0000950135-04-003212.txt : 20120829
0000950135-04-003212.hdr.sgml : 20120829
20040622201859
ACCESSION NUMBER: 0000950135-04-003212
CONFORMED SUBMISSION TYPE: N-2/A
PUBLIC DOCUMENT COUNT: 7
FILED AS OF DATE: 20040623
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: Eaton Vance Floating-Rate Income Trust
CENTRAL INDEX KEY: 0001288992
IRS NUMBER: 000000000
FILING VALUES:
FORM TYPE: N-2/A
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-21574
FILM NUMBER: 04875857
BUSINESS ADDRESS:
STREET 1: TWO INTERNATIONAL PLACE
CITY: BOSTON
STATE: MA
ZIP: 02110
BUSINESS PHONE: 617-482-8260
MAIL ADDRESS:
STREET 1: TWO INTERNATIONAL PLACE
CITY: BOSTON
STATE: MA
ZIP: 02110
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: Eaton Vance Floating-Rate Income Trust
CENTRAL INDEX KEY: 0001288992
IRS NUMBER: 000000000
FILING VALUES:
FORM TYPE: N-2/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-115087
FILM NUMBER: 04875856
BUSINESS ADDRESS:
STREET 1: TWO INTERNATIONAL PLACE
CITY: BOSTON
STATE: MA
ZIP: 02110
BUSINESS PHONE: 617-482-8260
MAIL ADDRESS:
STREET 1: TWO INTERNATIONAL PLACE
CITY: BOSTON
STATE: MA
ZIP: 02110
N-2/A
1
b50762evnv2za.txt
EATON VANCE FLOATING RATE INCOME TRUST
As filed with the Securities and Exchange Commission on June 23, 2004
1933 Act File No. 333-115087
1940 Act File No. 811-21574
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2 [X]
(CHECK APPROPRIATE BOX OR BOXES)
EATON VANCE FLOATING-RATE INCOME TRUST
--------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-8260
-----------------------------------------------------------------
ALAN R. DYNNER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
NAME AND ADDRESS (OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
MARK P. GOSHKO, ESQ. THOMAS A. HALE, ESQ.
KIRKPATRICK & LOCKHART LLP SKADDEN, ARPS, SLATE
75 STATE STREET MEAGHER & FLOM LLP
BOSTON, MASSACHUSETTS 02109 333 WEST WACKER DRIVE
SUITE 2100
CHICAGO, ILLINOIS 60606
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box):
[X] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=================================================================================================================
PROPOSED PROPOSED
AMOUNT BEING MAXIMUM MAXIMUM AMOUNT OF
REGISTERED OFFERING AGGREGATE REGISTRATION FEES
TITLE OF SECURITIES BEING PRICE PER UNIT OFFERING PRICE
REGISTERED (1) (1) (1) (1)(2)(3)
-----------------------------------------------------------------------------------------------------------------
Common Shares of Beneficial 39,000,000 $20.00 $780,000,000 $98,826
Interest, $0.01 par value
=================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee,
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes Shares that may be offered to the Underwriters pursuant to an
option to cover over-allotments.
(3) A Registration fee of $126.70 was previously paid in connection with the
initial filing filed on May 3, 2004.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION June 23, 2004
--------------------------------------------------------------------------------
SHARES
EATON VANCE FLOATING-RATE INCOME TRUST
COMMON SHARES
[EATON VANCE LOGO]
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES. Eaton Vance Floating-Rate Income Trust (the
"Trust") is a newly organized, diversified, closed-end management investment
company. The Trust's investment objective is to provide a high level of current
income. The Trust will, as a secondary objective, also seek preservation of
capital to the extent consistent with its primary goal of high current income.
The Trust will seek to achieve its investment objectives by investing primarily
in senior, secured floating rate loans ("Senior Loans"). Under normal market
conditions, Eaton Vance Management, the Trust's investment adviser, expects the
Trust to maintain an average duration of less than one year (including the
effect of anticipated leverage).
INVESTMENT ADVISER. The Trust's investment adviser is Eaton Vance Management
("Eaton Vance" or the "Adviser"). As of April 30, 2004, Eaton Vance and its
subsidiaries managed approximately $85 billion on behalf of funds, institutional
clients and individuals. As of April 30, 2004, Eaton Vance and its subsidiaries
managed approximately $11.8 billion in funds, in other commingled investment
vehicles and for institutional accounts which invest primarily in Senior Loans.
PORTFOLIO CONTENTS. The Trust will pursue its objectives by investing its
assets primarily in Senior Loans. Under normal market conditions, the Trust will
invest at least 80% of its total assets in Senior Loans. Senior Loans are made
to corporations, partnerships and other business entities ("Borrowers") which
operate in various industries and geographical regions, including foreign
Borrowers. Senior Loans pay interest at rates which are redetermined
periodically on the basis of a floating base lending rate plus a premium. Senior
Loans typically are of below investment grade quality and have below investment
grade credit ratings, which ratings are associated with securities having high
risk, speculative characteristics. Because of the protective features of Senior
Loans (being both senior in a Borrower's capital structure and secured by
specific collateral), the Adviser believes, based on its experience, that Senior
Loans tend to have more favorable loss recovery rates compared to most other
types of below investment grade obligations which are subordinated and
unsecured.
Because the Trust is newly organized, its common shares have no history of
public trading. The shares of closed-end management investment companies
frequently trade at a discount from their net asset value. The returns earned by
holders of the Trust's common shares ("Common Shareholders") who purchase their
shares in this offering and sell their shares below net asset value will be
reduced. Approximately one to three months after completion of the offering of
common shares, the Trust expects to begin use of financial leverage through the
issuance of preferred shares and/or through borrowings, leveraging initially up
to approximately 38% of its total assets (including the amount obtained through
leverage).
(continued on inside cover page)
INVESTING IN SHARES INVOLVES CERTAIN RISKS, INCLUDING THAT THE TRUST WILL INVEST
SUBSTANTIAL PORTIONS OF ITS ASSETS IN BELOW INVESTMENT GRADE QUALITY SECURITIES
WITH SPECULATIVE CHARACTERISTICS. SEE "INVESTMENT OBJECTIVES, POLICIES AND
RISKS" BEGINNING AT PAGE 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO PUBLIC SALES LOAD(1) PROCEEDS TO TRUST
---------------------------------------------------------------------------------------------------------------------
Per share $20.00 $0.90 $19.10
---------------------------------------------------------------------------------------------------------------------
Total $ $ $
---------------------------------------------------------------------------------------------------------------------
Total assuming full exercise of the over-allotment option $ $ $
---------------------------------------------------------------------------------------------------------------------
(notes on following page)
In addition to the sales load, the Trust will pay offering expenses of up to
$0.04 per share, estimated to total $ , which will reduce the "Proceeds to
Trust" (above). Eaton Vance or an affiliate has agreed to pay the amount by
which the aggregate of all of the Trust's offering costs (other than sales
loads) exceeds $0.04, per share. Eaton Vance or an affiliate has agreed to
reimburse all Trust organizational costs.
The underwriters named in the Prospectus may purchase up to additional
shares from the Trust under certain circumstances. The underwriters are offering
the shares subject to various conditions and expect to deliver the shares to
purchasers on or about , 2004.
UBS INVESTMENT BANK CITIGROUP MERRILL LYNCH & CO. WACHOVIA SECURITIES
RBC CAPITAL MARKETS H&R BLOCK FINANCIAL ADVISORS, INC. J.J.B. HILLIARD, W.L.
LYONS, INC.
OPPENHEIMER QUICK & REILLY, INC. RYAN BECK & CO., INC.
--------------------------------------------------------------------------------
(continued from previous page)
EXCHANGE LISTING. The Trust intends to apply for the listing of its common
shares on the New York Stock Exchange under the symbol "EFT."
The Trust's net asset value and distribution rate will vary and may be affected
by several factors, including changes in the credit quality of issuers and
interest rates and other market factors. Fluctuations in net asset value may be
magnified as a result of the Trust's use of leverage, which is a speculative
investment technique. An investment in the Trust may not be appropriate for all
investors. There is no assurance that the Trust will achieve its investment
objectives.
The Trust expects to use financial leverage through the issuance of preferred
shares and/or through borrowings, initially equal to approximately 38% of its
total assets (including the amount obtained through leverage). The Adviser
anticipates that the use of leverage will result in higher income to common
shareholders over time. Use of financial leverage creates an opportunity for
increased income but, at the same time, creates special risks. There can be no
assurance that a leveraging strategy will be utilized or will be successful. SEE
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--USE OF LEVERAGE AND RELATED RISKS"
AT PAGE 23 AND "DESCRIPTION OF CAPITAL STRUCTURE" AT PAGE 33.
This Prospectus sets forth concisely information you should know before
investing in the shares of the Trust. Please read and retain this Prospectus for
future reference. A Statement of Additional Information dated , 2004,
has been filed with the Securities and Exchange Commission ("SEC") and can be
obtained without charge by calling 1-800-225-6265 or by writing to the Trust. A
table of contents to the Statement of Additional Information is located at page
43 of this Prospectus. This Prospectus incorporates by reference the entire
Statement of Additional Information. The Statement of Additional Information is
available along with other Trust-related materials: at the SEC's public
reference room in Washington, DC (call 1-202-942-8090 for information on the
operation of the reference room); the EDGAR database on the SEC's internet site
(http://www.sec.gov); 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. The Trust's address is The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109 and its telephone number is 1-800-225-6265.
The Trust's shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by reference
in this Prospectus. The Trust has not authorized anyone to provide you with
different information. The Trust is not making an offer of these securities in
any state where the offer is not permitted.
Until , 2004 (25 days after the date of this Prospectus), all dealers
that buy, sell or trade the shares, whether or not participating in this
offering, may be required to deliver a Prospectus. This is in addition to the
dealers' obligation to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
---------------
(1) Eaton Vance (not the Trust) will pay certain additional compensation to
qualifying underwriters. See "Underwriting." Eaton Vance (not the Trust) will
pay UBS Securities LLC for services provided pursuant to a shareholder servicing
agreement between UBS Securities LLC and Eaton Vance. See "Shareholder Servicing
Agent, custodian and transfer agent." The total amount of the foregoing payments
will not exceed 4.5% of the aggregate initial offering price of the common
shares offered hereby.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Prospectus summary.................... 1
Summary of Trust expenses............. 9
The Trust............................. 11
Use of proceeds....................... 11
Investment objectives, policies and
risks............................... 11
Management of the Trust............... 28
Distributions......................... 30
Dividend reinvestment plan............ 32
Description of capital structure...... 33
Underwriting.......................... 39
Shareholder Servicing Agent, Custodian
and Transfer Agent.................. 41
Legal opinions........................ 42
Reports to shareholders............... 42
Independent Registered Public
Accounting Firm..................... 42
Additional information................ 42
Table of contents for the Statement of
Additional Information.............. 43
The Trust's privacy policy............ 43
--------------------------------------------------------------------------------
Prospectus summary
This is only a summary. This summary may not contain all of the information that
you should consider before investing in the Trust's common shares. You should
review the more detailed information contained in this Prospectus and in the
Statement of Additional Information, especially the information set forth under
the heading "Investment objectives, policies and risk."
THE TRUST
Eaton Vance Floating-Rate Income Trust (the "Trust") is a newly organized,
diversified, closed-end management investment company. The Trust offers
investors the opportunity to receive a high level of current income, through a
professionally managed portfolio investing primarily in senior, secured floating
rate loans ("Senior Loans"), which are normally accessible only to financial
institutions and large corporate and institutional investors, and are not widely
available to individual investors. To the extent consistent with this primary
goal, the Trust will offer an opportunity for preservation of capital.
Investments are based on Eaton Vance Management's ("Eaton Vance" or the
"Adviser") internal research and ongoing credit analysis, which is generally not
available to individual investors. An investment in the Trust may not be
appropriate for all investors. There is no assurance that the Trust will achieve
its investment objectives.
THE OFFERING
The Trust is offering common shares of beneficial interest, par value
$0.01 per share, through a group of underwriters (the "Underwriters") led by UBS
Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and Wachovia Capital Markets, LLC. The common shares of
beneficial interest are called "Common Shares." The Underwriters have been
granted an option by the Trust to purchase up to additional Common
Shares solely to cover over-allotments, if any. The initial public offering
price is $20.00 per share. The minimum purchase in this offering is 100 Shares
($2,000). See "Underwriting." Eaton Vance or an affiliate has agreed to (i)
reimburse all organizational costs and (ii) pay all offering costs (other than
sales loads) that exceed $0.04 per Common Share.
INVESTMENT OBJECTIVES AND POLICIES
The Trust's investment objective is to provide a high level of current income.
The Trust will, as a secondary objective, also seek preservation of capital to
the extent consistent with its primary goal of high current income. Under normal
market conditions, Eaton Vance expects the Trust to maintain a duration of less
than one year (including the effect of anticipated leverage). The Trust will
pursue its objectives by investing primarily in Senior Loans. Senior Loans are
made to corporations, partnerships and other business entities ("Borrowers")
which operate in various industries and geographical regions. Senior Loans pay
interest at rates which are redetermined periodically by reference to a base
lending rate, primarily the London-Interbank Offered Rate ("LIBOR"), plus a
premium. It is anticipated that the proceeds of the Senior Loans in which the
Trust will acquire interests primarily will be used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases,
refinancing, and internal growth and for other corporate purposes of Borrowers.
Under normal market conditions, the Trust will invest at least 80% of its total
assets in Senior Loans. The Trust may invest up to 20% of its total assets in
(i) loan interests which have (a) a second lien on collateral ("Second Lien"),
(b) no security interest in the collateral, or (c) lower than a senior claim on
collateral; (ii) other income-producing securities, such as investment and
non-investment grade corporate debt securities and U.S. government and U.S.
dollar-denominated foreign government or supranational debt securities; and
(iii) warrants and equity securities issued by a Borrower or its affiliates as
part of a package of investments in the Borrower or its affiliates. The Adviser
anticipates that most of the Trust's investments, including investments in
Senior Loans, will be of below
1
investment-grade quality. The Trust may invest up to 20% of its total assets in
corporate bonds of below investment grade quality ("Non-Investment Grade
Bonds"), commonly referred to as "junk bonds," are bonds that are rated below
investment grade by each of the national rating agencies who cover the security,
or, if unrated, are determined to be of comparable quality by the Adviser.
Standard & Poor's Ratings Group ("S&P") and Fitch Ratings ("Fitch") consider
securities rated below BBB- to be below investment grade and Moody's Investors
Service, Inc. ("Moody's") considers securities rated below Baa3 to be below
investment grade. The Trust's credit quality policies apply only at the time a
security is purchased, and the Trust is not required to dispose of a security in
the event of a downgrade of an assessment of credit quality or the withdrawal of
a rating. Securities rated in the lowest investment grade rating (BBB- or Baa3)
may have certain speculative characteristics. Below investment grade quality
securities are considered to be predominantly speculative because of the credit
risk of the issuers. See "Investment objectives, policies and risks--Additional
risk considerations--Non-investment grade securities risk."
The Trust will only invest in U.S. dollar denominated securities. The Trust may
invest in U.S. dollar denominated Senior Loans and other securities of
non-United States issuers. The Trust's investments may have significant exposure
to certain sectors of the economy and thus may react differently to political or
economic developments than the market as a whole.
Under normal market conditions, the Trust expects to maintain an average
duration of less than one year (including the effect of anticipated leverage).
In comparison to maturity (which is the date on which a debt instrument ceases
and the issuer is obligated to repay the principal amount), duration is a
measure of the price volatility of a debt instrument as a result of changes in
market rates of interest, based on the weighted average timing of the
instrument's expected principal and interest payments. Duration differs from
maturity in that it considers a security's yield, coupon payments, principal
payments and call features in addition to the amount of time until the security
finally matures. As the value of a security changes over time, so will its
duration. Prices of securities with longer durations tend to be more sensitive
to interest rate changes than securities with shorter durations. In general, a
portfolio of securities with a longer duration can be expected to be more
sensitive to interest rate changes than a portfolio with a shorter duration.
Investing in Senior Loans involves investment risk. Some Borrowers default on
their Senior Loan payments. The Trust attempts to manage this credit risk
through portfolio diversification and ongoing analysis and monitoring of
Borrowers. The Trust also is subject to market, liquidity, interest rate and
other risks. See "Investment objectives, policies and risks."
Scott H. Page and Payson F. Swaffield (each a Vice President of Eaton Vance) are
the portfolio managers of the Trust. Mr. Page and Mr. Swaffield have co-managed
other Eaton Vance portfolios investing primarily in Senior Loans since 1996. The
Trust's investments are actively managed, and Senior Loans and other securities
may be bought or sold on a daily basis.
The Adviser's staff monitors the credit quality and price of Senior Loans and
other securities held by the Trust, as well as other securities that are
available to the Trust. The Trust may invest in individual Senior Loans and
other securities of any credit quality. Although the Adviser considers ratings
when making investment decisions, it performs its own credit and investment
analysis and does not rely primarily on the ratings assigned by the rating
services. In evaluating the quality of particular Senior Loans or other
securities, whether rated or unrated, the Adviser will normally take into
consideration, among other things, the issuer's financial resources and
operating history, its sensitivity to economic conditions and trends, the
ability of its management, its debt maturity schedules and borrowing
requirements, and relative values based on anticipated cash flow, interest and
asset coverage, and earnings prospects.
