure of portfolio holdings information to the
following: 1) affiliated and unaffiliated service providers (including
the investment adviser, custodian, transfer agent, principal
underwriter, etc.) that have a legal or contractual duty to keep such
information confidential; 2) other persons who owe a fiduciary or
other duty of trust or confidence to the Fund (such as Fund legal
counsel and independent registered public accounting firm); or 3)
persons to whom the disclosure is made in advancement of a legitimate
business purpose of the Fund and who have expressly agreed in writing
to maintain the disclosed information in confidence and to use it only
in connection with the legitimate business purpose underlying the
arrangement (such as arrangements with securities lending agents,
credit rating agencies, statistical ratings agencies, analytical
service providers engaged by the investment adviser, proxy evaluation
vendors, pricing services, translation services, lenders under Fund
credit facilities and, for the purpose of facilitating portfolio
transactions of the Eaton Vance Municipals Funds, municipal bond
dealers). Additional categories of disclosure involving a legitimate
business purpose may be added to this list upon the authorization of
the Fund's Board of Trustees.
The Fund, the investment adviser and principal underwriter will not receive any monetary or other consideration in connection with the disclosure of information concerning the Fund's portfolio holdings.
The Policies may not be waived, or exception made, without the consent of the Chief Compliance Officer ("CCO") of the Fund. The CCO may not waive or make exception to the Policies unless such waiver or exception is consistent with the intent of the Policies, which is to ensure that disclosure of portfolio information is in the best interest of Fund shareholders. In determining whether to permit a waiver of or exception to the Policies, the CCO will consider whether the proposed disclosure serves a legitimate purpose of the Fund, whether it could provide the recipient with an advantage over Fund shareholders or whether the proposed disclosure gives rise to a conflict of interest between the Fund's shareholders and its investment adviser, principal underwriter or other affiliated person. The CCO will report all waivers of or exceptions to the Policies to the Trustees at their next meeting. The Trustees may impose additional restrictions on the disclosure of portfolio holdings information at any time.
The Policies are designed to provide useful information concerning the Fund to existing and prospective Fund shareholders while at the same time inhibiting the improper use of portfolio holdings information in trading Fund shares and/or portfolio securities held by the Fund. However, there can be no assurance that the provision of any portfolio holdings information is not susceptible to inappropriate uses (such as the development of "market timing" models), particularly in the hands of highly sophisticated investors, or that it will not in fact be used in such ways beyond the control of the Fund.
TAXES
Each series of the Trust is treated as a separate entity for federal income tax purposes. The Fund has elected to be treated and intends to qualify each year as a regulated investment company ("RIC") under the Code. Accordingly, the Fund intends to satisfy certain requirements relating to sources of its income and diversification of its assets and to distribute substantially all of its net income (including tax-exempt income) and net short-term and long-term capital gains (after reduction by any available capital loss carryforwards) in accordance with the timing requirements imposed by the Code, so as to maintain its RIC status and to avoid paying any federal income or excise tax. To the extent it qualifies for treatment as a RIC and satisfies the above-mentioned distribution requirements, the Fund will not be subject to federal income tax on income paid to its shareholders in the form of dividends or capital gain distributions. The Fund qualified as a RIC for its fiscal year ended March 31, 2005.
In order to avoid incurring a federal excise tax obligation, the Code requires that the Fund distribute (or be deemed to have distributed) by December 31 of each calendar year (i) at least 98% of its ordinary income (not including tax-exempt income) for such year, (ii) at least 98% of its capital gain net income (which is the excess of its realized capital gains over its realized capital losses), generally computed on the basis of the one-year period ending on October 31 of such year, after reduction by any available capital loss carryforwards and (iii) 100% of any income and capital gains from the prior year (as previously computed) that was not paid out during such year and on which the Fund paid no federal income tax. Under current law, provided that the Fund qualifies as a RIC for federal tax purposes, the Fund should not be liable for any income, corporate excise or franchise tax in the Commonwealth of Massachusetts.
If the Fund does not qualify as a RIC for any taxable year, the Fund's taxable income will be subject to corporate income taxes, and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to the shareholder as ordinary income. In addition, in order to requalify for taxation as a RIC, the Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
The Fund's investment in zero coupon and certain other securities will cause it to realize income prior to the receipt of cash payments with respect to these securities. Such income will be accrued daily by the Fund and, in order to avoid a tax payable by the Fund, the Fund may be required to liquidate securities that it might otherwise have continued to hold in order to generate cash so that the Fund may make required distributions to its shareholders.
Investments in lower-rated or unrated securities may present special tax issues for the Fund to the extent that the issuers of these securities default on their obligations pertaining thereto. The Code is not entirely clear regarding the federal income tax consequences of the Fund's taking certain positions in connection with ownership of such distressed securities.
Distributions by the Fund of net tax-exempt interest income that are properly
designated as "exempt-interest dividends" may be treated by shareholders as
interest excludable from gross income for federal income tax purposes under
Section 103(a) of the Code. In order for the Fund to be entitled to pay the
tax-exempt interest income allocated to it by the Portfolio as exempt-interest
dividends to its shareholders, the Fund must and intends to satisfy certain
requirements, including the requirement that, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
obligations the interest on which is exempt from regular federal income tax
under Code Section 103(a). For purposes of applying this 50% requirement, the
Fund will be deemed to own its proportionate share of each of the assets of the
Portfolio, and the Portfolio currently intends to invest its assets in a manner
such that the Fund can meet this 50% requirement. Interest on certain municipal
obligations may be taxable for purposes of the federal AMT and for state and
local purposes. In addition, corporate shareholders must include the full amount
of exempt-interest dividends in computing the preference items for the purposes
of the AMT. Shareholders of the Fund are required to report tax-exempt interest
on their federal income tax returns.
Tax-exempt distributions received from the Fund are taken into account in determining, and may increase, the portion of social security and certain railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of the Fund is not deductible to the extent it is deemed related to the Fund's distributions of tax-exempt interest. Further, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development or private activity bonds should consult their tax advisers before purchasing shares of the Fund. "Substantial user" is defined in applicable Treasury regulations to include a "non-exempt person" who regularly uses in its trade or business a part of a facility financed from the proceeds of industrial development bonds, and the same definition should apply in the case of 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 (except to the extent of a portion of the
discount attributable to original issue discount), is taxable as ordinary income. A long-term debt obligation is generally treated as acquired at a market discount if purchased after its original issue at a price less than (i) the stated principal amount payable at maturity, in the case of an obligation that does not have original issue discount or (ii) in the case of an obligation that does have original issue discount, the sum of the issue price and any original issue discount that accrued before the obligation was purchased, subject to a de minimis exclusion.
From time to time proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on certain types of municipal obligations, and it can be expected that similar proposals may be introduced in the future. Under federal tax legislation enacted in 1986, the federal income tax exemption for interest on certain municipal obligations was eliminated or restricted. As a result of such legislation, the availability of municipal obligations for investment by the Fund and the value of the securities held by it may be affected.
In the course of managing its investments, the Fund may realize some short-term and long-term capital gains (and/or losses) as well as other taxable income. Any distributions by the Fund of its share of such capital gains (after reduction by any capital loss carryforwards) or other taxable income would be taxable to shareholders of the Fund. However, it is expected that such amounts, if any, would normally be insubstantial in relation to the tax-exempt interest earned by the Fund.
The Fund's investments in options, futures contracts, hedging transactions, forward contracts (to the extent permitted) and certain other transactions will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules), the effect of which may be to accelerate income to the Fund, defer Fund losses, cause adjustments in the holding periods of Fund securities, convert capital gain into ordinary income and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to investors.
Any loss realized upon the sale or exchange of Fund shares with a tax holding period of 6 months or less will be disallowed to the extent of any distributions treated as tax-exempt interest with respect to such shares and if the loss exceeds the disallowed amount, will be treated as a long-term capital loss to the extent of any distributions treated as long-term capital gain with respect to such shares. In addition, all or a portion of a loss realized on a redemption or other disposition of Fund shares may be disallowed under "wash sale" rules to the extent the shareholder acquired other shares of the same Fund (whether through the reinvestment of distributions or otherwise) within the period beginning 30 days before the redemption of the loss shares and ending 30 days after such date. Any disallowed loss will result in an adjustment to the shareholder's tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares subject to a front-end sales charge cannot be taken into account for purposes of determining gain or loss on a redemption or exchange of the shares before the 91st day after their purchase to the extent a sales charge is reduced or eliminated in a subsequent acquisition of shares of the Fund (or of another fund) pursuant to the reinvestment or exchange privilege. Any disregarded amounts will result in an adjustment to the shareholder's tax basis in some or all of any other shares acquired.
Dividends and distributions on the Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Certain distributions declared in October, November or December and paid in the following January will be taxed to shareholders as if received on December 31 of the year in which they were declared.
In general, dividends (other than capital gain dividends) paid to a shareholder that is not a "U.S. person" within the meaning of the Code (a "foreign person"), are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate). Under the American Jobs Creation Act of 2004 (the "2004 Act"), before January 1, 2008, the Fund generally will not be required to withhold any amounts with respect to distributions of (i) U.S.-source interest income that would not be subject to U.S. federal income tax if earned directly by an individual foreign person, and (ii) net short-term capital gains in excess of net long-term capital losses, in each case to the extent such distributions are properly designated by the Fund.