The Trust may purchase or sell derivative instruments (which derive their value
from another instrument, security or index) for risk management purposes, such
as hedging against fluctuations in Senior Loans and other securities prices or
interest rates; diversification purposes; changing the
2
duration of the Trust; or leveraging the Trust. Transactions in derivative
instruments may include the purchase or sale of futures contracts on securities,
indices and other financial instruments, credit-linked notes, tranches of
collateralized loan obligations and/or collateralized debt obligations, options
on futures contracts, and exchange-traded and over-the-counter options on
securities or indices, and interest rate, total return and credit default swaps.
Guidelines of any rating organization that rates any preferred shares issued by
the Trust may limit the Trust's ability to engage in such transactions. Subject
to the Trust's policy of investing at least 80% of its total assets in Senior
Loans and subject to the limitations on the use of futures contracts and related
options imposed by Rule 4.5 of the Commodity Futures Trading Commission, the
Trust may invest, without limitation, in the foregoing derivative instruments
for the purposes stated herein.
LISTING
The Trust intends to apply for the listing of the Common Shares on the New York
Stock Exchange under the symbol "EFT."
LEVERAGE
The Trust expects to use financial leverage through the issuance of preferred
shares and/or through borrowings, including the issuance of debt securities
and/or through investment in derivative instruments. The Trust intends initially
to use financial leverage of approximately 38% of its total assets (including
the amount obtained through leverage). The Adviser anticipates that the use of
leverage should result in higher income to holders of Common Shares ("Common
Shareholders") over time. The Trust generally will not use leverage, however, if
the Adviser anticipates that it would result in a lower return to holders of the
Common Shareholders over time. Use of financial leverage creates an opportunity
for increased income for Common Shareholders but, at the same time, creates
special risks (including the likelihood of greater volatility of net asset value
and market price of the Common Shares), and there can be no assurance that a
leveraging strategy will be successful during any period in which it is
employed. The Trust currently intends to issue preferred shares approximately
one to three months after completion of this offering, subject to market
conditions and to the Trust's receipt of a AAA or Aaa credit rating on such
preferred shares from a nationally recognized statistical rating organization
("Rating Agency") (typically, Moody's, S&P or Fitch). During periods in which
the Trust is using leverage, the fees paid to Eaton Vance for investment
advisory services will be higher than if the Trust did not use leverage because
the fees paid will be calculated on the basis of the Trust's gross assets,
including proceeds from the issuance of preferred shares. See "Investment
objectives, policies and risks--Use of leverage and related risks" and
"Management of the Trust--The Adviser."
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance, an indirect wholly-owned subsidiary of Eaton Vance Corp., is the
Trust's investment adviser and administrator. The Adviser and its subsidiaries
manage approximately $85 billion on behalf of funds, institutional accounts and
individuals as of April 30, 2004. Twenty-nine of the funds are closed-end. As of
April 30, 2004, Eaton Vance and its subsidiaries managed approximately $11.8
billion in funds, in other commingled investment vehicles and for institutional
accounts which invest primarily in Senior Loans. See "Management of the Trust."
TAX ASPECTS
Dividends with respect to the Common Shares generally will not constitute
"qualified dividend income" for federal income tax purposes and thus will not be
eligible for the favorable long-term capital gains tax rates.
3
DISTRIBUTIONS
Commencing with the Trust's first dividend, the Trust intends to make regular
monthly cash distributions to Common Shareholders of substantially all of the
net investment income of the Trust. The amount of each monthly distribution will
vary depending on a number of factors, including dividends payable on the
Trust's preferred shares or other costs of financial leverage. As portfolio and
market conditions change, the rate of dividends on the Common Shares and the
Trust's dividend policy could change. Over time, the Trust will distribute all
of its net investment income (after it pays accrued dividends on any outstanding
preferred shares) or other costs of financial leverage. In addition, at least
annually, the Trust intends to distribute any net short-term capital gain and
any net capital gain (which is the excess of net long-term capital gain over
short-term capital loss). The initial distribution is expected to be declared
approximately 45 days and paid approximately 60 to 90 days after the completion
of this offering, depending on market conditions. Common Shareholders may elect
automatically to reinvest some or all of their distributions in additional
Common Shares under the Trust's dividend reinvestment plan. See "Distributions"
and "Dividend reinvestment plan."
DIVIDEND REINVESTMENT PLAN
The Trust has established a dividend reinvestment plan (the "Plan"). Under the
Plan, a Shareholder may elect to have all dividend and capital gain
distributions automatically reinvested in additional Common Shares either
purchased in the open market, or newly issued by the Trust if the Common Shares
are trading at or above their net asset value. Common Shareholders may elect to
participate in the Plan by completing the dividend reinvestment plan application
form. Common Shareholders who do not elect to participate in the Plan will
receive all distributions in cash paid by check mailed directly to them by PFPC
Inc., as dividend paying agent. Common Shareholders who intend to hold their
Common Shares through a broker or nominee should contact such broker or nominee
to determine whether or how they may participate in the Plan. See "Dividend
reinvestment plan."
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies (commonly
referred to as mutual funds) in that closed-end funds generally list their
shares for trading on a securities exchange and do not redeem their shares at
the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that can complicate portfolio
management, whereas closed-end funds generally can stay more fully invested in
securities consistent with the closed-end fund's investment objectives and
policies. In addition, in comparison to open-end funds, closed-end funds have
greater flexibility in the employment of financial leverage and in the ability
to make certain types of investments, including investments in illiquid
securities. However, shares of closed-end funds frequently trade at a discount
from their net asset value. In recognition of the possibility that the Common
Shares might trade at a discount to net asset value and that any such discount
may not be in the interest of Common Shareholders, the Trust's Board of Trustees
(the "Board"), in consultation with Eaton Vance, from time to time may review
possible actions to reduce any such discount. The Board might consider open
market repurchases or tender offers for Common Shares at net asset value. There
can be no assurance that the Board will decide to undertake any of these actions
or that, if undertaken, such actions would result in the Common Shares trading
at a price equal to or close to net asset value per share. The Board might also
consider the conversion of the Trust to an open-end mutual fund. The Board
believes, however, that the closed-end structure is desirable, given the Trust's
investment objectives and policies. Investors should assume, therefore, that it
is highly unlikely that the Board would vote to convert the Trust to an open-end
investment company. Investors should note that the anticipated issuance of
preferred shares to provide investment leverage could make a conversion to
open-end form more difficult because of the voting rights of preferred
shareholders, the costs of redeeming preferred shares and other factors. See
"Description of capital structure."
4
SPECIAL RISK CONSIDERATIONS
NO OPERATING HISTORY
The Trust is a closed-end investment company with no history of operations and
is designed for long-term investors and not as a trading vehicle.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the
possible loss of the entire principal amount invested. An investment in Common
Shares represents an indirect investment in the securities owned by the Trust.
The value of these securities, like other market investments, may move up or
down, sometimes rapidly and unpredictably. The Common Shares at any point in
time may be worth less than the original investment, even after taking into
account any reinvestment of dividends and distributions.
INCOME RISK
The income investors receive from the Trust is based primarily on the interest
it earns from its investments, which can vary widely over the short- and
long-term. If prevailing market interest rates drop, investors' income from the
Trust could drop as well. The Trust's income could also be affected adversely
when prevailing short-term interest rates increase and the Trust is utilizing
leverage, although this risk is mitigated by the Trust's investment in Senior
Loans, which pay floating rates of interest.
CREDIT RISK
Credit risk is the risk that one or more debt obligations in the Trust's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the obligation experiences a decline in its financial
status. Credit risk involves two basic elements: delinquency and default.
Delinquency refers to interruptions in the payment of interest and principal.
Default refers to the potential for unrecoverable principal loss from the sale
of foreclosed collateral or the Trust's inherent right to forgive principal or
modify a debt instrument.
PREPAYMENT RISK
During periods of declining interest rates or for other purposes, Borrowers may
exercise their option to prepay principal earlier than scheduled. For
fixed-income securities, such payments often occur during periods of declining
interest rates, forcing the Trust to reinvest in lower yielding securities. This
is known as call or prepayment risk. Non-Investment Grade Bonds frequently have
call features that allow the issuer to redeem the security at dates prior to its
stated maturity at a specified price (typically greater than par) only if
certain prescribed conditions are met ("call protection"). An issuer may redeem
a Non-Investment Grade Bond if, for example, the issuer can refinance the debt
at a lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. Senior Loans typically have no such call protection. For
premium bonds (bonds acquired at prices that exceed their par or principal
value) purchased by the Trust, prepayment risk may be enhanced.
ISSUER RISK
The value of corporate income-producing securities may decline for a number of
reasons which directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods and services.
SENIOR LOANS RISK
The risks associated with Senior Loans are similar to the risks of
Non-Investment Grade Bonds (discussed below), although Senior Loans are
typically senior and secured in contrast to Non-Investment Grade Bonds, which
are often subordinated and unsecured. Senior Loans' higher standing has
historically resulted in generally higher recoveries in the event of a corporate
reorganization or other restructuring. In addition, because their interest rates
are adjusted for changes in short-term interest rates, Senior Loans generally
have less interest rate risk than Non-Investment Grade Bonds, which are
typically fixed rate.
5
The Trust's investments in Senior Loans are typically below investment grade and
are considered speculative because of the credit risk of their issuers. Such
companies are more likely to default on their payments of interest and principal
owed to the Trust, and such defaults could reduce the Trust's net asset value
and income distributions. An economic downturn generally leads to a higher non-
payment rate, and a debt obligation may lose significant value before a default
occurs. Moreover, any specific collateral used to secure a loan may decline in
value or lose all its value or become illiquid, which would adversely affect the
loan's value.
Economic and other events (whether real or perceived) can reduce the demand for
certain Senior Loans or Senior Loans generally, which may reduce market prices
and cause the Trust's net asset value per share to fall. The frequency and
magnitude of such changes cannot be predicted.
Loans and other debt securities are also subject to the risk of price declines
and to increases in prevailing interest rates, although floating-rate debt
instruments are less exposed to this risk than fixed-rate debt instruments.
Interest rate changes may also increase prepayments of debt obligations and
require the Trust to invest assets at lower yields. No active trading market may
exist for certain loans, which may impair the ability of the Trust to realize
full value in the event of the need to liquidate such assets. Adverse market
conditions may impair the liquidity of some actively traded loans.
NON-INVESTMENT GRADE BONDS RISK
The Trust's investments in Non-Investment Grade Bonds are predominantly
speculative because of the credit risk of their issuers. While offering a
greater potential opportunity for capital appreciation and higher yields,
Non-Investment Grade Bonds typically entail greater potential price volatility
and may be less liquid than higher-rated securities. Issuers of Non-Investment
Grade Bonds are more likely to default on their payments of interest and
principal owed to the Trust, and such defaults will reduce the Trust's net asset
value and income distributions. The prices of these lower rated obligations are
more sensitive to negative developments than higher rated securities. Adverse
business conditions, such as a decline in the issuer's revenues or an economic
downturn, generally lead to a higher non-payment rate. In addition, a security
may lose significant value before a default occurs as the market adjusts to
expected higher non-payment rates.
DERIVATIVES RISK
Derivative transactions (such as futures contracts and options thereon, options,
swaps and short sales) subject the Trust to increased risk of principal loss due
to imperfect correlation or unexpected price or interest rate movements. The
Trust also will be subject to credit risk with respect to the counterparties to
the derivatives contracts purchased by the Trust. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Trust may experience significant
delays in obtaining any recovery under the derivative contract in a bankruptcy
or other reorganization proceeding. The Trust may obtain only a limited recovery
or may obtain no recovery in such circumstances.
EFFECTS OF LEVERAGE
There can be no assurance that a leveraging strategy will be utilized by the
Trust or that, if utilized, it will be successful during any period in which it
is employed. Leverage creates risks for Common Shareholders, including the
likelihood of greater volatility of net asset value and market price of the
Common Shares and the risk that fluctuations in dividend rates on any preferred
shares may affect the return to Common Shareholders. To the extent the income
derived from securities purchased with proceeds received from leverage exceeds
the cost of leverage, the Trust's distributions will be greater than if leverage
had not been used. Conversely, if the income from the securities purchased with
such proceeds is not sufficient to cover the cost of leverage, the amount
available for distribution to Common Shareholders as dividends and other
distributions will be less than if leverage had not been used. In the latter
case, Eaton Vance in its best judgment may nevertheless determine to maintain
the Trust's leveraged position if it deems such action to be appropriate. The
costs of an offering of
6
preferred shares and/or borrowing program will be borne by Common Shareholders
and consequently will result in a reduction of the net asset value of Common
Shares.
Financial leverage may be achieved through the issuance of preferred shares,
through borrowings, including the issuance of debt securities and/or through
investment in derivative instruments. Use of financial leverage creates an
opportunity for increased income for Common Shareholders but, at the same time,
creates special risks (including the likelihood of greater volatility of net
asset value and market price of the Common Shares), and there can be no
assurance that a leveraging strategy will be successful during any period in
which it is employed. See "Investment objectives, policies and risks--
Additional investment practices" and "Investment objectives, policies and
risks--Additional risk considerations."
The Trust currently intends to seek a AAA/Aaa credit rating on any preferred
shares from a Rating Agency. The Trust may be subject to investment restrictions
of the Rating Agency as a result. These restrictions may impose asset coverage
or portfolio composition requirements that are more stringent than those imposed
on the Trust by the Investment Company Act of 1940, as amended (the "Investment
Company Act" or "1940 Act"). It is not anticipated that these covenants or
guidelines will impede Eaton Vance in managing the Trust's portfolio in
accordance with its investment objectives and policies. See "Description of
capital structure--Preferred shares."
As discussed under "Management of the Trust," the fee paid to Eaton Vance will
be calculated on the basis of the Trust's gross assets, including proceeds from
the issuance of preferred shares and/or borrowings, so the fees will be higher
when leverage is utilized. In this regard, holders of preferred shares do not
bear the investment advisory fee. Rather, Common Shareholders bear the portion
of the investment advisory fee attributable to the assets purchased with the
proceeds of the preferred shares offering. See "Investment objectives, policies
and risks--Use of leverage and related risks."
INTEREST RATE RISK
The value of Common Shares will usually change in response to interest rate
fluctuations. When interest rates decline, the value of fixed-rate securities
already held by the Trust can be expected to rise. Conversely, when interest
rates rise, the value of existing fixed-rate portfolio securities can be
expected to decline. Because market interest rates are currently near their
lowest levels in many years, there is a greater than normal risk that the
Trust's portfolio will decline in value due to rising interest rates.
Fluctuations in the value of fixed-rate securities will not affect interest
income on existing securities but will be reflected in the Trust's net asset
value. Fixed-rate securities with longer durations tend to be more sensitive to
changes in interest rates than securities with shorter durations, usually making
them more volatile. The Trust may utilize certain strategies, including taking
positions in futures or interest rate swaps, for the purpose of reducing the
interest rate sensitivity of the portfolio and decreasing the Trust's exposure
to interest rate risk, although there is no assurance that it will do so or that
such strategies will be successful. The Trust is intended to have a relatively
low level of interest rate risk in comparison to funds that invest primarily in
fixed-rate income securities.
FOREIGN SECURITY RISK
The Trust may invest up to 15% of its total assets in foreign securities
including emerging markets. The prices of foreign securities may be affected by
factors not present with U.S. securities, including currency exchange rates,
political and economic conditions, less stringent regulation and higher
volatility. As a result, many foreign securities may be less liquid and more
volatile than U.S. securities.
LIQUIDITY RISK
The Trust may invest in Senior Loans and other securities for which there is no
readily available trading market or which are otherwise illiquid. The Trust may
not be able to dispose readily of such securities at prices that approximate
those at which the Trust could sell such securities if they were more widely
traded and, as a result of such illiquidity, the Trust may have to sell other
investments or engage in borrowing transactions if necessary to raise cash to
meet its obligations. In addition, the
7
limited liquidity could affect the market price of the securities, thereby
adversely affecting the Trust's net asset value and ability to make dividend
distributions.
REINVESTMENT RISK
Income from the Trust's portfolio will decline if and when the Trust invests the
proceeds from matured, traded or called debt obligations into lower yielding
instruments. A decline in income could affect the Common Shares' distribution
rate and their overall return.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from investment
will be worth less in the future as inflation decreases the value of money. As
inflation increases, the real value of the Common Shares and distributions
thereon can decline. In addition, during any periods of rising inflation,
dividend rates of preferred shares would likely increase, which would tend to
further reduce returns to Common Shareholders. This risk is mitigated to some
degree by the Trust's investments in Senior Loans.