The 2004 Act modifies the tax treatment of distributions from the Fund that are paid to a foreign person and are attributable to gain from "U.S. real property interests" ("USRPIs"), which the Code defines to include direct holdings of U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations" such as REITs. Under the 2004 Act, which applies to dividends paid or deemed paid on or before December 31, 2007, distributions to foreign persons attributable to gains from the sale or exchange of USRPIs
will give rise to an obligation for those foreign persons to file a U.S. tax return and pay tax, and may well be subject to withholding under future regulations. It is not expected that a significant portion of the Fund's distributions will be attributable to gains from the sale or exchange of USRPIs.
Amounts paid by the Fund to individuals and certain other shareholders who have not provided the Fund with their correct taxpayer identification number ("TIN") and certain certifications required by the Internal Revenue Service (the "IRS") as well as shareholders with respect to whom the Fund has received certain information from the IRS or a broker, may be subject to "backup" withholding of federal income tax arising from the Fund's taxable dividends and other distributions as well as the proceeds of redemption transactions (including repurchases and exchanges), at a rate of 28% for amounts paid through 2010. The backup withholding rate will be 31% for amounts paid thereafter. An individual's TIN is generally his or her social security number.
Under Treasury regulations, if a shareholder realizes a loss on disposition of a Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs.
The foregoing discussion does not address the special tax rules applicable to certain classes of investors, such as tax-exempt entities, foreign investors, insurance companies and financial institutions. Shareholders should consult their own tax advisers with respect to special tax rules that may apply in their particular situations, as well as the state, local, and, where applicable, foreign tax consequences of investing in the Fund.
PORTFOLIO SECURITIES TRANSACTIONS
Decisions concerning the execution of portfolio security transactions, including the selection of the market and the executing firm, are made by BMR, the Fund's investment adviser. The Fund is responsible for the expenses associated with portfolio transactions. The investment adviser is also responsible for the execution of transactions for all other accounts managed by it. The investment adviser places the portfolio security transactions for execution with many firms. The investment adviser uses its best efforts to obtain execution of portfolio security transactions at prices which are advantageous and at reasonably competitive spreads or (when a disclosed commission is being charged) at reasonably competitive commission rates. In seeking such execution, the investment adviser will use its best judgment in evaluating the terms of a transaction, and will give consideration to various relevant factors, including without limitation the full range and quality of the executing firm's services including the responsiveness of the firm to the investment adviser, 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 other transactions, and the reasonableness of the spread or commission, if any. In addition, the investment adviser may consider the receipt of Proprietary Research Services (as defined below), provided it does not compromise the investment adviser's obligation to seek best overall execution for the Fund. The investment adviser may engage in portfolio brokerage transactions with a broker-dealer firm that sells shares of Eaton Vance funds, provided such transactions are not directed to that firm as compensation for the promotion or sale of such shares.
Municipal obligations, including state obligations, purchased and sold by the Fund 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 Fund may also purchase municipal obligations from underwriters, and dealers in fixed-price offerings, the cost of which may include undisclosed fees and concessions to the underwriters. On occasion it may be necessary or appropriate to purchase or sell a security through a broker on an agency basis, in which case the Fund will incur a brokerage commission. Although spreads or commissions on portfolio security transactions will, in the judgment of the investment adviser, 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 Fund and the investment adviser's other clients for providing brokerage and research services to the investment adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a broker or dealer who executes a portfolio transaction may receive a commission that is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the investment adviser 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 the investment adviser and its affiliates have for accounts over which they exercise investment discretion. 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. The investment adviser may also receive Research Services from underwriters and dealers in fixed-price offerings.
It is a common practice of the investment advisory industry and of the advisers of investment companies, institutions and other investors to receive research, analytical, statistical and quotation services, data, information and other services, products and materials which assist such advisers in the performance of their investment responsibilities ("Research Services") from broker-dealer firms that execute portfolio transactions for the clients of such advisers and from affiliates of executing broker-dealers. Investment advisers also commonly receive Research Services from research providers that are not affiliated with an executing broker-dealer, but which have entered into payment arrangements involving an executing broker-dealer ("Third Party Research Services"). In a typical Third Party Research Services arrangement involving transactions in municipal obligations, an executing broker-dealer enters into an arrangement with an investment adviser pursuant to which the investment adviser receives a credit for portfolio transactions executed for its clients through that broker-dealer. These credits are referred to herein as "research credits" and are primarily generated as the result of acquisitions of new issuances of municipal obligations in fixed-price offerings. The amount of the research credit generated as the result of a particular transaction is typically a negotiated percentage of the offering price of the municipal obligations. The investment adviser may use research credits to acquire Third Party Research Services, which are then paid for by the executing broker-dealer. The investment adviser may receive Research Services and Third Party Research Services consistent with the foregoing.
Research Services received by the investment adviser include such matters as general economic, political, business and market information, industry and company reviews, evaluations of securities and portfolio strategies and transactions, proxy voting data and analysis services, technical analysis of various aspects of the securities markets, 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 the investment adviser 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 the investment adviser 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 investment adviser evaluates the nature and quality of the various Research Services obtained through broker-dealer firms and may attempt to allocate sufficient portfolio security transactions to such firms to ensure the continued receipt of Research Services which the investment adviser believes are useful or of value to it in rendering investment advisory services to its clients.
In the event that the investment adviser uses research credits generated from the Fund securities transactions to pay for Third Party Research Services (as described above), the investment adviser has agreed to reduce the advisory fee payable by the Fund by the amount of such research credits generated as the result of portfolio transactions occurring on or after May 1, 2004. However, the investment adviser generally does not expect to acquire Third Party Research Services with research credits.
Some executing broker-dealers develop and make available directly to their brokerage customers proprietary Research Services ("Proprietary Research Services"). As a general matter, broker-dealers bundle the cost of Proprietary Research Services with trade execution services rather than charging separately for each. In such circumstances, the cost or other value of the Proprietary Research Services cannot be determined. The advisory fee paid by the Fund will not be reduced in connection with the receipt of Proprietary Research Services by the investment adviser.
The investment companies sponsored by the investment adviser or its affiliates may allocate trades in such offerings to acquire information relating to the performance, fees and expenses of such companies and other mutual funds, which information is used by the Trustees of such companies to fulfill their responsibility to oversee the quality of the services provided by various entities, including the investment adviser, to such companies. Such companies may also pay cash for such information.
Municipal obligations considered as investments for the Fund may also be appropriate for other investment accounts managed by the investment adviser or its affiliates. Whenever decisions are made to buy or sell securities by the
Fund and one or more of such other accounts simultaneously, the investment
adviser 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 Fund 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 the investment adviser 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 Fund from time to time, it is the opinion of the
Trustees of the Trust that the benefits from the investment adviser organization
outweigh any disadvantage that may arise from exposure to simultaneous
transactions.
The following table shows brokerage commissions paid during the three fiscal years ended March 31, 2005, March 31, 2004 and March 31, 2003, as well as the amount of Fund security transactions for the most recent fiscal year (if any) that were directed to firms that provided some Research Services to the investment adviser or its affiliates, and the commissions paid in connection therewith. As described above, the investment adviser may consider the receipt of Research Services in selecting a broker-dealer firm, provided it does not compromise the investment adviser's obligation to seek best overall execution.
Amount of
Transactions Commissions Paid on
Fiscal Year Brokerage Directed to Firms Transactions Directed to
End Commission Paid Providing Research Firms Providing Research
----------- --------------- ------------------ ------------------------
March 31, 2005 $ $ $
March 31, 2004 $18,513
March 31, 2003 $10,316
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FINANCIAL STATEMENTS
The audited financial statements of, and the report of the independent registered public accounting firm for the Fund, appears in the Fund's most recent annual report to shareholders and are incorporated by reference into this SAI. A copy of the annual report accompanies this SAI.
Householding. Consistent with applicable law, duplicate mailings of shareholder reports and certain other Fund information to shareholders residing at the same address may be eliminated.
Registrant incorporates by reference the audited financial information for the Fund for the fiscal year ended March 31, 2005, as previously filed electronically with the SEC (Accession No. ).
APPENDIX A
Class A Fees, Performance & Ownership
Sales Charges, Service Fees and Repurchase Transaction Fees. For the fiscal year
ended March 31, 2005, the following table shows (1) total sales charges paid by
the Fund, (2) sales charges paid to investment dealers, (3) sales charges paid
to the principal underwriter, (4) CDSC payments to the principal underwriter,
(5) total service fees paid by the Fund, (6) service fees paid to investment
dealers, and (7) repurchase transaction fees paid to the principal underwriter.
Service fees that were not paid to investment dealers were retained by the
principal underwriter.