MARKET PRICE OF SHARES
The shares of closed-end management investment companies often trade at a
discount from their net asset value, and the Trust's Common Shares may likewise
trade at a discount from net asset value. The trading price of the Trust's
Common Shares may be less than the public offering price. This risk may be
greater for investors who sell their Common Shares in a relatively short period
after completion of the public offering.
MANAGEMENT RISK
The Trust is subject to management risk because it is an actively managed
portfolio. Eaton Vance and the individual portfolio managers will apply
investment techniques and risk analyses in making investment decisions for the
Trust, but there can be no guarantee that these will produce the desired
results.
REGULATORY RISK
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans, particularly in
connection with highly leveraged transactions, the availability of Senior Loans
for investment may be adversely affected. Further, such legislation or
regulation could depress the market value of Senior Loans.
MARKET DISRUPTION
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Trust cannot predict the
effects of similar events in the future on the U.S. economy. These terrorist
attacks and related events, including the war in Iraq, its aftermath, and
continuing occupation of Iraq by coalition forces, have led to increased
short-term market volatility and may have long-term effects on U.S. and world
economies and markets. A similar disruption of the financial markets could
impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares. In particular,
Non-Investment Grade Bonds and Senior Loans tend to be more volatile than higher
rated fixed income securities so that these events and any actions resulting
from them may have a greater impact on the prices and volatility on Non-
Investment Grade Bonds and Senior Loans than on higher rated fixed income
securities.
ANTI-TAKEOVER PROVISIONS
The Trust's Agreement and Declaration of Trust includes provisions that could
have the effect of limiting the ability of other persons or entities to acquire
control of the Trust or to change the composition of its Board. See "Description
of capital structure--Anti-takeover provisions in the Declaration of Trust."
8
Summary of Trust expenses
The purpose of the table below is to help you understand all fees and expenses
that you, as a Common Shareholder, would bear directly or indirectly. The
following table assumes leverage in an amount equal to 38% after preferred
shares issuance of the Trust's total assets, and shows Trust expenses as a
percentage of net assets attributable to Common Shares.
Shareholder transaction expenses
Sales load paid by you (as a percentage of offering
price)................................................. 4.50%
Expenses borne by the Trust............................... 0.97%(1)(2)
Dividend reinvestment plan fees........................... None(3)
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE
TO COMMON SHARES
(ASSUMING THE ISSUANCE
OF PREFERRED SHARES)(4)
--------------------------------------------------------------------------------------
Annual expenses
Investment advisory fee................................... 1.21%
Other expenses............................................ 0.37%(5)
------
Total annual expenses..................................... 1.58%
Less fee and expense reimbursements (years 1-5)........... (0.32)%(6)
------
Net annual expenses (years 1-5)........................... 1.26%(6)
======
------------
(1) Eaton Vance or an affiliate has agreed to reimburse all organizational
costs and pay all offering costs (other than sales load) that exceed $0.04
per Common Share (0.20% of the offering price).
(2) If the Trust offers preferred shares, costs of that offering, estimated to
be slightly more than 1.25% of the total amount of the preferred share
offering, will effectively be borne by Common Shareholders and result in
the reduction of the net asset value of the Common Shares. Assuming the
issuance of preferred shares in an amount equal to 38% of the Trust's total
assets (after issuance), those offering costs are estimated to be not more
than approximately $1,923,000 or $0.16 per Common Share (0.77% of the
offering price).
(3) You will be charged a $5.00 service charge and pay brokerage charges if you
direct the plan agent to sell your Common Shares held in a dividend
reinvestment account.
(4) Stated as percentages of net assets attributable to Common Shares assuming
no issuance of preferred shares or borrowings, the Trust's expenses would
be estimated to be as follows:
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES
(ASSUMING NO PREFERRED
SHARES ARE ISSUED
AND OUTSTANDING)
--------------------------------------------------------------------------------------
Annual expenses
Investment advisory fee................................... 0.75%
Other expenses............................................ 0.18%
-----------
Total annual expenses..................................... 0.93%
Less fees and expense reimbursements (years 1-5).......... (0.20)%
-----------
Net annual expenses (years 1-5)........................... 0.73%
===========
(5) Estimated expenses based on the current fiscal year.
(6) Eaton Vance has contractually agreed to reimburse the Trust for fees and
other expenses in the amount of 0.20% of average total assets of the Trust
for the first 5 full years of the Trust's operations, 0.15% of the average
total assets for the Trust in year 6, 0.10% in year 7 and 0.05% in year 8.
For this purpose, total assets shall be calculated by deducting accrued
liabilities of the Trust not including the amount of any preferred shares
outstanding or the principal amount of any indebtedness for money borrowed.
Without the reimbursement, Total annual expenses would be estimated to be
1.58% of average daily net assets attributable to Common Shares (or,
assuming no issuance of preferred shares or borrowings, 0.93%
9
of average daily net assets attributable to Common Shares). Eaton Vance may
voluntarily reimburse additional fees and expenses but is under no
obligation to do so. Any such voluntary reimbursements may be terminated at
any time.
The expenses shown in the table are based on estimated amounts for the Trust's
first year of operations and assume that the Trust issues approximately
12,500,000 Common Shares. See "Management of the Trust" and "Dividend
reinvestment plan."
EXAMPLE
The following example illustrates the expenses that you would pay on a $1,000
investment in common shares (including the sales load of $45, estimated offering
expenses of this offering of $2 and the estimated preferred share offering costs
assuming preferred shares are issued representing 38% of the Trust's total
assets (after issuance) of $7.70), assuming (1) total net annual expenses of
1.26% of net assets attributable to Common Shares in years 1 through 5,
increasing to 1.58% in years 9 and 10 and (2) a 5% annual return(1):
1 YEAR 3 YEARS 5 YEARS 10 YEARS(2)
-----------------------------------------
$67 $92 $120 $213
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER.
------------
(1) The example assumes that the estimated Other expenses set forth in the
Annual expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Trust's actual rate of return may be greater
or less than the hypothetical 5% return shown in the example.
(2) Assumes reimbursement of fees and expenses of 0.15% of average daily total
assets of the Trust in year 6, 0.10% in year 7 and 0.05% in year 8 and no
reimbursement of fees or expenses in years 9 and 10. Eaton Vance has not
agreed to reimburse the Trust for any portion of its fees and expenses
beyond 2012.
10
--------------------------------------------------------------------------------
The Trust
The Trust is a newly organized, diversified, closed-end management investment
company registered under the 1940 Act. The Trust was organized as a
Massachusetts business trust on April 28, 2004, pursuant to a Declaration of
Trust governed by the laws of The Commonwealth of Massachusetts and has no
operating history. The Trust's principal office is located at The Eaton Vance
Building, 255 State Street, Boston, Massachusetts 02109 and its telephone number
is 1-800-225-6265.
This Prospectus relates to the initial public offering of the Trust's common
shares of beneficial interest, $0.01 par value (the "Common Shares"). See
"Underwriting."
Use of proceeds
The net proceeds of this offering of Common Shares will be approximately
$ (or $ assuming exercise of the Underwriters' over-allotment
option in full), which, after payment of the estimated offering expenses, will
be invested in accordance with the Trust's investment objectives and policies as
soon as practicable, but, in no event, under normal market conditions, later
than three months after the receipt thereof. Pending such investment, the
proceeds may be invested in high-quality, short-term debt securities, cash
and/or other cash equivalents. Eaton Vance or an affiliate has agreed to (i)
reimburse all organizational costs and (ii) pay all offering costs of the Trust
(other than sales loads) that exceed $0.04 per Common Share.
Investment objectives, policies and risks
INVESTMENT OBJECTIVES
The Trust's investment objective is to provide a high level of current income.
The Trust will, as a secondary objective, also seek preservation of capital to
the extent consistent with its primary goal of high current income. Under normal
market conditions, Eaton Vance expects the Trust to maintain a duration of less
than one year (including the effect of anticipated leverage). The Trust will
pursue its objectives by investing its assets primarily in senior, secured
floating rate loans ("Senior Loans"). Investment in such floating rate
instruments is expected to minimize changes in the underlying principal value of
the Senior Loans, and therefore the Trust's net asset value, resulting from
changes in market interest rates. Senior Loans are made to corporations,
partnerships and other business entities ("Borrowers") which operate in various
industries and geographical regions. Senior Loans pay interest at rates which
are redetermined periodically by reference to a base lending rate, primarily the
London-Interbank Offered Rate ("LIBOR"), plus a premium.
PRIMARY INVESTMENT POLICIES
GENERAL COMPOSITION OF THE TRUST
Under normal market conditions, the Trust will invest at least 80% of its total
assets (generally by the purchase of assignments) in interests in Senior Loans
of domestic or foreign Borrowers (so long as foreign loans are U.S.
dollar-denominated and payments of interest and repayments of principal are
required to be made in U.S. dollars). The Trust may invest up to 20% of its
total assets in (i) loan interests which have (a) a second lien on collateral
("Second Lien"), (b) no security interest in the collateral, or (c) lower than a
senior claim on collateral; (ii) other income-producing securities, such as
investment and non-investment grade corporate debt securities and U.S.
government and U.S. dollar-denominated foreign government or supranational debt
securities; and (iii) warrants and equity securities issued by a Borrower or its
affiliates as part of a package of investments in the Borrower or
--------------------------------------------------------------------------------
11
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
its affiliates. If the Adviser determines that market conditions temporarily
warrant a defensive investment policy, the Trust may invest up to 100% of its
assets in cash and/or high quality, short-term debt securities, which would not
be consistent with the Trust's investment objectives. While temporarily
invested, the Trust may not achieve its investment objectives. The Adviser
anticipates that most of the Trust's investments, including investments in
Senior Loans, will be of below investment-grade quality. The Trust may invest up
to 20% of its total assets in corporate bonds of below investment grade quality
("Non-Investment Grade Bonds"), commonly referred to as "junk bonds," are bonds
that are rated below investment grade by each of the nationally recognized
statistical rating agencies ("Rating Agencies") who cover the security, or, if
unrated, are determined to be of comparable quality by the Adviser. Standard &
Poor's Ratings Group ("S&P") and Fitch Ratings ("Fitch") consider securities
rated below BBB- to be below investment grade and Moody's Investors Service,
Inc. ("Moody's") considers securities rated below Baa3 to be below investment
grade. The Trust's credit quality policies apply only at the time a security is
purchased, and the Trust is not required to dispose of a security in the event
of a downgrade of an assessment of credit quality, the withdrawal of a rating,
or in the event of a default. In determining whether to retain or sell such a
security, Eaton Vance may consider such factors as Eaton Vance's assessment of
the credit quality of the issuers of such security, the price at which such
security could be sold and the rating, if any, assigned to such security by
other Rating Agencies. Securities rated in the lowest investment grade rating
(BBB- or Baa3) may have certain speculative characteristics. Below investment
grade quality securities are considered to be predominantly speculative because
of the credit risk of the issuers. See "Investment objectives, policies and
risks--Additional risk considerations--Non-investment grade securities risk."
The Trust will only invest in U.S. dollar denominated securities. The Trust may
invest in U.S. dollar denominated securities of non-United States issuers. The
Trust's investments may have significant exposure to certain sectors of the
economy and thus may react differently to political or economic developments
than the market as a whole.
The Trust's policy of investing, under normal market conditions, at least 80% of
its total assets in Senior Loans is not considered to be fundamental by the
Trust and can be changed without a vote of the Trust's shareholders. However,
this policy may only be changed by the Trust's Board following the provision of
60 days prior written notice to the Trust's shareholders.
Under normal market conditions, the Trust expects to maintain an average
duration of less than one year (including the effect of anticipated leverage).
In comparison to maturity (which is the date on which a debt instrument ceases
and the issuer is obligated to repay the principal amount), duration is a
measure of the price volatility of a debt instrument as a result of changes in
market rates of interest, based on the weighted average timing of the
instrument's expected principal and interest payments. Duration differs from
maturity in that it considers a security's yield, coupon payments, principal
payments and call features in addition to the amount of time until the security
finally matures. As the value of a security changes over time, so will its
duration. Prices of securities with longer durations tend to be more sensitive
to interest rate changes than securities with shorter durations. In general, a
portfolio of securities with a longer duration can be expected to be more
sensitive to interest rate changes than a portfolio with a shorter duration.
The Adviser's staff monitors the credit quality and the price of Senior Loans
and other securities held by the Trust, as well as other securities that are
available to the Trust. The Trust may invest in Senior Loans and other
securities of any credit quality. Although the Adviser considers ratings when
making investment decisions, it performs its own credit and investment analysis
and does not rely primarily on the ratings assigned by the Rating Agencies. In
evaluating the quality of a particular security, whether rated or unrated, the
Adviser will normally take into consideration, among other things, the issuer's
financial resources and operating history, its sensitivity to economic
conditions and trends, the ability of its management, its debt maturity
schedules and borrowing requirements, and relative values based
--------------------------------------------------------------------------------
12
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
on anticipated cash flow, interest and asset coverage, and earnings prospects.
The Adviser will attempt to reduce the risks of investing in lower rated or
unrated debt instruments through active portfolio management, credit analysis
and attention to current developments and trends in the economy and the
financial markets.
The Trust may purchase shares of other investment companies with a similar
investment objective and policies as permitted under the Investment Company Act.
Such investments are limited to 10% of total assets overall, with no more than
5% invested in any one issuer. The value of shares of other closed-end
investment companies is affected by risks similar to those of the Trust, such as
demand for those securities regardless of the demand for the underlying
portfolio assets. Investment companies bear fees and expenses that the Trust
will bear indirectly, so investors in the Trust will be subject to duplication
of fees. The Trust also may invest up to 5% of its total assets in structured
notes or derivatives with rates of return determined by reference to the total
rate of return on one or more Senior Loans referenced in such notes or
instruments. The rate of return on the structured note may be determined by
applying a multiplier to the rate of total return on the referenced Senior Loan
or Loans. Application of a multiplier is comparable to the use of financial
leverage, a speculative technique. Leverage magnifies the potential for gain and
the risk of loss; as a result, a relatively small decline in the value of a
referenced Senior Loan could result in a relatively large loss in the value of a
structured note or derivative. Common Shares of other investment companies and
structured notes or derivatives as discussed above that invest in Senior Loans
or baskets of Senior Loans will be treated as Senior Loans for purposes of the
Trust's policy of normally investing at least 80% of its assets in Senior Loans,
and may be subject to the Trust's leverage limitations.
SENIOR LOANS
Senior Loans hold the most senior position in the capital structure of a
Borrower, are typically secured with specific collateral and have a claim on the
assets and/or stock of the Borrower that is senior to that held by subordinated
debt holders and stockholders of the Borrower. The capital structure of a
Borrower may include Senior Loans, senior and junior subordinated debt,
preferred stock and common stock issued by the Borrower, typically in descending
order of seniority with respect to claims on the Borrower's asset. Senior Loans
are typically secured by specific collateral. As also discussed above, the
proceeds of Senior Loans primarily are used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, refinancings and
internal growth and for other corporate purposes.
Senior Loans in which the Trust will invest generally pay interest at rates,
which are redetermined periodically by reference to a base lending rate, plus a
premium. Senior Loans typically have rates of interest which are redetermined
either daily, monthly, quarterly or semi-annually by reference to a base lending
rate, plus a premium or credit spread. These base lending rates are primarily
LIBOR, and secondarily the prime rate offered by one or more major United States
banks (the "Prime Rate") and the certificate of deposit ("CD") rate or other
base lending rates used by commercial lenders. As floating rate loans, the
frequency of how often a loan resets its interest rate will impact how closely
such loans track current market interest rate. The Senior Loans held by the
Trust will have a dollar-weighted average period until the next interest rate
adjustment of approximately 90 days or less. As a result, as short-term interest
rates increase, interest payable to the Trust from its investments in Senior
Loans should increase, and as short-term interest rates decrease, interest
payable to the Trust from its investments in Senior Loans should decrease. The
Trust may utilize derivative instruments to shorten the effective interest rate
redetermination period of Senior Loans in its portfolio. Senior Loans typically
have a stated term of between one and ten years. In the experience of the
Adviser over the last decade, however, the average life of Senior Loans has been
two to four years because of prepayments.
The Trust expects primarily to purchase Senior Loans by assignment from a
participant in the original syndicate of lenders or from subsequent assignees of
such interests. The Trust may also purchase participations in the original
syndicate making Senior Loans. Such indebtedness may be secured or
--------------------------------------------------------------------------------
13
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
unsecured. Loan participations typically represent direct participations in a
loan to a corporate borrower, and generally are offered by banks or other
financial institutions or lending syndicates. The Trust may participate in such
syndications, or can buy part of a loan, becoming a part lender. When purchasing
loan participations, the Trust assumes the credit risk associated with the
corporate borrower and may assume the credit risk associated with an interposed
bank or other financial intermediary. The participation interests in which the
Trust intends to invest may not be rated by any Rating Agency.
The Trust may purchase and retain in its portfolio Senior Loans where the
Borrowers have experienced, or may be perceived to be likely to experience,
credit problems, including default, involvement in or recent emergence from
bankruptcy reorganization proceedings or other forms of debt restructuring. At
times, in connection with the restructuring of a Senior Loan either outside of
bankruptcy court or in the context of bankruptcy court proceedings, the Trust
may determine or be required to accept equity securities or junior debt
securities in exchange for all or a portion of a Senior Loan.
The Trust may also purchase unsecured loans, other floating rate debt securities
such as notes, bonds and asset-backed securities (such as special purpose trusts
investing in bank loans), credit-linked notes, tranches of collateralized loan
obligations, investment grade fixed income debt obligations and money market
instruments, such as commercial paper.
Senior Loans and other floating-rate debt instruments are subject to the risk of
non-payment of scheduled interest or principal. Such non-payment would result in
a reduction of income to the Trust, a reduction in the value of the investment
and a potential decrease in the net asset value of the Trust. There can be no
assurance that the liquidation of any collateral securing a loan would satisfy
the Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Trust could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. The collateral securing a Senior Loan may
lose all or substantially all of its value in the event of bankruptcy of a
Borrower. Some Senior Loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate such Senior Loans
to presently existing or future indebtedness of the Borrower or take other
action detrimental to the holders of Senior Loans, including, in certain
circumstances, invalidating such Senior Loans or causing interest previously
paid to be refunded to the Borrower. If interest were required to be refunded,
it could negatively affect the Trust's performance.
Many Senior Loans in which the Trust will invest may not be rated by a Rating
Agency, will not be registered with the Securities and Exchange Commission or
any state securities commission and will not be listed on any national
securities exchange. The amount of public information available with respect to
Senior Loans will generally be less extensive than that available for registered
or exchange listed securities. In evaluating the creditworthiness of Borrowers,
the Adviser will consider, and may rely in part, on analyses performed by
others. Borrowers may have outstanding debt obligations that are rated below
investment grade by a Rating Agency. Many of the Senior Loans held by the Trust
will have been assigned ratings below investment grade by Rating Agencies. In
the event Senior Loans are not rated, they are likely to be the equivalent of
below investment grade quality. Because of the protective features of Senior
Loans, the Adviser believes, based on its experience, that Senior Loans tend to
have more favorable loss recovery rates as compared to more junior types of
below investment grade debt obligations. The Adviser does not view ratings as
the determinative factor in its investment decisions and relies more upon its
credit analysis abilities than upon ratings.
No active trading market may exist for some loans and some loans may be subject
to restrictions on resale. A secondary market may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods,
which may impair the ability to realize full value and thus cause a material
decline in the Trust's net asset value. During periods of limited supply and
liquidity of Senior Loans, the Trust's yield may be lower.
--------------------------------------------------------------------------------
14
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
When interest rates decline, the value of a fund invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a fund invested in fixed-rate obligations can be expected to decline.
Although changes in prevailing interest rates can be expected to cause some
fluctuations in the value of Senior Loans (due to the fact that floating rates
on Senior Loans only reset periodically), the value of Senior Loans is
substantially less sensitive to changes in market interest rates than fixed-rate
instruments. As a result, the Adviser expects the Trust's policy of investing a
portion of its assets in floating-rate Senior Loans will make the Trust less
volatile and less sensitive to changes in market interest rates than if the
Trust invested exclusively in fixed-rate obligations. Similarly, a sudden and
significant increase in market interest rates may cause a decline in the value
of these investments and in the Trust's net asset value. Other factors
(including, but not limited to, rating downgrades, credit deterioration, a large
downward movement in stock prices, a disparity in supply and demand of certain
Senior Loans and other securities or market conditions that reduce liquidity)
can reduce the value of Senior Loans and other debt obligations, impairing the
Trust's net asset value.
The Adviser uses an independent pricing service to value most loans and other
debt securities at their market value. The Adviser may use the fair value method
to value loans or other securities if market quotations for them are not readily
available or are deemed unreliable, or if events occurring after the close of a
securities market and before the Trust values its assets would materially affect
net asset value. 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. Because foreign securities trade on
days when the Common Shares are not priced, net asset value can change at times
when Common Shares cannot be sold.
ADDITIONAL INVESTMENT PRACTICES
SECOND LIEN LOANS AND DEBT SECURITIES
The Trust may invest in loans and other debt securities that have the same
characteristics as Senior Loans except that such loans are second in lien
priority rather than first. Such "second lien" loans and securities like Senior
Loans typically have adjustable floating rate interest payments. Accordingly,
the risks associated with "second lien" loans are higher than the risks of loans
with first priority over the collateral. In the event of default on a "second
lien" loan, the first priority lien holder has first claim to the underlying
collateral of the loan. It is possible, that no collateral value would remain
for the second priority lien holder and therefore result in a loss of investment
to the Trust.
COLLATERALIZED LOAN OBLIGATIONS ("CLOS")
The Trust may invest in certain asset-backed securities as discussed below.
Asset-backed securities are payment claims that are securitized in the form of
negotiable paper that is issued by a financing company (generically called a
Special Purpose Vehicle or "SPV"). These securitized payment claims are, as a
rule, corporate financial assets brought into a pool according to specific
diversification rules. The SPV is a company founded solely for the purpose of
securitizing these claims and its only asset is the risk arising out of this
diversified asset pool. On this basis, marketable securities are issued which,
due to the diversification of the underlying risk, generally represent a lower
level of risk than the original assets. The redemption of the securities issued
by the SPV takes place at maturity out of the cash flow generated by the
collected claims.
A CLO is a structured credit security issued by an SPV that was created to
reapportion the risk and return characteristics of a pool of assets. The assets,
typically Senior Loans, are used as collateral supporting the various debt
tranches issued by the SPV. The key feature of the CLO structure is the
prioritization of the cash flows from a pool of debt securities among the
several classes of CLO holders, thereby creating a series of obligations with
varying rates and maturities appealing to a wide range of investors. CLOs
generally are secured by an assignment to a trustee under the indenture pursuant
to which the bonds are issued of collateral consisting of a pool of debt
instruments, usually,
--------------------------------------------------------------------------------
15
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
non-investment grade bank loans. Payments with respect to the underlying debt
securities generally are made to the trustee under the indenture. CLOs are
designed to be retired as the underlying debt instruments are repaid. In the
event of sufficient early prepayments on such debt instruments, the class or
series of CLO first to mature generally will be retired prior to maturity.
Therefore, although in most cases the issuer of CLOs will not supply additional
collateral in the event of such prepayments, there will be sufficient collateral
to secure their priority with respect to other CLO tranches that remain
outstanding. The credit quality of these securities depends primarily upon the
quality of the underlying assets, their priority with respect to other CLO
tranches and the level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which shorten the
securities' weighted average maturity and may lower their return. If the credit
support or enhancement is exhausted, losses or delays in payment may result if
the required payments of principal and interest are not made. The value of these
securities also may change because of changes in market value, that is changes
in the market's perception of the creditworthiness of the servicing agent for
the pool, the originator of the pool, or the financial institution or fund
providing the credit support or enhancement.
COLLATERALIZED DEBT OBLIGATIONS ("CDOS")
The Trust may invest in CDOs. A CDO is a structured credit security issued by an
SPV that was created to reapportion the risk and return characteristics of a
pool of assets. The assets, typically non-investment grade bonds, leveraged
loans, and other asset-backed obligations, are used as collateral supporting the
various debt and equity tranches issued by the SPV. The key feature of the CDO
structure is the prioritization of the cash flows from a pool of debt securities
among the several classes of CDO holders, thereby creating a series of
obligations with varying rates and maturities appealing to a wide range of
investors. CDOs generally are secured by an assignment to a trustee under the
indenture pursuant to which the bonds are issued of collateral consisting of a
pool of debt securities, usually, non-investment grade bonds. Payments with
respect to the underlying debt securities generally are made to the trustee
under the indenture. CDOs are designed to be retired as the underlying debt
securities are repaid. In the event of sufficient early prepayments on such debt
securities, the class or series of CDO first to mature generally will be retired
prior to maturity. Therefore, although in most cases the issuer of CDOs will not
supply additional collateral in the event of such prepayments, there will be
sufficient collateral to secure CDOs that remain outstanding. The credit quality
of these securities depends primarily upon the quality of the underlying assets
and the level of credit support and/or enhancement provided. CDOs operate
similarly to CLOs and are subject to the same inherent risks.
FOREIGN SECURITIES
Although the Trust will only invest in U.S. dollar-denominated income
securities, the Trust may invest in Senior Loans and other debt securities of
non-U.S. issuers. Investment in securities of non-U.S. issuers involves special
risks, including that non-U.S. issuers may be subject to less rigorous
accounting and reporting requirements than U.S. issuers, less rigorous
regulatory requirements, differing legal systems and laws relating to creditors'
rights, the potential inability to enforce legal judgments and the potential for
political, social and economic adversity. The willingness and ability of
sovereign issuers to pay principal and interest on government securities depends
on various economic factors, including among others the issuer's balance of
payments, overall debt level, and cash flow considerations related to the
availability of tax or other revenues to satisfy the issuer's obligations. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in the payment or
delivery of securities and interest or in the recovery of assets held abroad)
and expenses not present in the settlement of domestic investments. Investments
may include
--------------------------------------------------------------------------------
16
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
securities issued by the governments of lesser-developed countries, which are
sometimes referred to as "emerging markets." There may be a possibility of
nationalization or expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial instability, armed
conflict and diplomatic developments which could affect the value of the Trust's
investments in certain foreign countries.
CORPORATE BONDS AND OTHER DEBT SECURITIES
The Trust may invest in a wide variety of bonds, debentures and similar debt
securities of varying maturities and durations issued by corporations and other
business entities, including limited liability companies. Debt securities in
which the Trust may invest may pay fixed or variable rates of interest. Bonds
and other debt securities generally are issued by corporations and other issuers
to borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and normally must repay the amount borrowed on or before
maturity. Certain debt securities are "perpetual" in that they have no maturity
date. The Trust may invest in bonds and other debt securities of any quality. As
discussed below, Non-Investment Grade Bonds, commonly known as "junk bonds," are
considered to be predominantly speculative in nature because of the credit risk
of the issuers.
NON-INVESTMENT GRADE BONDS
As indicated above, Non-Investment Grade Bonds are those rated lower than
investment grade (i.e., bonds rated lower than Baa3 by Moody's and lower than
BBB- by S&P and Fitch) or are unrated and of comparable quality as determined by
the Adviser. Non-Investment Grade Bonds rated BB and Ba have speculative
characteristics, while lower rated Non-Investment Grade Bonds are predominantly
speculative.
The Trust may hold securities that are unrated or in the lowest rating
categories (rated C by Moody's or D by S&P or Fitch). Bonds rated C by Moody's
are regarded as having extremely poor prospects of ever attaining any real
investment standing. Bonds rated D by S&P or Fitch are in payment default or a
bankruptcy petition has been filed and debt service payments are jeopardized. In
order to enforce its rights with defaulted securities, the Trust may be required
to retain legal counsel and/or a financial adviser. This may increase the
Trust's operating expenses and adversely affect net asset value.
The credit quality of most securities held by the Trust reflects a greater than
average possibility that adverse changes in the financial condition of an
issuer, or in general economic conditions, or both, may impair the ability of
the issuer to make payments of interest and principal. The inability (or
perceived inability) of issuers to make timely payment of interest and principal
would likely make the values of securities held by the Trust more volatile and
could limit the Trust's ability to sell its securities at favorable prices. In
the absence of a liquid trading market for securities held by it, the Trust may
have difficulties determining the fair market value of such securities.
Although the Adviser considers security ratings when making investment
decisions, it performs its own credit and investment analysis and does not rely
primarily on the ratings assigned by the Rating Agencies. In evaluating the
quality of a particular security, whether rated or unrated, the Adviser will
normally take into consideration, among other things, the issuer's financial
resources and operating history, its sensitivity to economic conditions and
trends, the ability of its management, its debt maturity schedules and borrowing
requirements, and relative values based on anticipated cash flow, interest and
asset coverage, and earnings prospects. Because of the greater number of
investment considerations involved in investing in high yield, high risk bonds,
the achievement of the Trust's objectives depends more on the Adviser's judgment
and analytical abilities than would be the case if the Trust invested primarily
in securities in the higher rating categories. While the Adviser will attempt to
reduce the risks of investing in lower rated or unrated securities through
active Trust management, diversification, credit analysis and attention to
current developments and trends in the economy and
--------------------------------------------------------------------------------
17
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
the financial markets, there can be no assurance that a broadly diversified fund
of such securities would substantially lessen the risk of defaults brought about
by an economic downturn or recession. In recent years, issuances of
Non-Investment Grade Bonds by companies in various sectors has increased.
Accordingly, the Trust's investments may have significant exposure to certain
sectors of the economy and thus may react differently to political or economic
developments than the market as a whole.
The Trust's high yield securities may have fixed or variable principal payments
and all types of interest rate and dividend payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent, deferred, and payment in
kind features.
CONVERTIBLE SECURITIES
The Trust may invest in convertible securities. A convertible security is a debt
security or preferred stock that is exchangeable for an equity security of the
issuer at a predetermined price. Depending upon the relationship of the
conversion price to the market value of the underlying security, a convertible
security may trade more like an equity security than a debt instrument. The
Trust may invest in convertible securities of any rating.
GOVERNMENT SECURITIES
U.S. Government securities include (1) U.S. Treasury obligations, which differ
in their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one year to
ten years) and U.S. Treasury bonds (generally maturities of greater than ten
years) and (2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are supported by any of the following: (a) the full faith
and credit of the U.S. Treasury, (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the U.S. Treasury, (c) discretionary
authority of the U.S. Government to purchase certain obligations of the U.S.
Government agency or instrumentality or (d) the credit of the agency or
instrumentality. The Trust may also invest in any other security or agreement
collateralized or otherwise secured by U.S. Government securities. Agencies and
instrumentalities of the U.S. Government include but are not limited to: Federal
Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal
Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association,
Government National Mortgage Association, Student Loan Marketing Association,
United States Postal Service, Small Business Administration, Tennessee Valley
Authority and any other enterprise established or sponsored by the U.S.
Government. Because the U.S. Government generally is not obligated to provide
support to its instrumentalities, the Trust will invest in obligations issued by
these instrumentalities only if the Adviser determines that the credit risk with
respect to such obligations is minimal.
The principal of and/or interest on certain U.S. Government securities which may
be purchased by the Trust could be (a) payable in foreign currencies rather than
U.S. dollars or (b) increased or diminished as a result of changes in the value
of the U.S. dollar relative to the value of foreign currencies. The value of
such portfolio securities may be affected favorably by changes in the exchange
rate between foreign currencies and the U.S. dollar.
SAMIS AND OTHER SENIOR LOAN BASED DERIVATIVES
As discussed above, the Trust may obtain exposure to senior loans and baskets of
senior loans through the use of derivative instruments. Such derivative
instruments have recently become increasingly available. The Adviser reserves
the right to utilize these instruments and similar instruments that may be
available in the future. The Trust currently intends to invest in a derivative
instrument known as the Select Aggregate Market Index ("SAMI") which provides
investors with exposure to a reference basket of Senior Loans. SAMIs are
structured as floating rate instruments. SAMIs consists of a basket of credit
default swaps whose underlying reference securities are senior secured loans.
While investing
--------------------------------------------------------------------------------
18
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
in SAMIs will increase the universe of floating rate debt securities to which
the Trust is exposed, such investments entail risks that are not typically
associated with investments in other floating rate debt securities. The
liquidity of the market for SAMIs will be subject to liquidity in the secured
loan and credit derivatives markets. Investment in SAMIs involves many of the
risks associated with investments in derivative instruments discussed generally
below. The Trust may also be subject to the risk that the counterparty in a
derivative transaction will default on its obligations. Derivative transactions
generally involve the risk of loss due to unanticipated adverse changes in
securities prices, interest rates, the inability to close out a position,
imperfect correlation between a position and the desired hedge, tax constraints
on closing out positions, and portfolio management constraints on securities
subject to such transactions. The potential loss on derivative instruments may
be substantial relative to the initial investment therein.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by corporations such as banks or bank holding companies and finance
companies. The rate of return on commercial paper may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Securities may be purchased on a "forward commitment" or "when-issued" basis
(meaning securities are purchased or sold with payment and delivery taking place
in the future) in order to secure what is considered to be an advantageous price
and yield at the time of entering into the transaction. However, the yield on a
comparable security when the transaction is consummated may vary from the yield
on the security at the time that the forward commitment or when-issued
transaction was made. From the time of entering into the transaction until
delivery and payment is made at a later date, the securities that are the
subject of the transaction are subject to market fluctuations. In forward
commitment or when-issued transactions, if the seller or buyer, as the case may
be, fails to consummate the transaction, the counterparty may miss the
opportunity of obtaining a price or yield considered to be advantageous. Forward
commitment or when-issued transactions may be expected to occur a month or more
before delivery is due. However, no payment or delivery is made until payment is
received or delivery is made from the other party to the transaction. Forward
commitment or when-issued transactions are not entered into for the purpose of
investment leverage.
ILLIQUID SECURITIES
The Trust may invest without limitation in Senior Loans and other securities for
which there is no readily available trading market or are otherwise illiquid.