CDSC Paid to Service Fees Repurchase Transaction
Total Sales Sales Charges to Sales Charges to Principal Total Service Paid to Investment Fees Paid to
Charges Paid Investment Dealers Principal Underwriter Underwriter Fees Paid Dealers Principal Underwriter
------------ ------------------ --------------------- ------------ ------------- ------------------ -----------------------
$ $ $ $ $ $ $
|
For the fiscal years ended March 31, 2004 and March 31, 2003, total sales charges of $ and $, respectively, were paid on sales of Class A, of which the principal underwriter received $ and $, respectively. The balance of such amounts was paid to investment dealers.
Performance Information. The table below indicates the average annual total return (both before and after taxes) on a hypothetical investment in shares of $1,000. Total return prior to the date this Class was first offered reflects the total return of Class B, adjusted to reflect the Class A sales charge. The Class B total return has not been adjusted to reflect certain other expenses (such as distribution and/or service fees). If such adjustments were made, the Class A total return would be different. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
Length of Period Ended March 31, 2005
Average Annual Total Return: One Year Five Years Ten Years
---------------------------- -------- ---------- ---------
Before Taxes and Excluding Maximum Sales Charge % % %
Before Taxes and Including Maximum Sales Charge % % %
After Taxes on Distributions and Excluding Maximum Sales Charge % % %
After Taxes on Distributions and Including Maximum Sales Charge % % %
After Taxes on Distributions and Redemption and Excluding Maximum Sales Charge % % %
After Taxes on Distributions and Redemption and Including Maximum Sales Charge % % %
|
Class A began offering its shares on June 27, 1996.
Control Persons and Principal Holders of Securities. At May 1, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of the Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 12.5% Pershing LLC Jersey City, NJ 7.9% Citigroup Global Markets, Inc New York, NY 5.5% |
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of the Fund as of such date.
APPENDIX B
Class B Fees, Performance & Ownership
Distribution, Service and Repurchase Transaction Fees. For the fiscal year ended
March 31, 2005, the following table shows (1) sales commissions paid by the
principal underwriter to investment dealers on sales of Class B shares, (2)
distribution fees paid to the principal underwriter under the Distribution Plan,
(3) CDSC payments to the principal underwriter, (4) uncovered distribution
charges under the Distribution Plan (dollar amount and as a percentage of net
assets attributable to Class B), (5) service fees paid under the Distribution
Plan, (6) service fees paid to investment dealers, and (7) repurchase
transaction fees paid to the principal underwriter. The service fees paid by the
Fund that were not paid to investment dealers were retained by the principal
underwriter.
Commission Paid
by Principal Distribution Fee CDSC Paid Uncovered Distribution Service Fees Repurchase Transaction
Underwriter to Paid to Principal to Principal Charges (as a % of Service Paid to Fees Paid to
Investment Dealers Underwriter Underwriter Class Net Assets) Fees Investment Dealers Principal Underwriter
------------------ ----------------- ------------ ---------------------- ------- ------------------ ----------------------
$ $ $ $ $ $ $
|
Performance Information. The table below indicates the average annual total return (both before and after taxes) on a hypothetical investment of $1,000 in this Class of shares for the periods shown in the table. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted return. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
Length of Period Ended March 31, 2005
Average Annual Total Return: One Year Five Years Ten Years
---------------------------- -------- ---------- ---------
Before Taxes and Before Deducting CDSC % % %
Before Taxes and After Deducting CDSC % % %
After Taxes on Distributions and Before Deducting CDSC % % %
After Taxes on Distributions and After Deducting CDSC % % %
After Taxes on Distributions and Redemption and Before Deducting CDSC % % %
After Taxes on Distributions and Redemption and After Deducting CDSC % % %
|
Control Persons and Principal Holders of Securities. At May 1, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of the Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 17.8% Citigroup Global Markets, Inc. New York, NY 8.5% Morgan Stanley Jersey City, NJ 5.9% |
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of the Fund as of such date.
APPENDIX C
Class C Fees, Performance & Ownership
Distribution, Service and Repurchase Transaction Fees. For the fiscal year ended
March 31, 2005, the following table shows (1) sales commissions paid by the
principal underwriter to investment dealers on sales of Class C shares, (2)
distribution fees paid to the principal underwriter under the Distribution Plan,
(3) CDSC payments to the principal underwriter, (4) uncovered distribution
charges under the Distribution Plan (dollar amount and as a percentage of net
assets attributable to Class C), (5) service fees paid under the Distribution
Plan, (6) service fees paid to investment dealers, and (7) repurchase
transaction fees paid to the principal underwriter. The service fees paid by the
Fund that were not paid to investment dealers were retained by the principal
underwriter.
Commission Paid
by Principal Distribution Fee CDSC Paid Uncovered Distribution Service Fees Repurchase Transaction
Underwriter to Paid to Principal to Principal Charges (as a % of Service Paid to Fees Paid to
Investment Dealers Underwriter Underwriter Class Net Assets) Fees Investment Dealers Principal Underwriter
------------------ ----------------- ------------ ---------------------- ------- ------------------ ----------------------
$ $ $ $ $ $ $
|
Performance Information. The table below indicates the average annual total return (both before and after taxes) on a hypothetical investment in shares of $1,000. Total return for the period prior to April 1, 1998 reflects the total return of a predecessor to Class C. Past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value will fluctuate; shares, when redeemed, may be worth more or less than their original cost. Any return presented with an asterisk (*) includes the effect of subsidizing expenses. Returns would have been lower without subsidies.
Total returns are historical and are calculated by determining the percentage change in net asset value or public offering price with all distributions reinvested. The Fund's past performance (both before and after taxes) is no guarantee of future results. Investment return and principal value of Fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than the quoted rturn. For the Fund's performance as of the most recent month-end, please refer to www.eatonvance.com.
About Returns After Taxes. After-tax returns are calculated using the highest historical individual federal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns are not relevant to shareholders who hold shares in tax-deferred accounts or to shares held by non-taxable entities. Return After Taxes on Distributions for a period may be the same as Return Before Taxes for that period because no taxable distributions were made during that period, or because the taxable portion of distributions made during the period was insignificant. Also, Return After Taxes on Distributions and Redemption for a period may be greater than Return After Taxes on Distributions for the same period because of losses realized on the sale of Fund shares. A portion of the distributions made in the current year may be recharacterized as taxable after year-end.
Length of Period Ended March 31, 2005
Average Annual Total Return: One Year Five Years Ten Years
---------------------------- -------- ---------- ---------
Before Taxes and Before Deducting CDSC % % %
Before Taxes and After Deducting CDSC % % %
After Taxes on Distributions and Before Deducting CDSC % % %
After Taxes on Distributions and After Deducting CDSC % % %
After Taxes on Distributions and Redemption and Before Deducting CDSC % % %
After Taxes on Distributions and Redemption and After Deducting CDSC % % %
|
Control Persons and Principal Holders of Securities. At May 1, 2005, the Trustees and officers of the Trust, as a group, owned in the aggregate less than 1% of the outstanding shares of this Class of the Fund. In addition, as of the same date, the following person(s) held the share percentage indicated below, which was owned either (i) beneficially by such person(s) or (ii) of record by such person(s) on behalf of customers who are the beneficial owners of such shares and as to which such record owner(s) may exercise voting rights under certain limited circumstances:
Merrill Lynch, Pierce, Fenner & Smith, Inc. Jacksonville, FL 38.5%
To the knowledge of the Trust, no other person owned of record or beneficially 5% or more of the outstanding shares of this Class of the Fund as of such date.
APPENDIX D
RATINGS
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 a particular date.
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. Evaluation of these bonds is dependent on the investment adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating service may not reflect the effect of recent developments on the issuer's ability to make interest and principal payments.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during other good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
Municipal Short-Term Obligations
MIG/VMIG Ratings U.S. Short-Term Ratings: In municipal debt issuance, there are three rating categories for short-term obligations that are considered investment grade. These ratings are designated as Moody's Investment Grade (MIG) and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents Moody's evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody's evaluation of the degree of risk associated with the demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
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.
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.
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.
CC: The rating CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but debt service payments are continued.
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 or the taking of a similar action 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: NR indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
Municipal Notes
S&P note ratings reflect the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note).
- Sources of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined to possess very strong characteristics will be given a plus(+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
Fitch Ratings
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 obligor's 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.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a project or the occurrence of a specific event.
Investment Grade Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse change could cause these securities to be rated below investment grade.
APPENDIX E
EATON VANCE FUNDS
PROXY VOTING POLICY AND PROCEDURES
I. Overview
The Boards of Trustees (the "Boards") of the Eaton Vance Funds (the "Funds") recognize that it is their fiduciary responsibility to actively monitor the Funds' operations. The Boards have always placed paramount importance on their oversight of the implementation of the Funds' investment strategies and the overall management of the Funds' investments. A critical aspect of the investment management of the Funds continues to be the effective assessment and voting of proxies relating to the Funds' portfolio securities. While the Boards will continue to delegate the day-to-day responsibilities relating to the management of the proxy-voting process to the relevant investment adviser or sub-adviser, if applicable, of the Fund (or its underlying portfolio in the case of a master-feeder arrangement), the Boards have determined that it is in the interests of the Funds' shareholders to adopt these written proxy voting policy and procedures (the "Policy"). For purposes of this Policy the term "Fund" shall include a Fund's underlying portfolio in the case of a master-feeder arrangement and the term "Adviser" shall mean the adviser to a Fund or its sub-adviser if a sub-advisory relationship exists.
II. Delegation of Proxy Voting Responsibilities
Pursuant to investment advisory agreements between each Fund and its Adviser, the Adviser has long been responsible for reviewing proxy statements relating to Fund investments and, if the Adviser deems it appropriate to do so, to vote proxies on behalf of the Funds. The Boards hereby formally delegate this responsibility to the Adviser, except as otherwise described in this Policy. In so doing, the Boards hereby adopt on behalf of each Fund the proxy voting policies and procedures of the Adviser(s) to each Fund as the proxy voting policies and procedures of the Fund. The Boards recognize that the Advisers may from time to time amend their policies and procedures. The Advisers will report material changes to the Boards in the manner set forth in Section IV below. In addition, the Boards will annually review and approve the Advisers' proxy voting policies and procedures.
III. Delegation of Proxy Voting Disclosure Responsibilities
The Securities and Exchange Commission (the "Commission") recently enacted certain new reporting requirements for registered investment companies. The Commission's new regulations require that funds (other than those which invest exclusively in non-voting securities) make certain disclosures regarding their proxy voting activities. The most significant disclosure requirement for the Funds is the duty pursuant to Rule 30b1-4 promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"), to file Form N-PX no later than August 31/st/ of each year beginning in 2004.
Under Form N-PX, each Fund will be required to disclose, among other things, information concerning proxies relating to the Fund's portfolio investments, whether or not the Fund (or its Adviser) voted the proxies relating to securities held by the Fund and how it voted in the matter and whether it voted for or against management.
The Boards hereby delegate to each Adviser the responsibility for recording, compiling and transmitting in a timely manner all data required to be filed on Form N-PX to Eaton Vance Management, which acts as administrator to each of the Funds (the "Administrator"), for each Fund that such Adviser manages. The Boards hereby delegate the responsibility to file Form N-PX on behalf of each Fund to the Administrator.
IV. Conflicts of Interest
The Boards expect each Adviser, as a fiduciary to the Fund(s) it manages, to put the interests of each Fund and its shareholders above those of the Adviser. In the event that in connection with its proxy voting responsibilities a conflict of interest arises between a Fund's shareholders and the Fund's Adviser or the Administrator (or any of their affiliates) or any affiliated person of the Fund, the Adviser, to the extent it is aware or reasonably should have been aware of the conflict, will refrain from voting any proxies related to companies giving rise to such conflict until it notifies and consults with the appropriate Board(s) concerning the conflict.
Once the Adviser notifies the relevant Board(s) of the conflict, the Board(s) shall convene a meeting of the Boards' Fund Special Committee (the "Committee") to review and consider all relevant materials related to the proxies involved. In considering such proxies, the Adviser shall make available all materials requested by the Committee and make reasonably available appropriate personnel to discuss the matter with the Committee upon the Committee's request. The Committee will instruct the Adviser on the appropriate course of action. If the
Committee is unable to meet and the failure to vote a proxy would have a material adverse impact on the Fund(s) involved, each Adviser will have the right to vote such proxy, provided that it discloses the existence of the conflict to the Committee at its next meeting.
V. Reports
The Administrator shall make copies of each Form N-PX filed on behalf of the Funds available for the Boards' review upon the Boards' request. The Administrator (with input from the Adviser for the relevant Fund(s)) shall also provide any reports reasonably requested by the Boards regarding the proxy voting records of the Funds.
Each Adviser shall annually report any material changes to such Adviser's proxy voting policies and procedures to the relevant Board(s) and the relevant Board(s) will annually review and approve the Adviser's proxy voting policies and procedures. Each Adviser shall report any changes to such Adviser's proxy voting policies and procedures to the Administrator prior to implementing such changes in order to enable the Administrator to effectively coordinate the Funds' disclosure relating to such policies and procedures.
APPENDIX F
EATON VANCE MANAGEMENT
BOSTON MANAGEMENT AND RESEARCH
PROXY VOTING POLICIES AND PROCEDURES
I. Introduction
Eaton Vance Management, Boston Management and Research and Eaton Vance Investment Counsel (each an "Adviser" and collectively the "Advisers") have each adopted and implemented policies and procedures that each Adviser believes are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with its fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended. The Advisers' authority to vote the proxies of their clients is established by their advisory contracts or similar documentation, such as the Eaton Vance Funds Proxy Voting Policies and Procedures. These proxy policies and procedures reflect the Securities and Exchange Commission ("SEC") requirements governing advisers and the long-standing fiduciary standards and responsibilities for ERISA accounts set out in the Department of Labor Bulletin 94-2 C.F.R. 2509.94-2 (July 29, 1994).
II. Overview
Each Adviser manages its clients' assets with the overriding goal of seeking to provide the greatest possible return to such clients consistent with governing laws and the investment policies of each client. In pursuing that goal, each Adviser seeks to exercise its clients' rights as shareholders of voting securities to support sound corporate governance of the companies issuing those securities with the principle aim of maintaining or enhancing the companies' economic value.
The exercise of shareholder rights is generally done by casting votes by proxy at shareholder meetings on matters submitted to shareholders for approval (for example, the election of directors or the approval of a company's stock option plans for directors, officers or employees). Each Adviser is adopting the formal written guidelines described in detail below and will utilize such guidelines in voting proxies on behalf of its clients. These guidelines are designed to promote accountability of a company's management and board of directors to its shareholders and to align the interests of management with those of shareholders.
In seeking to ensure a level of consistency and rationality in the proxy voting process, the guidelines contained in these policies and procedures are designed to address the manner in which certain matters that arise regularly in proxies will generally be voted. However, each Adviser takes the view that these guidelines should not be used as mechanical instructions for the exercise of this important shareholder right. Except in the instance of routine matters related to corporate administrative matters which are not expected to have a significant economic impact on the company or its shareholders (on which the Advisers will routinely vote with management), the Advisers will review each matter on a case-by-case basis and reserve the right to deviate from these guidelines when they believe the situation warrants such a deviation. In addition, no set of guidelines can anticipate all situations that may arise. In special cases, the Proxy Administrator (the person specifically charged with the responsibility to review and vote proxies on behalf of each Adviser's clients) may seek insight from the Adviser's analysts, portfolio managers and/or Chief Equity Investment Officer on how a particular proxy proposal will impact the financial prospects of a company, and vote accordingly. The guidelines are just that: guidelines rather than hard and fast rules, simply because corporate governance issues are so varied.
III. Proxy Voting Guidelines
The following guidelines relate to the types of proposals that are most frequently presented in proxy statements to shareholders. Absent unusual circumstances, each Adviser will utilize these guidelines when voting proxies on behalf of its clients.
A. Election of Board of Directors
The Advisers believe that a Board of Directors should primarily be independent, not have significant ties to management and consist of members who are all elected annually. In addition, the Advisers believe that important Board committees (e.g., audit, nominating and compensation committees) should be entirely independent. In general,
* The Advisers will support the election of directors that result in a
Board made up of a majority of independent directors.
* The Advisers will support the election for independent directors to
serve on the audit, compensation, and/or nominating committees of a
Board of Directors.
* The Advisers will hold all directors accountable for the actions of
the Board's committees. For example, the Advisers will consider
withholding votes for nominees who have recently approved compensation
arrangements that the Advisers deem excessive or propose equity-based
compensation plans that unduly dilute the ownership interests of
shareholders.
* The Advisers will support efforts to declassify existing Boards, and
will vote against proposals by companies to adopt classified Board
structures.
* The Advisers will vote against proposals for cumulative voting,
confidential stockholder voting and the granting of pre-emptive
rights.
B. Approval of Independent Auditors
The Advisers believe that the relationship between the company and its auditors should be limited primarily to the audit engagement and closely allied audit-related and tax services, although non-audit services may be provided so long as they are consistent with the requirements of the Sarbanes-Oxley Act and, if required, have been approved by an independent audit committee. The Advisers will also consider the reputation of the auditor and any problems that may have arisen in the auditor's performance of services.
C. Executive Compensation
The Advisers believe that appropriately designed equity-based compensation plans, approved by shareholders, can be an effective way to align the interests of shareholders and the interests of management, employees, and directors. However, the Advisers are opposed to plans that substantially dilute shareholders' ownership interests in the company or have objectionable structural features.
8 The Advisers will generally vote against plans where total potential
dilution (including all equity-based plans) seems likely to exceed 15%
of shares outstanding over ten years and extends longer than ten
years.
* The Advisers will generally vote against plans if annual option grants
exceed 2% of shares outstanding.
These total and annual dilution thresholds are guidelines, not ceilings, and when assessing a plan's impact on client shareholdings the Advisers will consider other factors such as specific industry practices, company and stock performance and management credibility. The Proxy Administrator may consult with the relevant analyst(s) or portfolio manager(s) or, if appropriate, the Chief Equity Investment Officer, to determine when or if it may be appropriate to exceed these guidelines.
8 The Advisers will typically vote against plans that have any of the following structural features :
* Ability to re-price underwater options without shareholder
approval.