Illiquid securities include securities legally restricted as to resale, such as
commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and securities eligible for resale pursuant to Rule 144A thereunder.
Section 4(2) and Rule 144A securities may, however, be treated as liquid by the
Adviser pursuant to procedures adopted by the Board, which require consideration
of factors such as trading activity, availability of market quotations and
number of dealers willing to purchase the security. If the Trust invests in Rule
144A securities, the level of portfolio illiquidity may be increased to the
extent that eligible buyers become uninterested in purchasing such securities.
It may be difficult to sell such securities at a price representing the fair
value until such time as such securities may be sold publicly. Where
registration is required, a considerable period may elapse between a decision to
sell the securities and the time when it would be permitted to sell. Thus, the
Trust may not be able to obtain as favorable a price as that prevailing at the
time of the decision to sell. The Trust may also acquire securities through
private placements under which it may agree to contractual restrictions on the
resale of such securities. Such restrictions might prevent their sale at a time
when such sale would otherwise be desirable.
--------------------------------------------------------------------------------
19
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
DERIVATIVES
As described more specifically below, the Trust may purchase or sell derivative
instruments (which are instruments that derive their value from another
instrument, security or index) to seek to hedge against fluctuations in
securities prices or interest rates or for purposes of leveraging the Trust. The
Trust's transactions in derivative instruments may include the purchase or sale
of futures contracts on securities, credit-linked notes, securities indices,
other indices or other financial instruments; options on futures contracts;
exchange-traded and over-the-counter options on securities or indices;
index-linked securities; and interest rate swaps. The Trust's transactions in
derivative instruments involve a risk of loss or depreciation due to:
unanticipated adverse changes in securities prices, interest rates, the other
financial instruments' prices; the inability to close out a position; default by
the counterparty; imperfect correlation between a position and the desired
hedge; tax constraints on closing out positions; and portfolio management
constraints on securities subject to such transactions. The loss on derivative
instruments (other than purchased options) may substantially exceed the Trust's
initial investment in these instruments. In addition, the Trust may lose the
entire premium paid for purchased options that expire before they can be
profitably exercised by the Trust. Transaction costs will be incurred in opening
and closing positions in derivative instruments. There can be no assurance that
Eaton Vance's use of derivative instruments will be advantageous to the Trust.
CREDIT-LINKED NOTES
The Trust may invest in credit-linked notes ("CLN") for risk management
purposes, including diversification. A CLN is a derivative instrument. It is a
synthetic obligation between two or more parties where the payment of principal
and/or interest is based on the performance of some obligation (a reference
obligation). In this type of investment, the Trust is subject to credit risks,
including, but not limited to, default risks, associated with the issuer of the
CLN's reference obligation. Material events or circumstances impacting the
issuer of the CLN's reference obligation will affect the payments between the
derivative instrument's parties because such events or circumstances will impact
the performance of the reference obligation. The reference obligation may be
loan obligations such as Senior Loans and other debt obligations. In addition to
credit risk of the reference obligation and interest rate risk, the buyer/seller
of the CLN is subject to counterparty risk.
SWAPS
Swap contracts may be purchased or sold to hedge against fluctuations in
securities prices, interest rates or market conditions, to change the duration
of the overall portfolio, or to mitigate default risk. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) to be exchanged or "swapped" between the parties, which returns
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate or in a "basket" of securities representing a particular index.
Interest Rate Swaps. The Trust will enter into interest rate and total return
swaps only on a net basis, i.e., the two payment streams are netted out, with
the Trust receiving or paying, as the case may be, only the net amount of the
two payments. Interest rate swaps involve the exchange by the Trust 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 Trust will only
enter into interest rate swaps on a net basis. If the other party to an interest
rate swap defaults, the Trust's risk of loss consists of the net amount of
payments that the Trust is contractually entitled to receive. The net amount of
the excess, if any, of the Trust's obligations over its entitlements will be
maintained in a segregated account by the Trust's custodian. The Trust will not
enter into any interest rate swap unless the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market.
--------------------------------------------------------------------------------
20
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
The Trust may use interest rate swaps for risk management purposes only and not
as a speculative investment and would typically use interest rate swaps to
shorten the average interest rate reset time of the Trust's holdings. Interest
rate swaps involve the exchange by the Trust with another party of their
respective commitments to pay or receive interests (e.g., an exchange of fixed
rate payments for floating rate payments). The use of interest rate swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Adviser is incorrect in its forecasts of market values, interest rates
and other applicable factors, the investment performance of the Trust would be
unfavorably affected.
Total Return Swaps. As stated above, the Trust will enter into total return
swaps only on a net basis. Total return swaps are contracts in which one party
agrees to make payments of the total return from the underlying asset(s), which
may include securities, baskets of securities, or securities indices during the
specified period, in return for payments equal to a fixed or floating rate of
interest or the total return from other underlying asset(s).
Credit Default Swaps. The Trust may enter into credit default swap contracts
for risk management purposes, including diversification. When the Trust is the
buyer of a credit default swap contract, the Trust is entitled to receive the
par (or other agreed-upon) value of a referenced debt obligation from the
counterparty to the contract in the event of a default by a third party, such as
a U.S. or foreign corporate issuer, on the debt obligation. In return, the Trust
would pay the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Trust would have spent the stream of payments and received no benefit from
the contract. When the Trust is the seller of a credit default swap contract, it
receives the stream of payments, but is obligated to pay upon default of the
referenced debt obligation. As the seller, the Trust would effectively add
leverage to its portfolio because, in addition to its total net assets, the
Trust would be subject to investment exposure on the notional amount of the
swap. The Trust will segregate assets in the form of cash and cash equivalents
in an amount equal to the aggregate market value of the credit default swaps of
which it is the seller, marked to market on a daily basis. These transactions
involve certain risks, including the risk that the seller may be unable to
fulfill the transaction.
FUTURES AND OPTIONS ON FUTURES
The Trust may purchase and sell various kinds of financial futures contracts and
options thereon to seek to hedge against changes in interest rates or for other
risk management purposes. Futures contracts may be based on various debt
securities and securities indices (such as the Municipal Bond Index traded on
the Chicago Board of Trade). Such transactions involve a risk of loss or
depreciation due to unanticipated adverse changes in securities prices, which
may exceed the Trust's initial investment in these contracts. The Trust will
only purchase or sell futures contracts or related options in compliance with
the rules of the Commodity Futures Trading Commission. These transactions
involve transaction costs. There can be no assurance that Eaton Vance's use of
futures will be advantageous to the Trust. Rating Agency guidelines on any
preferred shares issued by the Trust may limit use of these transactions.
SECURITIES LENDING
The Trust 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 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 when the expected returns, net of administrative expenses and any
finders' fees, justifies the attendant risk. Securities loans currently are
required to be secured continuously by collateral in cash, cash equivalents
(such as money market
--------------------------------------------------------------------------------
21
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
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. The
financial condition of the borrower will be monitored by the Adviser on an
ongoing basis.
BORROWINGS
The Trust may borrow money to the extent permitted under the 1940 Act as
interpreted, modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time. The Trust may from time to time borrow money to
add leverage to the portfolio. The Trust may also borrow money for temporary
administrative purposes.
REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements (the purchase of a security
coupled with an agreement to resell at a higher price) with respect to its
permitted investments. In the event of the bankruptcy of the other party to a
repurchase agreement, the Trust might experience delays in recovering its cash.
To the extent that, in the meantime, the value of the securities the Trust
purchased may have decreased, the Trust could experience a loss. The Trust's
repurchase agreements will provide that the value of the collateral underlying
the repurchase agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the agreement, and will be marked to
market daily.
REVERSE REPURCHASE AGREEMENTS
The Trust may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Trust temporarily transfers possession of a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash. At the same time, the Trust agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, which reflects an
interest payment. The Trust may enter into such agreements when it is able to
invest the cash acquired at a rate higher than the cost of the agreement, which
would increase earned income.
When the Trust enters into a reverse repurchase agreement, any fluctuations in
the market value of either the securities transferred to another party or the
securities in which the proceeds may be invested would affect the market value
of the Trust's assets. As a result, such transactions may increase fluctuations
in the market value of the Trust's assets. While there is a risk that large
fluctuations in the market value of the Trust's assets could affect net asset
value, this risk is not significantly increased by entering into reverse
repurchase agreements, in the opinion of the Adviser. Because reverse repurchase
agreements may be considered to be the practical equivalent of borrowing funds,
they constitute a form of leverage. Such agreements will be treated as subject
to investment restrictions regarding "borrowings." If the Trust reinvests the
proceeds of a reverse repurchase agreement at a rate lower than the cost of the
agreement, entering into the agreement will lower the Trust's yield.
PORTFOLIO TURNOVER
The Trust cannot accurately predict its portfolio turnover rate, but the annual
turnover rate may exceed 100% (excluding turnover of securities having a
maturity of one year or less). A high turnover rate (100% or more) necessarily
involves greater expenses to the Trust and may result in a realization of net
short-term capital gains. The Trust may engage in active short-term trading to
benefit from yield disparities among different issues of securities or among the
markets for fixed income securities of different countries, to seek short-term
profits during periods of fluctuating interest rates, or for other reasons. Such
trading will increase the Trust's rate of turnover and may increase the
incidence of net short-term capital gains which, upon distribution by the Trust,
are taxable to the Trust's shareholders as ordinary income.
--------------------------------------------------------------------------------
22
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
USE OF LEVERAGE AND RELATED RISKS
The Trust expects to use leverage through the issuance of preferred shares,
through borrowings, including the issuance of debt securities and/or investment
in derivative instruments. The Trust initially intends to use leverage of
approximately 38% of its total assets (including the amount obtained from
leverage). The Adviser anticipates that the use of leverage should result in
higher income to Common Shareholders overtime. The Trust generally will not use
leverage, however, if the Adviser anticipates that it would result in a lower
return to Common Shareholders for any significant amount of time. The Trust also
may borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise might require untimely dispositions of Trust securities.
Leverage creates risks for holders of the Common Shares, including the
likelihood of greater volatility of net asset value and market price of the
Common Shares. There is a risk that fluctuations in the dividend rates on any
preferred shares may adversely affect the return to the holders of the Common
Shares. If the income from the securities purchased with such funds is not
sufficient to cover the cost of leverage, the return on the Trust will be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Shareholders as dividends and other distributions will be
reduced. The Adviser in its best judgment nevertheless may determine to maintain
the Trust's leveraged position if it deems such action to be appropriate in the
circumstances.
Changes in the value of the Trust's portfolio will be borne entirely by the
Common Shareholders. If there is a net decrease (or increase) in the value of
the Trust's investment portfolio, the leverage will decrease (or increase) the
net asset value per Common Share to a greater extent than if the Trust were not
leveraged. During periods in which the Trust is using leverage, the fees paid to
Eaton Vance for investment advisory services will be higher than if the Trust
did not use leverage because the fees paid will be calculated on the basis of
the Trust's gross assets, including the proceeds from the issuance of preferred
shares. As discussed under "Description of capital structure," the Trust's
issuance of preferred shares may alter the voting power of Common Shareholders.
Capital raised through leverage will be subject to dividend payments, which may
exceed the income and appreciation on the assets purchased. The issuance of
preferred shares involves offering expenses and other costs and may limit the
Trust's freedom to pay dividends on Common Shares or to engage in other
activities. The issuance of a class of preferred shares having priority over the
Common Shares creates an opportunity for greater return per Common Share, but at
the same time such leveraging is a speculative technique in that it will
increase the Trust's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with offering proceeds exceed the cost
of issuing additional classes of securities (and other Trust expenses), the use
of leverage will diminish the investment performance of the Common Shares
compared with what it would have been without leverage.
The Trust may be subject to certain restrictions on investments imposed by
guidelines of one or more Rating Agencies that may issue ratings for any
preferred shares issued by the Trust. These guidelines may impose asset coverage
or Trust composition requirements that are more stringent than those imposed on
the Trust by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Adviser from managing the Trust's portfolio in
accordance with the Trust's investment objectives and policies.
Under the Investment Company Act, the Trust is not permitted to issue preferred
shares unless immediately after such issuance the total asset value of the
Trust's portfolio is at least 200% of the liquidation value of the outstanding
preferred shares (i.e., such liquidation value may not exceed 50% of the Trust's
total assets). In addition, the Trust is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the net asset value of the Trust's portfolio (determined after
deducting the amount of such dividend or other distribution) is at
--------------------------------------------------------------------------------
23
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
least 200% of such liquidation value. If preferred shares are issued, the Trust
intends, to the extent possible, to purchase or redeem preferred shares, from
time to time, to maintain coverage of any preferred shares of at least 200%. If
the Trust issues preferred shares amounting to 38% leverage, there will be an
asset coverage of 263%. Normally, holders of the Common Shares will elect four
of the Trustees of the Trust and holders of any preferred shares will elect two.
In the event the Trust failed to pay dividends on its preferred shares for two
years, preferred shareholders would be entitled to elect a majority of the
Trustees until the dividends are paid.
To qualify for federal income taxation as a "regulated investment company," the
Trust must distribute in each taxable year at least 90% of its net investment
income (including net interest income and net short-term gain). The Trust also
will be required to distribute annually substantially all of its income and
capital gain, if any, to avoid imposition of a nondeductible 4% federal excise
tax. If the Trust is precluded from making distributions on the Common Shares
because of any applicable asset coverage requirements, the terms of the
preferred shares may provide that any amounts so precluded from being
distributed, but required to be distributed for the Trust to meet the
distribution requirements for qualification as a regulated investment company,
will be paid to the holders of the preferred shares as a special dividend. This
dividend can be expected to decrease the amount that holders of preferred shares
would be entitled to receive upon redemption or liquidation of the shares.
The Trust's willingness to issue new securities for investment purposes, and the
amount the Trust will issue, will depend on many factors, the most important of
which are market conditions and interest rates. Successful use of a leveraging
strategy may depend on the Adviser's ability to predict correctly interest rates
and market movements, and there is no assurance that a leveraging strategy will
be successful during any period in which it is employed.
Assuming the utilization of leverage in the amount of 38% of the Trust's total
assets and an annual dividend rate on preferred shares of 1.25% based on market
rates as of the date of this Prospectus, the additional income that the Trust
must earn (net of expenses) in order to cover such dividend payments is 0.48%.
The Trust's actual cost of leverage will be based on market rates at the time
the Trust undertakes a leveraging strategy, and such actual cost of leverage may
be higher or lower than that assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Common Shares of leverage in the amount of approximately 38% of
the Trust's total assets, assuming hypothetical annual returns of the Trust's
portfolio of minus 10% to plus 10%. As the table shows, leverage generally
increases the return to Common Shareholders when portfolio return is positive
and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
Assumed portfolio return (net of expenses)......... (10)% (5)% 0% 5% 10%
Corresponding Common Share return assuming 38%
leverage......................................... (16.90)% (8.83)% (0.77)% 7.30% 15.36%
Until the Trust issues preferred shares or borrows, the Common Shares will not
be leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Common
Shares cannot be achieved until the proceeds resulting from the use of leverage
have been invested in accordance with the Trust's investment objectives and
policies.
--------------------------------------------------------------------------------
24
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
ADDITIONAL RISK CONSIDERATIONS
NO OPERATING HISTORY
The Trust is a closed-end management investment company with no history of
operations and is designed for long-term investors and not as a trading vehicle.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the
possible loss of the entire principal amount invested. An investment in Common
Shares represents an indirect investment in the securities owned by the Trust.
The value of these securities, like other market investments, may move up or
down, sometimes rapidly and unpredictably. The Common Shares at any point in
time may be worth less than the original investment, even after taking into
account any reinvestment of dividends and distributions.
INCOME RISK
The income investors receive from the Trust is based primarily on the interest
it earns from its investments, which can vary widely over the short- and
long-term. If prevailing market interest rates drop, investors' income from the
Trust over time could drop as well. The Trust's income could also be affected
already when prevailing short-term interest rates increase and the Trust is
utilizing leverage, although this risk is mitigated by the Trust's investment in
Senior Loans.
CREDIT RISK
Credit risk is the risk that one or more debt obligations in the Trust's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the obligation experiences a decline in its financial
status. Credit risk involves two basic elements: delinquency and default.
Delinquency refers to interruptions in the payment of interest and principal.
Default refers to the potential for unrecoverable principal loss from the sale
of foreclosed collateral or the Trust's inherent right to forgive principal or
modify a debt instrument.
PREPAYMENT RISK
During periods of declining interest rates or for other purposes, the Borrowers
may exercise their option to prepay principal earlier than scheduled. For
fixed-income securities, such payments often occur during period of declining
interest rates, forcing the Trust to reinvest in lower yielding securities. This
is known as call or prepayment risk. Non-Investment Grade Bonds frequently have
call features that allow the issuer to redeem the security at dates prior to its
stated maturity at a specified price (typically greater than par) only if
certain prescribed conditions are met ("call protection"). An issuer may redeem
a high yield obligation if, for example, the issuer can refinance the debt at a
lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. Senior Loans typically have no such call protection. For
premium bonds (bonds acquired at prices that exceed their par or principal
value) purchased by the Trust, prepayment risk may be enhanced.