* The unrestricted ability to issue options with an exercise price
below the stock's current market price.
* Automatic share replenishment ("evergreen") feature.
* The Advisers are supportive of measures intended to increase long-term stock ownership by executives. These may include:
* Requiring senior executives to hold a minimum amount of stock in
the company (frequently expressed as a certain multiple of the
executive's salary).
* Using restricted stock grants instead of options.
* Utilizing phased vesting periods or vesting tied to company
specific milestones or stock performance.
* The Advisers will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value.
In assessing a company's executive compensation plan, the Advisers will weigh all components of the plan. For example, the grant of stock options to executives of a company in a particular year may appear excessive if that grant goes above 2% of the shares outstanding of the company. However, such grants may be appropriate if the senior management of the company has accepted significantly reduced cash compensation for the year in lieu of receiving a greater number of options. D. Corporate Structure Matters/Anti-Takeover Defenses As a general matter, the Advisers oppose anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions. In general,
* Because a classified board structure prevents shareholders from
electing a full slate of directors annually, the Advisers will
typically vote against proposals to create classified boards and vote
in favor of shareholder proposals to declassify a board.
* The Advisers will vote for proposals to subject shareholder rights
plans ("poison pills") to a shareholder vote.
* The Advisers will vote for shareholder proposals that seek to
eliminate supermajority voting requirements and oppose proposals
seeking to implement supermajority voting requirements.
* The Advisers will generally vote against proposals to authorize
preferred stock whose voting, conversion, dividend and other rights
are determined at the discretion of the board of directors when the
stock is issued, when used as an anti-takeover device. However, such
"blank check" preferred stock may be issued for legitimate financing
needs and the Adviser may vote for proposals to issue such preferred
stock when it believes such circumstances exist.
* The Advisers will vote for proposals to lower barriers to shareholder
action (for example, limiting rights to call special meetings or act
by written consent).
* The Advisers will vote against proposals for a separate class of stock
with disparate voting rights.
* The Advisers will consider on a case-by-case basis on board approved
proposals regarding changes to a company's capitalization; however,
the Advisers will generally vote in favor of proposals authorizing the
issuance of additional common stock (except in the case of a merger,
restructuring or another significant corporate event which will be
handled on a case-by-case basis), provided that such issuance does not
exceed three times the number of currently outstanding shares.
E. State of Incorporation/Offshore Presence
Under ordinary circumstances, the Advisers will not interfere with a choice to reincorporate or reorganize a company in a different jurisdiction, provided that management's decision has been approved by the board of directors. The Advisers recognize that there may be benefits to reincorporation (such as tax benefits and more developed business laws in the jurisdiction of reincorporation). Each proposal to reincorporate in offshore tax havens will be reviewed on a case-by-case basis to determine whether such actions are in the best interests of the shareholders of the company, including the Advisers' clients.
F. Environmental/Social Policy Issues
The Advisers believe that "ordinary business matters" are primarily the responsibility of management and should be approved solely by the company's board of directors. The Advisers recognize that certain social and environmental issues raised in shareholder proposals are the subject of vigorous public debate and many are the subject of legal statutes or regulation by federal and/or state agencies. The Advisers generally support management on these types of proposals, although they may make exceptions where they believe a proposal has substantial economic implications. The Advisers expect that the companies in which they invest their clients' assets will act as responsible corporate citizens.
G. Circumstances Under Which The Advisers Will Abstain From Voting
The Advisers will seek to vote all proxies for clients who have delegated the responsibility to vote such proxies to the Advisers. Under certain circumstances, the costs to their clients associated with voting such proxies would far outweigh the benefit derived from exercising the right to vote. In those circumstances, the Advisers will make a case-by-case determination on whether or not to vote such proxies. In the case of countries which required so-called "share blocking," the Adviser may also abstain from voting. The Advisers will not seek to vote proxies on behalf of their clients unless they have agreed to take on that responsibility on behalf of a client. Finally, the Advisers may be required to abstain from voting on a particular proxy in a situation where a conflict exists between the Adviser and its client. The policy for resolution of such conflicts is described below in Section V.
IV. Recordkeeping
The Advisers will maintain records relating to the proxies they vote on behalf of their clients in accordance with Section 204-2 of the Investment Advisers Act of 1940, as amended. Those records will include:
* A copy of the Advisers' proxy voting policies and procedures;
* Proxy statements received regarding client securities (if such proxies
are available on the SEC's EDGAR system or a third party undertakes to
promptly provide a copy of such documents to the Advisers, the
Advisers do not need to retain a separate copy of the proxy
statement);
* A record of each vote cast;
* A copy of any document created by the Advisers that was material to
making a decision on how to vote a proxy for a client or that
memorializes the basis for such a decision; and
* Each written client request for proxy voting records and the Advisers'
written response to any client request (whether written or oral) for
such records.
All records described above will be maintained in an easily accessible place for five years and will be maintained in the offices of the Advisers for two years after they are created.
V. Identification and Resolution of Conflicts with Clients
As fiduciaries to their clients, each Adviser puts the interests of its clients ahead of its own. In order to ensure that relevant personnel of the Advisers are able to identify potential conflicts of interest, each Adviser will take the following steps:
* Quarterly, the Eaton Vance Legal and Compliance Departments will seek
information from the department heads of each department of the
Advisers and of Eaton Vance Distributors, Inc. ("EVD") (an affiliate
of the Advisers and principal underwriter of the Eaton Vance Funds).
Each department head will be asked to provide a list of significant
clients or prospective clients of the Advisers or EVD. For example, a
department head would report the fact that EVD was in discussions with
a corporate client considering management of the corporation's 401(k)
plan assets.
* A representative of the Legal and Compliance Departments will compile
a list of the companies identified (the "Conflicted Companies") and
provide that list to the Proxy Administrator.
* The Proxy Administrator will compare the list of Conflicted Companies
with the names of companies for which he or she expects to receive or
has received proxy statements (the "Proxy Companies"). If a Conflicted
Company is also a Proxy Company, the Proxy Administrator will report
that fact to the Eaton Vance Chief Legal Officer and the Chief Equity
Investment Officer.
The Chief Legal Officer and Chief Equity Investment Officer will then determine if a conflict of interest exists between the relevant Adviser and its client. If they determine that a conflict exists, they or their designees will take the following steps to seek to resolve such conflict prior to voting any proxies relating to these Conflicted Companies.
* For clients other than a Fund, if the Proxy Administrator expects to
vote the proxy of the Conflicted Company strictly according to the
guidelines contained in these Proxy Voting Policies and Procedures
(the "Policies"), she will (i) inform the Chief Legal Officer and
Chief Equity Investment Officer (or their designees) of that fact,
(ii) vote the proxies and (iii) record the existence of the conflict
and the resolution of the matter.
* If (i) the client involved is a Fund, or (ii) the Proxy Administrator intends to vote in a manner inconsistent with the guidelines contained herein or, if the issues raised by the proxy are not contemplated by these Policies, and the matters involved in such proxy could have a material economic impact on the client(s) involved, the Adviser will seek instruction on how the proxy should be voted from:
* The client, in the case of an individual or corporate client;
* In the case of a Fund, its board of directors, or any committee
identified by the board; or
* The adviser, in situations where the Adviser acts as a
sub-adviser to such adviser.
The Adviser will provide all reasonable assistance to each party to enable such party to make an informed decision.
If the client, fund board or adviser, as the case may be, fails to instruct the Adviser on how to vote the proxy, the Adviser will generally abstain from voting in order to avoid the appearance of impropriety. If however, the failure of the Adviser to vote its clients' proxies would have a material adverse economic impact on the Advisers' clients' securities holdings in the Conflicted Company, the Adviser may vote such proxies in order to protect its clients' interests. In either case, the Proxy Administrator will record the existence of the conflict and the resolution of the matter.
PART C - OTHER INFORMATION
Item 23. Exhibits (with inapplicable items omitted)
(a)(1) Amended and Restated Declaration of Trust of Eaton Vance Investment Trust dated January 11, 1993 filed as Exhibit (1)(a) to Post-Effective Amendment No. 34 filed July 13, 1995 (Accession No. 000950156-95-000496) and incorporated herein by reference.
(2) Amendment dated June 23, 1997 to the Declaration of Trust filed as Exhibit (1)(b) to Post-Effective Amendment No. 39 filed March 25, 1998 (Accession No. 000590156-98-000284) and incorporated herein by reference.
(3) Establishment and Designation of Classes of Shares of Beneficial
Interest, without Par Value, dated June 26, 1996 filed as Exhibit
(a)(3) to Post-Effective Amendment No. 41 filed May 27, 1999
(Accession No. 0000950156-99-000404) and incorporated herein by
reference.
(4) Amendment of Establishment and Designation of Series of Shares of Beneficial Interest, without Par Value (as amended and restated June 16, 2003) filed as Exhibit (a)(4) to Post-Effective Amendment No. 46 filed July 23, 2003 (Accession No. 0000940394-03-000522) and incorporated herein by reference.
(b)(1) By-Laws as amended March 30, 1992 filed as Exhibit (2)(a) to Post-Effective Amendment No. 34 filed July 13, 1995 and incorporated herein by reference.
(2) Amendment to By-Laws of Eaton Vance Investment Trust dated December 13, 1993 filed as Exhibit (2)(b) to Post-Effective Amendment No. 34 and incorporated herein by reference.
(3) Amendment to By-Laws dated June 18, 2002 filed as Exhibit (b)(3) to Post-Effective Amendment No. 46 filed July 23, 2003 and incorporated herein by reference.
(4) Amendment to By-Laws dated February 7, 2005 filed herewith.
(c) Reference is made to Item 23(a) and 23(b) above.
(d) Investment Advisory Agreements with Boston Management and Research for Eaton Vance California Limited Maturity Municipals Fund, Eaton Vance Florida Limited Maturity Municipals Fund, Eaton Vance Massachusetts Limited Maturity Municipals Fund, Eaton Vance National Limited Maturity Municipals Fund, Eaton Vance New Jersey Limited Maturity Municipals Fund, Eaton Vance New York Limited Maturity Municipals Fund, Eaton Vance Ohio Limited Maturity Municipals Fund and Eaton Vance Pennsylvania Limited Maturity Municipals Fund filed herewith.
(e)(1) Distribution Agreement between Eaton Vance Investment Trust and Eaton Vance Distributors, Inc. effective June 23, 1997 with attached Schedule A effective June 23, 1997 filed as Exhibit (6)(a) to Post-Effective Amendment No. 39 and incorporated herein by reference.
(2) Selling Group Agreement between Eaton Vance Distributors, Inc. and Authorized Dealers filed as Exhibit (6)(b) to the Post-Effective Amendment No. 61 filed December 28, 1995 (Accession No. 000950156-95-000883) to the Registration Statement of Eaton Vance Growth Trust (File Nos. 2-22019, 811-1241) and incorporated herein by reference.
(f) The Securities and Exchange Commission has granted the Registrant an exemptive order that permits the Registrant to enter into deferred compensation arrangements with its independent Trustees. See in the Matter of Capital Exchange Fund, Inc., Release No. IC-20671 (November 1, 1994).
(g)(1) Custodian Agreement with Investors Bank & Trust Company dated April 15, 1994 filed as Exhibit (8) to Post-Effective Amendment No. 34 and incorporated herein by reference.
(2) Amendment to Custodian Agreement with Investors Bank & Trust Company dated October 23, 1995 filed as Exhibit (8)(b) to Post-Effective Amendment No. 35 filed March 29, 1996 (Accession No. 000950156-96-000334) and incorporated herein by reference.
(3) Amendment to Master Custodian Agreement with Investors Bank & Trust Company dated December 21, 1998 filed as Exhibit (g)(3) to the Registration Statement of Eaton Vance Municipals Trust (File Nos. 33-572, 811-4409) filed January 25, 1999 (Accession No. 0000950156-99-000050) and incorporated herein by reference.
(4) Extension Agreement dated August 31, 2000 to Master Custodian Agreement with Investors Bank & Trust Company filed as Exhibit (g)(4) to Post-Effective Amendment No. 85 of Eaton Vance Municipals Trust (File Nos. 33-572, 811-4409) filed January 23, 2001 (Accession No. 0000940394-01-500027) and incorporated herein by reference.
(5) Delegation Agreement dated December 11, 2000 with Investors Bank & Trust Company filed as Exhibit (j)(e) to the Eaton Vance Prime Rate Reserves N-2, Amendment No. 5 (File No. 333-32276, 811-05808) filed April 3, 2001 (Accession No. 0000940394-01-500125) and incorporated herein by reference.
(h)(1)(a) Amended Administrative Services Agreement between Eaton Vance Investment Trust (on behalf of each of its series) and Eaton Vance Management dated June 19, 1995 with attached schedules (including Amended Schedule A) filed as Exhibit (9) to Post-Effective Amendment No. 34 filed July 13, 1995 and incorporated herein by reference.
(b) Amendment to Schedule A dated June 23, 1997 to the Amended
Administrative Services Agreement dated June 19, 1995 filed as Exhibit
(9)(a)(1) to Post-Effective Amendment No. 39 filed March 25, 1998 and
incorporated herein by reference.
(2) Transfer Agency Agreement dated as of July 31, 2003 filed as Exhibit
(h)(3) to Post-Effective Amendment No. 82 of Eaton Vance Growth Trust
(File Nos. 2-22019, 811-1241) filed July 31, 2003 (Accession No.
0000940394-03-000592) and incorporated herein by reference.
(3) Sub-Transfer Agency Services Agreement effective August 1, 2002 between PFPC Inc. and Eaton Vance Management filed as Exhibit (h)(3) to Post-Effective Amendment No. 45 filed July 24, 2002 and incorporated herein by reference.
(i)(1) Opinion of Internal Counsel filed as Exhibit (i) to Post-Effective Amendment No. 46 filed July 23, 2003 and incorporated herein by reference.
(2) Consent of Internal Counsel dated May 25, 2005 filed herewith.
(m)(1) Eaton Vance Investment Trust Class A Service Plan adopted June 23,
1997 with attached Schedule A effective June 23, 1997 filed as Exhibit
(15)(a) to Post-Effective Amendment No. 39 and incorporated herein by
reference.
(2) Eaton Vance Investment Trust Class B Distribution Plan adopted June 23, 1997 with attached Schedule A effective June 23, 1997 filed as Exhibit (15)(b) to Post-Effective Amendment No. 39 and incorporated herein by reference.
(3)(a) Eaton Vance Investment Trust Class C Distribution Plan adopted June 23, 1997 with attached Schedule A effective June 23, 1997 filed as Exhibit (15)(c) to Post-Effective Amendment No. 39 and incorporated herein by reference.
(b) Amended Schedule A effective June 16, 2003 to Class C Distribution Plan adopted June 23, 1997 filed as Exhibit (m)(3)(b) to Post-Effective Amendment No. 46 filed July 23, 2003 and incorporated herein by reference.
(n) Amended and Restated Multiple Class Plan for Eaton Vance Funds dated February 9, 2004 filed as Exhibit (o)(1) to Post-Effective Amendment No.94 of Eaton Vance Mutual Funds Trust (File Nos. 02-90946, 811-4015) filed February 26, 2004 (Accession No. 0000940394-04-000170) and incorporated herein by reference.
(p) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance Management, Boston Management and Research, Eaton Vance Distributors, Inc. and the Eaton Vance Funds effective September 1, 2000, as revised February 1, 2005, filed as Exhibit (r)(1) to the Registration Statement on Form N-2 of Eaton Vance Global Enhanced Equity Income Fund (File Nos. 33-122540, 811-21711) filed February 4, 2005 (Accession No. 0000898423-05-000098) and incorporated herein by reference.
(q)(1) Power of Attorney for Eaton Vance Investment Trust dated July 1, 2003 filed as Exhibit (q)(1) to Post-Effective Amendment No. 46 filed July 23, 2003 and incorporated herein by reference.
(2) Power of Attorney for California Limited Maturity Municipals
Portfolio, Florida Limited Maturity Municipals Portfolio,
Massachusetts Limited Maturity Municipals Portfolio, National Limited
Maturity Municipals Portfolio, New Jersey Limited Maturity Municipals
Portfolio, New York Limited Maturity Municipals Portfolio, Ohio
Limited Maturity Municipals Portfolio and Pennsylvania Limited
Maturity Municipals Portfolio, dated July 1, 2003 filed as Exhibit
(q)(2) to Post-Effective Amendment No. 46 filed July 23, 2003 and
incorporated herein by reference.
Item 24. Persons Controlled by or Under Common Control
Not applicable
Item 25. Indemnification
Article IV of the Registrant's Amended and Restated Declaration of Trust permits Trustee and officer indemnification by By-Law, contract and vote. Article XI of the By-Laws contains indemnification provisions. Registrant's Trustees and officers are insured under a standard mutual fund errors and omissions insurance policy covering loss incurred by reason of negligent errors and omissions committed in their capacities as such.
The distribution agreements of the Registrant also provide for reciprocal indemnity of the principal underwriter, on the one hand, and the Trustees and officers, on the other.
Item 26. Business and Other Connections of Investment Adviser
Reference is made to: (i) the information set forth under the caption "Management and Organization" in the Statement of Additional Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange Act of 1934 (File No. 1-8100); and (iii) the Form ADV of Eaton Vance Management (File No. 801-15930) and BMR (File No. 801-43127) filed with the Commission, all of which are incorporated herein by reference.