ISSUER RISK
The value of corporate income-producing securities may decline for a number of
reasons which directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods and services.
SENIOR LOANS RISK
The risks associated with Senior Loans are similar to the risks of
Non-Investment Grade Bonds (discussed below), although Senior Loans are
typically senior and secured in contrast to Non-Investment Grade Bonds, which
are often subordinated and unsecured. Senior Loans' higher standing has
historically resulted in generally higher recoveries in the event of a corporate
reorganization or other restructuring.
--------------------------------------------------------------------------------
25
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
In addition, because their interest rates are adjusted for changes in short-term
interest rates, Senior Loans generally have less interest rate risk than
Non-Investment Grade Bonds, which are typically fixed rate. The Trust's
investments in Senior Loans are typically below investment grade and are
considered speculative because of the credit risk of their issuers. Such
companies are more likely to default on their payments of interest and principal
owed to the Trust, and such defaults could reduce the Trust's net asset value
and income distributions. An economic downturn generally leads to a higher
non-payment rate, and a debt obligation may lose significant value before a
default occurs. Moreover, any specific collateral used to secure a loan may
decline in value or lose all its value or become illiquid, which would adversely
affect the loan's value.
Economic and other events (whether real or perceived) can reduce the demand for
certain Senior Loans or Senior Loans generally, which may reduce market prices
and cause the Trust's net asset value per share to fall. The frequency and
magnitude of such changes cannot be predicted.
Loans and other debt securities are also subject to the risk of price declines
and to increases in prevailing interest rates, although floating-rate debt
instruments are less exposed to this risk than fixed-rate debt instruments.
Interest rate changes may also increase prepayments of debt obligations and
require the Trust to invest assets at lower yields. No active trading market may
exist for certain loans, which may impair the ability of the Trust to realize
full value in the event of the need to liquidate such assets. Adverse market
conditions may impair the liquidity of some actively traded loans.
NON-INVESTMENT GRADE BONDS RISK
The Trust's investments in Non-Investment Grade Bonds are predominantly
speculative because of the credit risk of their issuers. While offering a
greater potential opportunity for capital appreciation and higher yields,
Non-Investment Grade Bonds typically entail greater potential price volatility
and may be less liquid than higher-rated securities. Issuers of Non-Investment
Grade Bonds are more likely to default on their payments of interest and
principal owed to the Trust, and such defaults will reduce the Trust's net asset
value and income distributions. The prices of these lower rated obligations are
more sensitive to negative developments than higher rated securities. Adverse
business conditions, such as a decline in the issuer's revenues or an economic
downturn, generally lead to a higher non-payment rate. In addition, a security
may lose significant value before a default occurs as the market adjusts to
expected higher non-payment rates.
DERIVATIVES RISK
Derivative transactions (such as futures contracts and options thereon, options
and swaps) subject the Trust to increased risk of principal loss due to
imperfect correlation or unexpected price or interest rate movements. The Trust
also will be subject to credit risk with respect to the counterparties to the
derivatives contracts purchased by the Trust. If a counterparty becomes bankrupt
or otherwise fails to perform its obligations under a derivative contract due to
financial difficulties, the Trust may experience significant delays in obtaining
any recovery under the derivative contract in a bankruptcy or other
reorganization proceeding. The Trust may obtain only a limited recovery or may
obtain no recovery in such circumstances.
EFFECTS OF LEVERAGE
There can be no assurance that a leveraging strategy will be utilized by the
Trust or that, if utilized, it will be successful during any period in which it
is employed. See "Investment objectives, policies and risks--Use of leverage and
related risks."
INTEREST RATE RISK
The value of Trust shares will usually change in response to interest rate
fluctuations. When interest rates decline, the value of fixed-rate securities
already held by the Trust can be expected to rise. Conversely, when interest
rates rise, the value of existing fixed-rate portfolio securities can be
expected to decline.
--------------------------------------------------------------------------------
26
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Because market interest rates are currently near their lowest levels in many
years, there is a greater than normal risk that the Trust's portfolio will
decline in value due to rising interest rates. Fluctuations in the value of
fixed-rate securities will not affect interest income on existing securities but
will be reflected in the Trust's net asset value. Fixed-rate securities with
longer durations tend to be more sensitive to changes in interest rates than
securities with shorter durations, usually making them more volatile. Because
the Trust's dollar-weighted average duration will normally not exceed 1 year
(including the effects of anticipated leverage), the Common Shares' net asset
value and market price per Common Share will tend to fluctuate more in response
to changes in market interest rates than if the Trust invested mainly in
shorter-term debt securities and less than if the Trust invested mainly in
longer-term debt securities. The Trust may utilize certain strategies, including
taking positions in futures or interest rate swaps, for the purpose of reducing
the interest rate sensitivity of the portfolio and decreasing the Trust's
exposure to interest rate risk, although there is no assurance that it will do
so or that such strategies will be successful. The Trust is intended to have a
relatively low level of interest rate risk in comparison to funds that invest
primarily in fixed-rate income securities.
FOREIGN SECURITY RISK
The Trust may invest up to 15% of its total assets in foreign securities
including emerging markets. The prices of foreign securities may be affected by
factors not present with U.S. securities, including currency exchange rates,
political and economic conditions, less stringent regulation and higher
volatility. As a result, many foreign securities may be less liquid and more
volatile than U.S. securities.
LIQUIDITY RISK
The Trust may invest in Senior Loans and other securities for which there is no
readily available trading market or which are otherwise illiquid. Most Senior
Loans are valued by an independent pricing service that uses market quotations
of investors and traders in Senior Loans. Economic and other events (whether
real or perceived) can reduce the demand for certain Senior Loans or Senior
Loans generally, which may reduce market prices and cause the Trust's net asset
value per share to fall. The frequency and magnitude of such changes cannot be
predicted.
Some Senior Loans are not readily marketable and may be subject to restrictions
on resale. Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no active trading market may exist
for some of the Senior Loans in which the Trust will invest. Where a secondary
market exists, such market for some Senior Loans may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods.
Senior Loans that are illiquid may impair the Trust's ability to realize the
full value of its assets in the event of a voluntary or involuntary liquidation
of such assets and thus may cause a decline in the Trust's net asset value. The
Trust has no limitation on the amount of its assets which may be invested in
securities which are not readily marketable or are subject to restrictions on
resale. The risks associated with illiquidity are particularly acute in
situations where the Trust's operations require cash, such as when the Trust
conducts repurchase offers for its shares, and may result in borrowings to meet
short-term cash requirements. The Trustees of the Trust will consider the
liquidity of the Trust's investments in determining the amount of quarterly
repurchase offers, if any.
REINVESTMENT RISK
Income from the Trust's portfolio will decline if and when the Trust invests the
proceeds from matured, traded or called debt obligations into lower yielding
instruments. A decline in income could affect the Common Shares' distribution
rate and their overall return.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from investment
will be worth less in the future as inflation decreases the value of money. As
inflation increases, the real value of the Common
--------------------------------------------------------------------------------
27
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Shares and distributions thereon can decline. In addition, during any periods of
rising inflation, dividend rates of preferred shares would likely increase,
which would tend further to reduce returns to Common Shareholders. This risk is
mitigated to some degree by the Trust's investments in Senior Loans.
MARKET PRICE OF SHARES
The shares of closed-end management investment companies often trade at a
discount from their net asset value, and the Common Shares may likewise trade at
a discount from net asset value. The trading price of the Common Shares may be
less than the public offering price. This risk may be greater for investors who
sell their Common Shares in a relatively short period after completion of the
public offering.
MANAGEMENT RISK
The Trust is subject to management risk because it is an actively managed
portfolio. Eaton Vance and the individual portfolio managers will apply
investment techniques and risk analyses in making investment decisions for the
Trust, but there can be no guarantee that these will produce the desired
results.
REGULATORY RISK
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans, particularly in
connection with highly leveraged transactions, the availability of Senior Loans
for investment may be adversely affected. Further, such legislation or
regulation could depress the market value of Senior Loans.
MARKET DISRUPTION
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Trust cannot predict the
effects of similar events in the future on the U.S. economy. These terrorist
attacks and related events, including the war in Iraq, its aftermath, and
continuing occupation of Iraq by coalition forces, have led to increased
short-term market volatility and may have long-term effects on U.S. and world
economies and markets. A similar disruption of the financial markets could
impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares. In particular,
Non-Investment Grade Bonds and Senior Loans tend to be more volatile than higher
rated fixed income securities so that these events and any actions resulting
from them may have a greater impact on the prices and volatility on Non-
Investment Grade Bonds and Senior Loans than on higher rated fixed income
securities.
ANTI-TAKEOVER PROVISIONS
The Trust's Agreement and Declaration of Trust includes provisions that could
have the effect of limiting the ability of other persons or entities to acquire
control of the Trust or to change the composition of its Board. See "Description
of capital structure -- Anti-takeover provisions in the Declaration of Trust."
Management of the Trust
BOARD OF TRUSTEES
The management of the Trust, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of the Trust's Board under the laws of The Commonwealth of
Massachusetts and the 1940 Act.
--------------------------------------------------------------------------------
28
MANAGEMENT OF THE TRUST
--------------------------------------------------------------------------------
THE ADVISER
Eaton Vance acts as the Trust's investment adviser under an Investment Advisory
Agreement (the "Advisory Agreement"). The Adviser's principal office is located
at The Eaton Vance Building, 255 State Street, Boston, MA 02109. Eaton Vance,
its affiliates and predecessor companies have been managing assets of
individuals and institutions since 1924 and of investment companies since 1931.
Eaton Vance (or its affiliates) currently serves as the investment adviser to
investment companies and various individual and institutional clients with
combined assets under management of approximately $85 billion as of April 30,
2004. Eaton Vance is an indirect, wholly-owned subsidiary of Eaton Vance Corp.,
a publicly-held holding company, which through its subsidiaries and affiliates
engages primarily in investment management, administration and marketing
activities.
Under the general supervision of the Trust's Board, the Adviser will carry out
the investment and reinvestment of the assets of the Trust, will furnish
continuously an investment program with respect to the Trust, will determine
which securities should be purchased, sold or exchanged, and will implement such
determinations. The Adviser will furnish to the Trust investment advice and
office facilities, equipment and personnel for servicing the investments of the
Trust. The Adviser will compensate all Trustees and officers of the Trust who
are members of the Adviser's organization and who render investment services to
the Trust, and will also compensate all other Adviser personnel who provide
research and investment services to the Trust. In return for these services,
facilities and payments, the Trust has agreed to pay the Adviser as compensation
under the Advisory Agreement a fee in the amount of 0.75% of the average daily
gross assets of the Trust, subject to the expense reimbursement agreement
described below. Eaton Vance has contractually agreed to reimburse the Trust for
fees and other expenses in the amount of 0.20% of average daily total assets of
the Trust for the first 5 full years of the Trust's operations, 0.15% of average
daily total assets of the Trust in year 6, 0.10% in year 7 and 0.05% in year 8.
Eaton Vance may voluntarily reimburse additional fees and expenses but is under
no obligation to do so. Any such voluntary reimbursements may be terminated at
any time. Gross assets of the Trust shall be calculated by deducting accrued
liabilities of the Trust not including the amount of any preferred shares
outstanding or the principal amount of any indebtedness for money borrowed.
During periods in which the Trust is using leverage, the fees paid to Eaton
Vance for investment advisory services will be higher than if the Trust did not
use leverage because the fees paid will be calculated on the basis of the
Trust's gross assets, including proceeds from any borrowings and from the
issuance of preferred shares.
Scott H. Page and Payson F. Swaffield are responsible for the overall and
day-to-day management of the Trust's investments. Among other portfolios, Mr.
Page and Mr. Swaffield have each been Eaton Vance portfolio managers since 1996,
and are Vice Presidents of Eaton Vance. They currently co-manage (i) the
following registered closed-end interval funds: Eaton Vance Prime Rate Reserves,
Eaton Vance Advisers Senior Floating-Rate Fund, Eaton Vance Institutional Senior
Floating Rate Fund and Eaton Vance Classic Senior Floating-Rate Fund; (ii) the
following registered open-end funds: Eaton Vance Floating-Rate Fund and Eaton
Vance Floating-Rate High Income Fund (the Senior Loan portion); (iii) Eaton
Vance Senior Income Trust, a registered closed-end fund listed on the New York
Stock Exchange, (iv) Eaton Vance Limited Duration Income Fund, a registered
closed-end fund listed on the New York Stock Exchange (the Senior Loan portion);
(v) Eaton Vance Senior Floating-Rate Trust, a registered closed-end fund listed
on the New York Stock Exchange and (vi) Eaton Vance VT Floating-Rate Income
Fund, a registered open-end fund offered primarily to insurance company separate
accounts, all of which employ investment strategies primarily focused on Senior
Loans. As of April 30, 2004, these funds had combined assets of approximately
$11.8 billion. See "Additional investment information and restrictions--
Litigation involving Eaton Vance" in the Statement of Additional Information for
further information.
The Trust and the Adviser have adopted a Code of Ethics relating to personal
securities transactions. The Code of Ethics permits Adviser personnel to invest
in securities (including securities that may be
--------------------------------------------------------------------------------
29
MANAGEMENT OF THE TRUST
--------------------------------------------------------------------------------
purchased or held by the Trust) for their own accounts, subject to certain
pre-clearance, reporting and other restrictions and procedures contained in such
Code of Ethics.
Eaton Vance serves as administrator of the Trust but currently receives no
compensation for providing administrative services to the Trust. Under an
Administration Agreement with the Trust ("Administration Agreement"), Eaton
Vance is responsible for managing the business affairs of the Trust, subject to
the supervision of the Trust's Board. Eaton Vance will furnish to the Trust all
office facilities, equipment and personnel for administering the affairs of the
Trust. Eaton Vance's administrative services include recordkeeping, preparation
and filing of documents required to comply with federal and state securities
laws, supervising the activities of the Trust's custodian and transfer agent,
providing assistance in connection with the Trustees' and shareholders'
meetings, providing service in connection with any repurchase offers and other
administrative services necessary to conduct the Trust's business.
Distributions
The Trust intends to make monthly distributions of net investment income, after
payment of interest on any outstanding borrowings or dividends on any
outstanding preferred shares. The Trust will distribute annually any net
short-term capital gain and any net capital gain (which is the excess of net
long-term capital gain over short-term capital loss). Distributions to Common
Shareholders cannot be assured, and the amount of each monthly distribution is
likely to vary. It is possible, although not intended, that distributions could
exceed net investment income and net short-term and long-term capital gain,
resulting in a return of capital. Initial distributions to Common Shareholders
are expected to be declared approximately 45 days and paid approximately 60 to
90 days after the completion of this offering depending on market conditions.
While there are any borrowings or preferred shares outstanding, the Trust may
not be permitted to declare any cash dividend or other distribution on its
Common Shares in certain circumstances. See "Description of capital structure."
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based on the advice of
Kirkpatrick & Lockhart LLP, counsel to the Trust.
The following is a summary discussion of the material U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of the Common Shares of the Trust. This discussion addresses only U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, banks and financial institutions, insurance companies,
dealers in securities or foreign currencies, foreign shareholders, shareholders
who hold their shares as or in a hedge against currency risk, a constructive
sale, or a conversion transaction, shareholders who are subject to the
alternative minimum tax, or tax-exempt or tax-deferred plans, accounts, or
entities. In addition, the discussion does not address any state, local, or
foreign tax consequences, and it does not address any U.S. federal tax
consequences other than U.S. federal income tax consequences. The discussion is
based upon present provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change or
differing interpretations (possibly with retroactive effect). No attempt is made
to present a detailed explanation of all U.S. federal income tax concerns
affecting the Trust and its shareholders, and the discussion set forth herein
does not constitute tax advice. Investors are urged to consult their own tax
advisers to determine the specific tax consequences to them of investing in the
Trust, including the applicable federal, state, local and foreign tax
consequences to them and the effect of possible changes in tax laws.
--------------------------------------------------------------------------------
30
DISTRIBUTIONS
--------------------------------------------------------------------------------
The Trust will distribute annually any net short-term capital gain (which are
taxable as ordinary income) and any net capital gain. Distributions of the
Trust's net capital gains ("capital gain dividends"), if any, are taxable to
Common Shareholders as long-term capital gains, regardless of the length of time
Common Shares have been held by Common Shareholders. Dividends paid to Common
Shareholders out of the Trust's current and accumulated earnings and profits,
except in the case of capital gain dividends and certain dividends received by
individuals, will be taxable as ordinary income. Dividends with respect to the
Common Shares generally will not constitute "qualified dividend income" for
federal income tax purposes and thus will not be eligible for the favorable
long-term capital gains tax rates. Distributions, if any, in excess of the
Trust's earnings and profits will first reduce the adjusted tax basis of a
holder's Common Shares and, after that basis has been reduced to zero, will
constitute capital gains to the Shareholder (assuming the Common Shares are held
as a capital asset). See below for a summary of the maximum tax rates applicable
to capital gains (including capital gain dividends). Dividends will not qualify
for a dividends received deduction generally available to corporate
Shareholders.