Item 27. Principal Underwriters
(a) Registrant's principal underwriter, Eaton Vance Distributors, Inc., a wholly-owned subsidiary of Eaton Vance Management, is the principal underwriter for each of the registered investment companies named below:
Eaton Vance Advisers Senior Floating-Rate Fund Eaton Vance Mutual Funds Trust Eaton Vance Growth Trust Eaton Vance Prime Rate Reserves Eaton Vance Institutional Senior Floating-Rate Fund Eaton Vance Series Trust II Eaton Vance Investment Trust Eaton Vance Special Investment Trust Eaton Vance Municipals Trust EV Classic Senior Floating-Rate Fund Eaton Vance Municipals Trust II Eaton Vance Variable Trust |
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
----------------- -------------------------- ---------------
Ira Baron Vice President None
John Bercini Vice President None
Chris Berg Vice President None
Kate B. Bradshaw Vice President None
Timothy Breer Vice President None
Eric Caplinger Vice President None
Mark Carlson Vice President None
Randy Clark Vice President None
Daniel C. Cataldo Vice President and Treasurer None
Patrick Cosgrove Vice President None
Raymond Cox Vice President None
Peter Crowley Vice President None
Kevin Darrow Vice President None
Derek Devine Vice President None
Todd Dickinson Vice President None
John Dolan Vice President None
James Durocher Vice President None
Alan R. Dynner Vice President, Secretary and Clerk Secretary
Robert Ellerbeck Vice President None
Daniel Ethier Vice President None
Troy Evans Vice President None
Vince Falbo Vice President None
Richard A. Finelli Vice President None
Daniel Flynn Vice President None
James Foley Vice President None
Michael A. Foster Vice President None
Kathleen Fryer Vice President None
Anne Marie Gallagher Vice President None
William M. Gillen Senior Vice President None
Hugh S. Gilmartin Vice President None
John Greenway Vice President None
Jorge Gutierrez Vice President None
Peter Hartman Vice President None
James B. Hawkes Vice President and Director Vice President and
Trustee
C-4
|
Joseph Hernandez Vice President None
Perry D. Hooker Vice President None
Elizabeth Johnson Vice President None
Paul F. Jones Vice President None
Steve Jones Vice President None
Lindsey Kidder Vice President None
Thomas P. Luka Vice President None
Coleen Lynch Vice President None
John Macejka Vice President None
Geoff Marshall Vice President None
Christopher Mason Vice President None
Judy Snow May Vice President None
Don McCaughey Vice President None
Andy McClelland Vice President None
Dave McDonald Vice President None
Tim McEwen Vice President None
Morgan C. Mohrman Senior Vice President None
Don Murphy Vice President None
James A. Naughton Vice President None
Joseph Nelson Vice President None
Mark D. Nelson Vice President None
Scott Nelson Vice President None
Linda D. Newkirk Vice President None
James O'Brien Vice President None
James L. O'Connor Vice President Treasurer
Andrew Ogren Vice President None
Philip Pace Vice President None
Margaret Pier Vice President None
Shannon Price Vice President None
James Putman Vice President None
James Queen Vice President None
David Richman Vice President None
Tim Roach Vice President None
Randy Skarda Vice President None
Lawrence Sinsimer Senior Vice President None
Bill Squadroni Vice President None
Joseph Staszkiw Vice President None
William M. Steul Vice President and Director None
Cornelius J. Sullivan Senior Vice President None
Frank Sweeney Vice President None
Stefan Thielen Vice President None
Michael Tordone Vice President None
John M. Trotsky Vice President None
Jerry Vainisi Vice President None
John Vaughan Vice President None
Chris Volf Vice President None
Greg Walsh Vice President None
Stan Weiland Vice President None
Wharton P. Whitaker President and Director None
Greg Whitehead Vice President None
Mark Whitehouse Vice President None
Steve Widder Vice President None
Charles Womack Vice President None
Joseph Yasinski Vice President None
Trey Young Vice President None
Gregor Yuska Vice President None
------------------------------------------
|
* Address is The Eaton Vance Building, 255 State Street, Boston, MA 02109
(c) Not applicable
Item 28. Location of Accounts and Records
All applicable accounts, books and documents required to be maintained by the Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are in the possession and custody of the Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street, 16th Floor, Mail Code ADM27, Boston, MA 02116, and its transfer agent, PFPC Inc., 4400 Computer Drive, Westborough, MA 01581-5120, with the exception of certain corporate documents and portfolio trading documents which are in the possession and custody of the administrator and investment adviser or sub-adviser. Registrant is informed that all applicable accounts, books and documents required to be maintained by registered investment advisers are in the custody and possession of Eaton Vance Management and Boston Management and Research.
Item 29. Management Services
Not applicable
Item 30. Undertakings
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Boston, and the Commonwealth of Massachusetts, on May 25, 2005.
EATON VANCE INVESTMENT TRUST
By: /s/ Thomas J. Fetter
---------------------------
Thomas J. Fetter, President
|
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in their capacities on May 25, 2005.
Signature Title
--------- -----
/s/ Thomas J. Fetter President (Chief Executive Officer)
------------------------
Thomas J. Fetter
/s/ James L. O'Connor Treasurer (Principal Financial and
------------------------ Accounting Officer)
James L. O'Connor
Benjamin C. Esty* Trustee
------------------------
Benjamin C. Esty
/s/ James B. Hawkes Trustee
------------------------
James B. Hawkes
Samuel L. Hayes, III* Trustee
------------------------
Samuel L. Hayes, III
William H. Park* Trustee
------------------------
William H. Park
Ronald A. Pearlman* Trustee
------------------------
Ronald A. Pearlman
Norton H. Reamer* Trustee
------------------------
Norton H. Reamer
Lynn A. Stout* Trustee
------------------------
Lynn A. Stout
Ralph F. Verni* Trustee
------------------------
Ralph F. Verni
*By: /s/ Alan R. Dynner
-----------------------
|
Alan R. Dynner (As attorney-in-fact)
EXHIBIT INDEX
The following exhibits are filed as part of this amendment to the Registration Statement pursuant to Rule 483 of Regulation C.
Exhibit No. Description
----------- -----------
(b)(4) Amendment to By-Laws dated February 7, 2005
(d) Investment Advisory Agreements with Boston Management and
Research for Eaton Vance California Limited Maturity Municipals
Fund, Eaton Vance Florida Limited Maturity Municipals Fund, Eaton
Vance Massachusetts Limited Maturity Municipals Fund, Eaton Vance
National Limited Maturity Municipals Fund, Eaton Vance New Jersey
Limited Maturity Municipals Fund, Eaton Vance New York Limited
Maturity Municipals Fund, Eaton Vance Ohio Limited Maturity
Municipals Fund and Eaton Vance Pennsylvania Limited Maturity
Municipals Fund
(i)(2) Consent of Counsel dated May 25, 2005 to Opinion
|
Exhibit (b)(4)
Amendment to the By-Laws of Eaton Vance Investment Trust
February 7, 2005
Pursuant to Article XV of the By-Laws of Eaton Vance Municipals Trust (the "Trust"), upon vote by a majority of the Trustees of the Trust Sections 3 and 4 of Article III are hereby amended and restated in their entirety as follows:
Section 3. Chairman of the Trustees. The Trustees may appoint from among their number a Chairman. The Chairman shall preside at meetings of the Trustees and may call meetings of the Trustees and of any committee thereof whenever he deems it necessary or desirable to do so. The Chairman may in his discretion preside at any meeting of the shareholders, and may delegate such authority to another Trustee or officer of the Trust. The Chairman shall exercise and perform such additional powers and duties as from time to time may be assigned to him by the Trustees, and shall have the resources and authority appropriate to discharge the responsibilities of the office.
Section 4. President. Subject to such supervisory powers, if any, as may be given by the Trustees to the Chairman of the Trustees, the President shall be the chief executive officer of the Trust and subject to the control of the Trustees, he shall have general supervision, direction and control of the business of the Trust and of its employees and shall exercise such general powers of management as are usually vested in the office of President of a corporation. In the event that the Chairman does not preside at a meeting of shareholders or delegate such power and authority to another Trustee or officer of the Fund, the President or his designee shall preside at such meeting. He shall have the power to employ attorneys and counsel for the Trust and to employ such subordinate officers, agents, clerks and employees as he may find necessary to transact the business of the Trust. He shall also have the power to grant, issue, execute or sign such powers of attorney, proxies or other documents as may be deemed advisable or necessary in furtherance of the interests of the Trust. The President shall have such other powers and duties as, from time to time, may be conferred upon or assigned to him by the Trustees.
Exhibit (d)
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE CALIFORNIA LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance California Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance California Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
--------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
--------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE FLORIDA LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance Florida Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance Florida Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
-----------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE MASSACHUSETTS LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance Massachusetts Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive
commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance Massachusetts
Limited Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE NEW JERSEY LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance New Jersey Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive
commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance New Jersey Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE NATIONAL LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of September, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance National Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive commission rates. In selecting brokers or dealers qualified to execute a
particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance National Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE NEW YORK LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance New York Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive
commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance New York Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE OHIO LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance Ohio Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly
authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance Ohio Limited
Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
------------------------------
President
|
BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
------------------------------
Vice President
and not individually
|
EATON VANCE INVESTMENT TRUST
INVESTMENT ADVISORY AGREEMENT
ON BEHALF OF EATON VANCE PENNSYLVANIA LIMITED MATURITY MUNICIPALS FUND
AGREEMENT made as of this 8th day of October, 2004, between Eaton Vance Investment Trust, a Massachusetts business trust (the "Trust"), on behalf of Eaton Vance Pennsylvania Limited Maturity Municipals Fund (the "Fund") and Boston Management and Research, a Massachusetts business trust (the "Adviser").
1. Duties of the Adviser. The Trust hereby employs the Adviser to act as investment adviser for and to manage the investment and reinvestment of the assets of the Fund and to administer its affairs, subject to the supervision of the Trustees of the Trust, for the period and on the terms set forth in this Agreement.
The Adviser hereby accepts such employment, and undertakes to afford to the Fund the advice and assistance of the Adviser's organization in the choice of investments and in the purchase and sale of securities for the Fund and to furnish for the use of the Fund office space and all necessary office facilities, equipment and personnel for servicing the investments of the Fund and for administering its affairs and to pay the salaries and fees of all officers and Trustees of the Trust who are members of the Adviser's organization and all personnel of the Adviser performing services relating to research and investment activities. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
The Adviser shall provide the Fund with such investment management and supervision as the Trust may from time to time consider necessary for the proper supervision of the Fund's investments. As investment adviser to the Fund, the Adviser shall furnish continuously an investment program and shall determine from time to time what securities and other investments shall be acquired, disposed of or exchanged and what portion of the Fund's assets shall be held uninvested, subject always to the applicable restrictions of the Declaration of Trust, By-Laws and registration statement of the Trust under the Investment Company Act of 1940, all as from time to time amended. Should the Trustees of the Trust at any time, however, make any specific determination as to investment policy for the Fund and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Trust, all actions which it deems necessary or desirable to implement the investment policies of the Trust and the Fund.
The Adviser shall place all orders for the purchase or sale of portfolio securities for the account of the Fund either directly with the issuer or with brokers or dealers selected by the Adviser, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser shall use its best efforts to seek to execute security transactions at prices which are advantageous to the Fund and (when a disclosed commission is being charged) at reasonably competitive commission rates. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser and the Adviser is expressly authorized to pay any broker or dealer who provides such brokerage and research services a commission for executing a security transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. Subject to the requirement set forth in the second sentence of this paragraph, the Adviser is authorized to consider, as a factor in the selection of any broker or dealer with whom purchase or sale orders may be placed, the fact that such broker or dealer has sold or is selling shares of the Fund or any other series of the Trust, or any one or more investment companies sponsored by the Adviser or its affiliates.
2. Compensation of the Adviser. For the services, payments and facilities to be furnished hereunder by the Adviser, the Adviser shall be entitled to receive from the Fund, on a daily basis, compensation in an amount 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 of the Fund in each Category as indicated below:
Category Daily Net Assets Annual Asset Rate -------- ----------------- ----------------- 1 Up to $500 million 0.300% 2 $500 million but less than $1 billion 0.275% 3 $1 billion but less than $1.5 billion 0.250% 4 $1.5 billion but less than $2 billion 0.225% 5 $2 billion but less than $3 billion 0.200% 6 $3 billion and over 0.175%, plus |
(b) a daily income-based fee computed by applying the daily income rate applicable to that portion of the total daily gross income of the Fund (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 of the Fund in the same Category bears to the total daily net assets on such day) in each Category as indicated below:
Category Daily Net Assets Daily Income Rate -------- ----------------- ----------------- 1 Up to $500 million 3.00% 2 $500 million but less than $1 billion 2.75% 3 $1 billion but less than $1.5 billion 2.50% 4 $1.5 billion but less than $2 billion 2.25% 5 $2 billion but less than $3 billion 2.00% 6 $3 billion and over 1.75% |
Such daily compensation shall be paid monthly in arrears on the last business day of each month. The Fund's daily net assets and gross income shall be computed in accordance with the Declaration of Trust of the Trust and any applicable votes and determinations of the Trustees of the Trust. In case of initiation or termination of the Agreement during any month with respect to the Fund, the fee for that month shall be based on the number of calendar days during which it is in effect.
The Adviser may, from time to time, waive all or a part of the above compensation.
3. Allocation of Charges and Expenses. It is understood that the Fund will
pay all expenses other than those expressly stated to be payable by the Adviser
hereunder, which expenses payable by the Fund shall include, without implied
limitation, (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Trust under the Investment Company Act of 1940, (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 shares, (viii) expenses of registering and
qualifying the Fund and its shares 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 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, accounts and records, 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 the 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 Adviser's organization, (xviii) all payments to be made and expenses to be
assumed by the Fund pursuant to any one or more distribution plans adopted by
the Trust on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940, and (xix) such non-recurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of the Trust to indemnify its Trustees, officers and shareholders
with respect thereto.
4. Other Interests. It is understood that Trustees and officers of the Trust and shareholders of the Fund are or may be or become interested in the Adviser as trustees, officers, employees, shareholders or otherwise and that trustees, officers, employees and shareholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. It is also understood that trustees, officers, employees and shareholders of the Adviser may be or become interested (as directors, trustees, officers, employees, shareholders or otherwise) in other companies or entities (including, without limitation, other investment companies) which the Adviser may organize, sponsor or acquire, or with which it may merge or consolidate, and which may include the words "Eaton Vance" or "Boston Management and Research" or any combination thereof as part of their name, and that the Adviser or its subsidiaries or affiliates may enter into advisory or management agreements or other contracts or relationships with such other companies or entities.
5. Limitation of Liability of the Adviser. The services of the Adviser to the Fund are not to be deemed to be exclusive, the Adviser being free to render services to others and engage in other business activities. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses which may be sustained in the acquisition, holding or disposition of any security or other investment.
6. Sub-Investment Advisers. The Adviser may employ one or more sub-investment advisers from time to time to perform such of the acts and services of the Adviser, including the selection of brokers or dealers or other persons to execute the Fund's portfolio security transactions, and upon such terms and conditions as may be agreed upon between the Adviser and such sub-investment adviser and approved by the Trustees of the Trust, all as permitted by the Investment Company Act of 1940.
7. Duration and Termination of this Agreement. This Agreement shall become effective upon the date of its execution, and, unless terminated as herein provided, shall remain in full force and effect through and including March 31, 2006 and shall continue in full force and effect indefinitely thereafter, but
only so long as such continuance after March 31, 2006 is specifically approved at least annually (i) by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval.
Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Agreement without the payment of any penalty, by action of Trustees of the Trust or the trustees of the Adviser, as the case may be, and the Trust may, at any time upon such written notice to the Adviser, terminate this Agreement by vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a writing signed by both parties hereto, provided that no amendment to this Agreement shall be effective until approved (i) by the vote of a majority of those Trustees of the Trust who are not interested persons of the Adviser or the Trust cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities of the Fund.
9. Limitation of Liability. The Adviser expressly acknowledges the provisions in the Declaration of Trust of the Trust limiting the personal liability of the shareholders of the Fund, the Trustees and officers of the Trust, and the Adviser hereby agrees that it shall have recourse to the Trust or the Fund for payment of claims or obligations as between the Trust or the Fund and the Adviser arising out of this Agreement and shall not seek satisfaction from the shareholders or any shareholder of the Fund or any Trustee or officer of the Trust.
10. Use of Name "Eaton Vance". The Adviser hereby consents to the use by the Fund of the name "Eaton Vance" as part of the Fund's name; provided, however, that such consent shall be conditioned upon the employment of the Adviser or one of its affiliates as the investment adviser of the Fund. The name "Eaton Vance" or any variation thereof may be used from time to time in other connections and for other purposes by the Adviser and its affiliates and other investment companies that have obtained consent to the use of the name "Eaton Vance". The Adviser shall have the right to require the Fund to cease using the name "Eaton Vance" as part of the Fund's name if the Fund ceases, for any reason, to employ the Adviser or one of its affiliates as the Fund's investment adviser. Future names adopted by the Fund for itself, insofar as such names include identifying words requiring the consent of the Adviser, shall be the property of the Adviser and shall be subject to the same terms and conditions.
11. Certain Definitions. The terms "assignment" and "interested persons" when used herein shall have the respective meanings specified in the Investment Company Act of 1940 as now in effect or as hereafter amended subject, however, to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. The term "vote of a majority of the outstanding voting securities" shall mean the vote, at a meeting of shareholders, of the lesser of (a) 67 per centum or more of the shares of the Fund present or represented by proxy at the meeting if the holders of more than 50 per centum of the outstanding shares of the Fund are present or represented by proxy at the meeting, or (b) more than 50 per centum of the outstanding shares of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.
EATON VANCE INVESTMENT TRUST
(on behalf of Eaton Vance Pennsylvania
Limited Maturity Municipals Fund)
By: /s/ Thomas J. Fetter
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President
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BOSTON MANAGEMENT AND RESEARCH
By: /s/ Alan R. Dynner
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Vice President
and not individually
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Exhibit (i)(2)
CONSENT OF COUNSEL
I consent to the incorporation by reference in this Post-Effective Amendment No. 49 to the Registration Statement of Eaton Vance Investment Trust (1933 Act File No. 33-1121) of my opinion dated July 23, 2003, which was filed as Exhibit (i) to Post-Effective Amendment No. 46.
/s/ Maureen A. Gemma
Maureen A. Gemma, Esq.
May 25, 2005
Boston, Massachusetts
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