The Trust will inform Common Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
Selling Shareholders will generally recognize gain or loss in an amount equal to
the difference between the Common Shareholder's adjusted tax basis in the Common
Shares sold and the amount received. If the Common Shares are held as a capital
asset, the gain or loss will be a capital gain or loss.
The maximum tax rate applicable to net capital gains recognized by individuals
and other non-corporate taxpayers is (i) the same as the maximum ordinary income
tax rate for gains recognized on the sale of capital assets held for one year or
less and (ii) 15% for gains recognized on the sale of capital assets held for
more than one year (as well as certain capital gain dividends) (5% for
individuals in the 10% or 15% tax brackets). Any loss on a disposition of Common
Shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received with respect to those
Common Shares. For purposes of determining whether Common Shares have been held
for six months or less, the holding period is suspended for any periods during
which the Common Shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property, or
through certain options or short sales. Any loss realized on a sale or exchange
of Common Shares will be disallowed to the extent those Common Shares are
replaced by other Common Shares within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the Common Shares
(whether through the reinvestment of distributions, which could occur, for
example, if the Common Shareholder is a participant in the Plan (as defined
below) or otherwise). In that event, the basis of the replacement Common Shares
will be adjusted to reflect the disallowed loss.
An investor should be aware that, if Common Shares are purchased shortly before
the record date for any taxable dividend (including a capital gain dividend),
the purchase price likely will reflect the value of the dividend and the
investor then would receive a taxable distribution likely to reduce the trading
value of such Common Shares, in effect resulting in a taxable return of some of
the purchase price. Taxable distributions to individuals and certain other
non-corporate Common Shareholders, including those who have not provided their
correct taxpayer identification number and other required certifications, may be
subject to "backup" federal income tax withholding at the fourth lowest rate of
tax applicable to a single individual (in 2004, 28%).
The foregoing briefly summarizes some of the important federal income tax
consequences to Common Shareholders of investing in Common Shares, reflects the
federal tax law as of the date of this Prospectus, and does not address special
tax rules applicable to certain types of investors, such as corporate and
foreign investors. Investors should consult their tax advisors regarding other
federal, state or local tax considerations that may be applicable in their
particular circumstances, as well as any proposed tax law changes.
--------------------------------------------------------------------------------
31
--------------------------------------------------------------------------------
Dividend reinvestment plan
Pursuant to the Trust's dividend reinvestment plan (the "Plan"), a Common
Shareholder may elect to have all distributions of dividends (including all
capital gain dividends) automatically reinvested in Common Shares. Common
Shareholders may elect to participate in the Plan by completing the dividend
reinvestment plan application form. If Common Shareholders do not participate,
such Common Shareholders will receive all distributions in cash paid by check
mailed directly to them by PFPC Inc., as dividend paying agent.
PFPC Inc. (the "Plan Agent") serves as agent for the Common Shareholders in
administering the Plan. Common Shareholders who elect not to participate in the
Plan will receive all distributions of dividends in cash paid by check mailed
directly to the Common Shareholder of record (or if the Common Shares are held
in street or other nominee name, then to the nominee) by PFPC Inc., as
disbursing agent. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent prior to any dividend record date.
Common Shares will be acquired by the Plan Agent or an independent broker-dealer
for the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional previously authorized but
unissued Common Shares from the Trust ("newly issued Common Shares") or (ii) by
purchase of outstanding Common Shares on the open market ("open-market
purchases") on the New York Stock Exchange or elsewhere. If on the payment date
for the dividend, the net asset value per Common Share is equal to or less than
the market price per Common Share plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued Common Shares on behalf of the
participants. The number of newly issued Common Shares to be credited to each
participant's account will be determined by dividing the dollar amount of the
dividend by the net asset value per Common Share on the date the Common Shares
are issued, provided that the maximum discount from the then current market
price per Common Share on the date of issuance may not exceed 5%. If on the
dividend payment date the net asset value per Common Share is greater than the
market value plus estimated brokerage commissions (such condition being referred
to herein as "market discount"), the Plan Agent will invest the dividend amount
in Common Shares acquired on behalf of the participants in open-market
purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have up to 30 days after the dividend payment date to invest the dividend
amount in Common Shares acquired in open-market purchases. If, before the Plan
Agent has completed its open-market purchases, the market price of a Common
Share exceeds the net asset value per Common Share, the average per Common Share
purchase price paid by the Plan Agent may exceed the net asset value of the
Common Shares, resulting in the acquisition of fewer Common Shares than if the
dividend had been paid in newly issued Common Shares on the dividend payment
date. Therefore, the Plan provides that if the Plan Agent is unable to invest
the full dividend amount in open-market purchases during the purchase period or
if the market discount shifts to a market premium during the purchase period,
the Plan Agent will cease making open-market purchases and will invest the
uninvested portion of the dividend amount in newly issued Common Shares.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Common Shareholders for tax records. Common Shares in the
account of each Plan participant will be held by the Plan Agent on behalf of the
Plan participant, and each Common Shareholder proxy will include those Common
Shares purchased or received pursuant to the Plan. The Plan Agent will forward
all
--------------------------------------------------------------------------------
32
DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------
proxy solicitation materials to participants and vote proxies for Common Shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of Common Shareholders such as banks, brokers or nominees that hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record Common Shareholder's name and held for the account of
beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares issued directly
by the Trust as a result of dividends payable either in Common Shares or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
Common Shareholders participating in the Plan may receive benefits not available
to Common Shareholders not participating in the Plan. If the market price (plus
commissions) of the Common Shares is above their net asset value, participants
in the Plan will receive Common Shares of the Trust at less than they could
otherwise purchase them and will have Common Shares with a cash value greater
than the value of any cash distribution they would have received on their Common
Shares. If the market price plus commissions is below the net asset value,
participants will receive distributions in Common Shares with a net asset value
greater than the per Common Share value of any cash distribution they would have
received on their Common Shares. However, there may be insufficient Common
Shares available in the market to make distributions in Common Shares at prices
below the net asset value. Also, since the Trust does not redeem its Common
Shares, the price on resale may be more or less than the net asset value.
Experience under the Plan may indicate that changes are desirable. Accordingly,
upon 30 days' notice to Plan participants, the Trust reserves the right to amend
or terminate the Plan. Common Shareholders will be charged a $5.00 service
charge and pay brokerage charges if such Common Shareholder directs the Plan
Agent to sell Common Shares held in a dividend reinvestment account.
All correspondence concerning the Plan should be directed to the Plan Agent at
PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027. Please call 1-800-331-1710
between the hours of 9:00 a.m. and 5:00 p.m. Eastern Standard Time if you have
questions regarding the Plan.
Description of capital structure
The Trust is an unincorporated business trust established under the laws of The
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
April 28, 2004 and filed with the Secretary of The Commonwealth on April 28,
2004 (the "Declaration of Trust"). The Declaration of Trust provides that the
Trustees of the Trust may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of Common Shares. The
Trust intends to hold annual meetings of shareholders in compliance with the
requirements of the New York Stock Exchange.
COMMON SHARES
The Declaration of Trust permits the Trust to issue an unlimited number of full
and fractional Common Shares. Each Common Share represents an equal
proportionate interest in the assets of the Trust with each other Common Share
in the Trust. Holders of Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board. The 1940 Act or the terms of
any borrowings or preferred shares may limit the payment of dividends to the
holders of Common Shares. Each whole Common Share shall be entitled to one vote
as to matters on which it is entitled to vote
--------------------------------------------------------------------------------
33
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
pursuant to the terms of the Declaration of Trust on file with the SEC. Upon
liquidation of the Trust, after paying or adequately providing for the payment
of all liabilities of the Trust and the liquidation preference with respect to
any outstanding preferred shares, and upon receipt of such releases, indemnities
and refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining assets of the Trust among the holders of
the Common Shares. The Declaration of Trust provides that shareholders are not
liable for any liabilities of the Trust and permits inclusion of a clause to
that effect in every agreement entered into by the Trust and in coordination
with the Trust's By-Laws indemnifies shareholders against any such liability.
Although shareholders of an unincorporated business trust established under
Massachusetts law, in certain limited circumstances, may be held personally
liable for the obligations of the Trust as though they were general partners,
the provisions of the Declaration of Trust and By-Laws described in the
foregoing sentence make the likelihood of such personal liability remote.
While there are any borrowings or preferred shares outstanding, the Trust may
not be permitted to declare any cash dividend or other distribution on its
Common Shares, unless at the time of such declaration, (i) all accrued dividends
on preferred shares or accrued interest on borrowings have been paid and (ii)
the value of the Trust's total assets (determined after deducting the amount of
such dividend or other distribution), less all liabilities and indebtedness of
the Trust not represented by senior securities, is at least 300% of the
aggregate amount of such securities representing indebtedness and at least 200%
of the aggregate amount of securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, the Trust may be required to
comply with other asset coverage requirements as a condition of the Trust
obtaining a rating of the preferred shares from a Rating Agency. These
requirements may include an asset coverage test more stringent than under the
1940 Act. This limitation on the Trust's ability to make distributions on its
Common Shares could in certain circumstances impair the ability of the Trust to
maintain its qualification for taxation as a regulated investment company for
federal income tax purposes. The Trust intends, however, to the extent possible
to purchase or redeem preferred shares or reduce borrowings from time to time to
maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the preferred shares in certain circumstances in
connection with any such impairment of the Trust's status as a regulated
investment company. See "Investment objectives, policies and risks" and
"Distributions--Federal income tax matters." Depending on the timing of any such
redemption or repayment, the Trust may be required to pay a premium in addition
to the liquidation preference of the preferred shares to the holders thereof.
The Trust has no present intention of offering additional Common Shares, except
as described herein. Other offerings of its Common Shares, if made, will require
approval of the Board. Any additional offering will not be sold at a price per
Common Share below the then current net asset value (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
shareholders or with the consent of a majority of the Trust's outstanding Common
Shares. The Common Shares have no preemptive rights.
The Trust generally will not issue Common Share certificates. However, upon
written request to the Trust's transfer agent, a share certificate will be
issued for any or all of the full Common Shares credited to an investor's
account. Common Share certificates that have been issued to an investor may be
returned at any time.
--------------------------------------------------------------------------------
34
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
CREDIT FACILITY/COMMERCIAL PAPER PROGRAM
In the event the Trust leverages through borrowings, the Trust may enter into
definitive agreements with respect to a credit facility/commercial paper program
or other borrowing program. The Trust may negotiate with commercial banks to
arrange a credit facility/commercial paper program. Any such borrowings would
constitute financial leverage. Such a facility/commercial paper program is not
expected to be convertible into any other securities of the Trust, outstanding
amounts are expected to be prepayable by the Trust prior to final maturity
without significant penalty and there are not expected to be any sinking fund or
mandatory retirement provisions. Outstanding amounts would be payable at
maturity or such earlier times as required by the agreement. The Trust may be
required to prepay outstanding amounts under the facility/program or incur a
penalty rate of interest in the event of the occurrence of certain events of
default. The Trust would be expected to indemnify the lenders under the
facility/program against liabilities they may incur in connection with the
facility/program.
In addition, the Trust expects that such a credit facility/program would contain
covenants that, among other things, likely will limit the Trust's ability to pay
dividends in certain circumstances, incur additional debt, change its
fundamental investment policies and engage in certain transactions, including
mergers and consolidations, and may require asset coverage ratios in addition to
those required by the 1940 Act. The Trust may be required to pledge its assets
and to maintain a portion of its assets in cash or high-grade securities as a
reserve against interest or principal payments and expenses. The Trust expects
that any credit facility/program would have customary covenant, negative
covenant and default provisions. There can be no assurance that the Trust will
enter into an agreement for a credit facility/program on terms and conditions
representative of the foregoing, or that additional material terms will not
apply. In addition, if entered into, any such credit facility/program may in the
future be replaced or refinanced by one or more credit facilities having
substantially different terms or by the issuance of preferred shares or debt
securities.
REPURCHASE OF COMMON SHARES AND OTHER DISCOUNT MEASURES
Because shares of closed-end management investment companies frequently trade at
a discount to their net asset values, the Board has determined that from time to
time it may be in the interest of shareholders for the Trust to take corrective
actions. The Board, in consultation with Eaton Vance, will review at least
annually the possibility of open market repurchases and/or tender offers for the
Common Shares and will consider such factors as the market price of the Common
Shares, the net asset value of the Common Shares, the liquidity of the assets of
the Trust, effect on the Trust's expenses, whether such transactions would
impair the Trust's status as a regulated investment company or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions which may have a material effect
on the Trust's ability to consummate such transactions. There are no assurances
that the Board will, in fact, decide to undertake either of these actions or if
undertaken, that such actions will result in the Trust's Common Shares trading
at a price which is equal to or approximates their net asset value. In
recognition of the possibility that the Common Shares might trade at a discount
to net asset value and that any such discount may not be in the interest of
shareholders, the Board, in consultation with Eaton Vance, from time to time may
review possible actions to reduce any such discount.
PREFERRED SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including preferred shares
(the "preferred shares"), having a par value of $0.01 per share, in one or more
series, with rights as determined by the Board, by action of the Board without
the approval of the shareholders.
--------------------------------------------------------------------------------
35
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
Under the requirements of the 1940 Act, the Trust must, immediately after the
issuance of any preferred shares, have an "asset coverage" of at least 200%.
Asset coverage means the ratio which the value of the total assets of the Trust,
less all liability and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Trust, if any, plus the aggregate liquidation
preference of the preferred shares. If the Trust seeks a rating of the preferred
shares, asset coverage requirements, in addition to those set forth in the 1940
Act, may be imposed. The liquidation value of the preferred shares is expected
to equal their aggregate original purchase price plus redemption premium, if
any, together with any accrued and unpaid dividends thereon (on a cumulative
basis), whether or not earned or declared. The terms of the preferred shares,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board (subject to applicable
law and the Trust's Declaration of Trust) if and when it authorizes the
preferred shares. The Trust may issue preferred shares that provide for the
periodic redetermination of the dividend rate at relatively short intervals
through an auction or remarketing procedure, although the terms of the preferred
shares may also enable the Trust to lengthen such intervals. At times, the
dividend rate as redetermined on the Trust's preferred shares may approach or
exceed the Trust's return after expenses on the investment of proceeds from the
preferred shares and the Trust's leveraged capital structure would result in a
lower rate of return to Common Shareholders than if the Trust were not so
structured.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Trust, the terms of any preferred shares may entitle the holders of
preferred shares to receive a preferential liquidating distribution (expected to
equal the original purchase price per preferred share plus redemption premium,
if any, together with accrued and unpaid dividends, whether or not earned or
declared and on a cumulative basis) before any distribution of assets is made to
holders of Common Shares. After payment of the full amount of the liquidating
distribution to which they are entitled, the preferred shareholders would not be
entitled to any further participation in any distribution of assets by the
Trust.
Holders of preferred shares, voting as a class, shall be entitled to elect two
of the Trust's Trustees. Under the 1940 Act, if at any time dividends on the
preferred shares are unpaid in an amount equal to two full years' dividends
thereon, the holders of all outstanding preferred shares, voting as a class,
will be allowed to elect a majority of the Trust's Trustees until all dividends
in default have been paid or declared and set apart for payment. In addition, if
required by the Rating Agency rating the preferred shares or if the Board
determines it to be in the best interests of the shareholders, issuance of the
preferred shares may result in more restrictive provisions than required by the
1940 Act being imposed. In this regard, holders of the preferred shares may be
entitled to elect a majority of the Trust's Board in other circumstances, for
example, if one payment on the preferred shares is in arrears.
The Trust currently intends to seek a AAA/Aaa credit rating for the preferred
shares from a Rating Agency. The Trust intends that, as long as preferred shares
are outstanding, the composition of its portfolio will reflect guidelines
established by such Rating Agency. Although, as of the date hereof, no such
Rating Agency has established guidelines relating to the preferred shares, based
on previous guidelines established by such Rating Agencies for the securities of
other issuers, the Trust anticipates that the guidelines with respect to the
preferred shares will establish a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. Although, at this time, no assurance
can be given as to the nature or extent of the guidelines which may be imposed
in connection with obtaining a rating of the preferred shares, the Trust
currently anticipates that such guidelines will include asset coverage
requirements which are more restrictive than those under the 1940 Act,
restrictions on certain portfolio investments and investment practices,
requirements that the Trust maintain a portion of its assets in short-term,
high-quality, fixed-income securities and certain mandatory redemption
--------------------------------------------------------------------------------
36
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
requirements relating to the preferred shares. No assurance can be given that
the guidelines actually imposed with respect to the preferred shares by such
Rating Agency will be more or less restrictive than as described in this
Prospectus.
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Declaration of Trust includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Trust or to change the composition of its Board, and could have the effect of
depriving Common Shareholders of an opportunity to sell their Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Trust. These provisions may have the effect of
discouraging attempts to acquire control of the Trust, which attempts could have
the effect of increasing the expenses of the Trust and interfering with the
normal operation of the Trust. The Board is divided into three classes, with the
term of one class expiring at each annual meeting of shareholders. At each
annual meeting, one class of Trustees is elected to a three-year term. This
provision could delay for up to two years the replacement of a majority of the
Board. A Trustee may be removed from office only for cause by a written
instrument signed by the remaining Trustees or by a vote of the holders of at
least two-thirds of the class of shares of the Trust that elected such Trustee
and are entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the holders
of at least 75% of the outstanding shares of each class of the Trust, voting as
a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board shall by resolution have approved a memorandum of
understanding with such holders, in which case normal voting requirements would
be in effect. For purposes of these provisions, a 5%-or-greater holder of a
class of shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any class
of beneficial interest of the Trust. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Trust or any
subsidiary of the Trust with or into any Principal Shareholder; (ii) the
issuance of any securities of the Trust to any Principal Shareholder for cash;
(iii) the sale, lease or exchange of all or any substantial part of the assets
of the Trust to any Principal Shareholder (except assets having an aggregate
fair market value of less than $1,000,000, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period); or (iv) the sale, lease or exchange
to the Trust or any subsidiary thereof, in exchange for securities of the Trust,
of any assets of any Principal Shareholder (except assets having an aggregate
fair market value of less than $1,000,000, aggregating for the purposes of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period).
The Board has determined that provisions with respect to the Board and the 75%
voting requirements described above, which voting requirements are greater than
the minimum requirements under Massachusetts law or the 1940 Act, are in the
best interest of shareholders generally. Reference should be made to the
Declaration of Trust on file with the SEC for the full text of these provisions.
CONVERSION TO OPEN-END FUND
The Trust may be converted to an open-end management investment company at any
time if approved by the lesser of (i) two-thirds or more of the Trust's then
outstanding Common Shares and preferred shares (if any), each voting separately
as a class, or (ii) more than 50% of the then outstanding Common Shares and
preferred shares (if any), voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Trust could not occur until 90 days after
the shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. The
--------------------------------------------------------------------------------
37
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
composition of the Trust's portfolio likely would prohibit the Trust from
complying with regulations of the SEC applicable to open-end management
investment companies. Accordingly, conversion likely would require significant
changes in the Trust's investment policies and liquidation of a substantial
portion of its relatively illiquid portfolio. Conversion of the Trust to an
open-end management investment company also would require the redemption of any
outstanding preferred shares and could require the repayment of borrowings,
which would eliminate the leveraged capital structure of the Trust with respect
to the Common Shares. In the event of conversion, the Common Shares would cease
to be listed on the New York Stock Exchange or other national securities
exchange or market system. The Board believes that the closed-end structure is
desirable, given the Trust's investment objectives and policies. Investors
should assume, therefore, that it is unlikely that the Board would vote to
convert the Trust to an open-end management investment company. Shareholders of
an open-end management investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of a redemption. If the Trust were to
convert to an open-end investment company, the Trust expects it would pay all
such redemption requests in cash, but likely would reserve the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Trust were converted to an open-end
fund, it is likely that new Common Shares would be sold at net asset value plus
a sales load.
--------------------------------------------------------------------------------
38
--------------------------------------------------------------------------------
Underwriting
The underwriters named below (the "Underwriters"), acting through UBS Securities
LLC, 299 Park Avenue, New York, New York, Citigroup Global Markets Inc., 388
Greenwich Street, New York, New York, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, 4 World Financial Center, New York, New York, and Wachovia Capital
Markets, LLC, 7 St. Paul Street, 1st Floor, Baltimore, Maryland, as lead
managers and RBC Dain Rauscher Incorporated, H&R Block Financial Advisors, Inc.,
J.J.B. Hilliard, W.L. Lyons, Inc., Oppenheimer & Co. Inc., Quick & Reilly, Inc.,
a FleetBoston Financial Company and Ryan, Beck & Co., Inc. as their
representatives (together with the lead managers, the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement with the Trust and Eaton Vance (the "Underwriting Agreement"), to
purchase from the Trust the number of Common Shares set forth opposite their
respective names. The Underwriters are committed to purchase and pay for all of
such Common Shares (other than those covered by the over-allotment option
described below) if any are purchased.
NUMBER OF
UNDERWRITERS COMMON SHARES
---------------------------------------------------------------------------
UBS Securities LLC..........................................
Citigroup Global Markets Inc. ..............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Wachovia Capital Markets, LLC
RBC Dain Rauscher Incorporated..............................
H&R Block Financial Advisors, Inc. .........................
J.J.B. Hilliard, W.L. Lyons, Inc. ..........................
Oppenheimer & Co. Inc. .....................................
Quick & Reilly, Inc., a FleetBoston Financial Company.......
Ryan, Beck & Co., Inc. .....................................
-------------
Total..................................................
=============
The Trust has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to an additional
Common Shares to cover over-allotments, if any, at the initial offering price.
The Underwriters may exercise such option solely for the purpose of covering
underwriting over-allotments incurred in the sale of the Common Shares offered
hereby. To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase an additional number of Common Shares proportionate to such
Underwriter's initial commitment.
The Trust has agreed to pay a commission to the Underwriters in the amount of
$0.90 per Common Share (4.5% of the public offering price per Common Share). The
Representatives have advised the Trust that the Underwriters may pay up to
$ per Common Share from such commission to selected dealers who sell the
Common Shares and that such dealers may reallow a concession of up to $ per
Common Share to certain other dealers who sell Common Shares. Eaton Vance or an
affiliate has agreed to (i) reimburse all organizational costs and (ii) pay all
offering costs of the Trust (other than sales loads) that exceed $0.04 per
Common Share. Investors must pay for any Common Shares purchased on or before
, 2004.
Prior to this offering, there has been no public market for the Common Shares or
any other securities of the Trust. Consequently, the offering price for the
Common Shares was determined by negotiation among the Trust and the
Representatives. There can be no assurance, however, that the price at which
Common Shares sell after this offering will not be lower than the price at which
they are sold by the
--------------------------------------------------------------------------------
39
UNDERWRITING
--------------------------------------------------------------------------------
Underwriters or that an active trading market in the Common Shares will develop
and continue after this offering. The minimum investment requirement is 100
Common Shares ($2,000).
The Trust and Eaton Vance have each agreed to indemnify the several Underwriters
for or to contribute to the losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Trust has agreed not to offer, sell or register with the Securities and
Exchange Commission any additional equity securities of the Trust, other than
issuances of Common Shares, including pursuant to the Trust's Plan, and
issuances in connection with any preferred shares, each as contemplated in this
Prospectus, for a period of 180 days after the date of the Underwriting
Agreement without the prior written consent of the Representatives.
The Representatives have informed the Trust that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
In connection with this offering, the Underwriters may purchase and sell Common
Shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Shares and syndicate short positions involve
the sale by the Underwriters of a greater number of Common Shares than they are
required to purchase from the Trust in this offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the Common Shares sold in this offering
for their account may be reclaimed by the syndicate if such Common Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Shares, which may be higher than the price that might otherwise prevail
in the open market; and these activities, if commenced, may be discontinued at
any time without notice. These transactions may be effected on the New York
Stock Exchange or otherwise.
The Trust anticipates that the Representatives and certain other Underwriters
may from time to time act as brokers or dealers in connection with the execution
of its portfolio transactions after they have ceased to be Underwriters and,
subject to certain restrictions, may act as such brokers while they are
Underwriters.
In connection with the offering, certain of the Underwriters or selected dealers
may distribute prospectuses electronically.
Eaton Vance (and not the Trust) has agreed pursuant to an additional
compensation agreement (the "Additional Compensation Agreement") to pay to
certain qualifying Underwriters who meet specified sales targets ("Qualifying
Underwriters"), quarterly in arrears, an annual fee of up to 0.15% of the
Trust's average daily gross assets attributable to Common Shares sold by such
Qualifying Underwriters (including a proportionate share of assets acquired
using leverage). Such sales targets may be waived or lowered with respect to any
Underwriter in the sole discretion of Eaton Vance. These fee payments will
remain in effect only so long as the Advisory Agreement remains in effect
between the Trust and Eaton Vance or any successor in interest or affiliate of
Eaton Vance, as and to the extent that such Advisory Agreement is renewed
periodically in accordance with the 1940 Act. The sum of the additional
compensation payable to the Qualifying Underwriters will not exceed % of the
aggregate initial offering price of the Common Shares offered hereby.
will receive additional compensation which will not exceed % of the aggregate
initial offering price of the Common Shares offered hereby.
--------------------------------------------------------------------------------
40
UNDERWRITING
--------------------------------------------------------------------------------
As described below under "Shareholder Servicing Agent, Custodian and Transfer
Agent," UBS Securities LLC will provide shareholder services to the Trust
pursuant to a shareholder servicing agreement with Eaton Vance.
Compensation received by pursuant to the Additional Compensation
Agreement and compensation received by UBS Securities LLC pursuant to the
Shareholder Servicing Agreement (as defined below) together will not exceed 4.5%
of the aggregate initial offering price of the Common Shares offered hereby, and
the total compensation received by the Underwriters will not exceed 9.0% of the
aggregate initial offering price of the Common Shares offered hereby.
Shareholder Servicing Agent, custodian and transfer agent
Pursuant to a shareholder servicing agreement (the "Shareholder Servicing
Agreement") between UBS Securities LLC (the "Shareholder Servicing Agent") and
Eaton Vance, the Shareholder Servicing Agent will (i) at the request of and as
specified by Eaton Vance, undertake to make available public information
pertaining to the Trust on an ongoing basis and to communicate to investors and
prospective investors the Trust's features and benefits (including arranging
periodic seminars or conference calls for Eaton Vance to communicate to
investors, responding to questions from current or prospective shareholders and
contacting specific shareholders, where appropriate), provided that services
shall not include customary market research information provided by the
Shareholder Servicing Agent or its registered broker-dealer affiliates in the
ordinary course of their business; (ii) at the request of and as specified by
Eaton Vance, make available to investors and prospective investors market price,
net asset value, yield and other information regarding the Trust (provided that
services shall not include customary market research information provided by the
Shareholder Servicing Agent or its registered broker-dealer affiliates in the
ordinary course of their business), if reasonably obtainable, for the purpose of
maintaining the visibility of the Trust in the investor community; (iii) at the
request of Eaton Vance or the Trust, provide certain economic research and
statistical information and reports, if reasonably obtainable, to Eaton Vance or
the Trust and consult with representatives of Eaton Vance and/or Trustees of the
Trust in connection therewith, which information and reports shall include: (a)
statistical and financial market information with respect to the Trust's market
performance; and (b) comparative information regarding the Trust and other
closed-end management investment companies with respect to (1) the net asset
value of their respective shares, (2) the respective market performance of the
Trust and such other companies, and (3) other relevant performance indicators.
Except as legally required, such information and reports may not be quoted or
referred to, orally or in writing, reproduced or disseminated by the Trust or
any of its affiliates or any of their agents, without the prior written consent
of the Shareholder Servicing Agent, which consent will not be unreasonably
withheld; and (iv) at the request of Eaton Vance or the Trust, provide
information to and consult with Eaton Vance and/or the Board of Trustees of the
Trust with respect to applicable strategies designed to address market value
discounts, which may include share repurchases, tender offers, modifications to
dividend policies or capital structure, repositioning or restructuring of the
Trust, conversion of the Trust to an open-end investment company, liquidation or
merger; including providing information concerning the use and impact of the
above strategic alternatives by other market participants; provided, however,
that under the terms of the Shareholder Servicing Agreement, the Shareholder
Servicing Agent is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. For these
services, Eaton Vance will pay the Shareholder Servicing Agent a fee computed
daily and payable quarterly equal, on an annual basis, to 0.10% of the Trust's
average daily gross assets. The sum of the payments payable to the Shareholder
Servicing Agent under the Shareholder Servicing Agreement will not exceed % of
the aggregate initial offering price of the Common Shares offered hereby. Under
the terms of the Shareholder Servicing Agreement, the Shareholder Servicing
Agent is relieved from liability to Eaton Vance or the Trust for any act or
--------------------------------------------------------------------------------
41
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
--------------------------------------------------------------------------------
omission to act in the course of its performance under the Shareholder Servicing
Agreement in the absence of bad faith, gross negligence or willful misconduct on
the part of the Shareholder Servicing Agent. The Shareholder Servicing Agreement
will continue so long as the Advisory Agreement remains in effect between the
Trust and the Adviser or any successor in interest or affiliate of the Adviser,
as and to the extent that such Advisory Agreement is renewed periodically in
accordance with the 1940 Act.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 is the custodian of the Trust and will maintain custody of
the securities and cash of the Trust. IBT maintains the Trust's general ledger
and computes net asset value per share at least weekly. IBT also attends to
details in connection with the sale, exchange, substitution, transfer and other
dealings with the Trust's investments and receives and disburses all funds. IBT
also assists in preparation of shareholder reports and the electronic filing of
such reports with the SEC.
PFPC Inc., P.O. Box 43027, Providence, Rhode Island 02940-3027 is the transfer
agent and dividend disbursing agent of the Trust.
Legal opinions
Certain legal matters in connection with the Common Shares will be passed upon
for the Trust by Kirkpatrick & Lockhart LLP, Boston, Massachusetts, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois.
Reports to shareholders
The Trust will send to Common Shareholders unaudited semi-annual and audited
annual reports, including a list of investments held.
Independent Registered Public Accounting Firm
Deloitte & Touche LLP, Boston, Massachusetts, are the Independent Registered
Public Accounting Firm for the Trust and will audit the Trust's financial
statements.
Additional information
The Prospectus and the Statement of Additional Information do not contain all of
the information set forth in the Registration Statement that the Trust has filed
with the SEC. The complete Registration Statement may be obtained from the SEC
upon payment of the fee prescribed by its rules and regulations. The Statement
of Additional Information can be obtained without charge by calling
1-800-225-6265.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
--------------------------------------------------------------------------------
42
--------------------------------------------------------------------------------
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 14
Investment advisory and other services...................... 20
Determination of net asset value............................ 23
Portfolio trading........................................... 24
Taxes....................................................... 26
Other information........................................... 29
Independent Registered Public Accounting Firm............... 30
Financial statements........................................ 31
Notes to financial statements............................... 32
Appendix A: Ratings......................................... A-1
The Trust's privacy policy
The Trust is committed to ensuring your financial privacy. This notice is being
sent to comply with privacy regulations of the Securities and Exchange
Commission. The Trust has in effect the following policy with respect to
nonpublic personal information about its customers:
- Only such information received from you, through application forms or
otherwise, and information about your Trust transactions will be collected.
- None of such information about you (or former customers) will be disclosed to
anyone, except as permitted by law (which includes disclosure to employees
necessary to service your account).
- Policies and procedures (including physical, electronic and procedural
safeguards) are in place that are designed to protect the confidentiality of
such information.
For more information about the Trust's privacy policies call 1-800-262-1122.
--------------------------------------------------------------------------------
43
(EATON VANCE LOGO)
CE-FLRITRH
STATEMENT OF ADDITIONAL INFORMATION SUBJECT TO COMPLETION June 23, 2004
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
, 2004
EATON VANCE FLOATING-RATE INCOME TRUST
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
----
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 14
Investment advisory and other services...................... 21
Determination of net asset value............................ 23
Portfolio trading........................................... 24
Taxes....................................................... 26
Other information........................................... 29
Independent Registered Public Accounting Firm............... 30
Statement Of Assets And Liabilities......................... 32
Notes to financial statements............................... 33
Appendix A: Ratings......................................... A-1
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE FLOATING-RATE INCOME TRUST (THE
"TRUST") DATED , 2004, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS
INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN CONJUNCTION WITH
SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING
YOUR FINANCIAL INTERMEDIARY OR CALLING THE TRUST AT 1-800-225-6265.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Capitalized terms used in this SAI and not otherwise defined have the meanings
given them in the Trust's Prospectus.
Additional investment information and restrictions
Primary investment strategies are described in the Prospectus. The following is
a description of the various investment policies that may be engaged in, whether
as a primary or secondary strategy, and a summary of certain attendant risks.
Eaton Vance may not buy any of the following instruments or use any of the
following techniques unless it believes that doing so will help to achieve the
Trust's investment objectives.
SENIOR LOANS
STRUCTURE OF SENIOR LOANS
A Senior Loan is typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other financial
institution (the "Agent") for a group of loan investors ("Loan Investors"). The
Agent typically administers and enforces the Senior Loan on behalf of the other
Loan Investors in the syndicate. In addition, an institution, typically but not
always the Agent, holds any collateral on behalf of the Loan Investors.
Senior Loans primarily include senior floating rate loans to corporations and
secondarily institutionally traded senior floating rate debt obligations issued
by an asset-backed pool, and interests therein. Loan interests primarily take
the form of assignments purchased in the primary or secondary market. Loan
interests may also take the form of participation interests in a Senior Loan.
Such loan interests may be acquired from U.S. or foreign commercial banks,
insurance companies, finance companies or other financial institutions who have
made loans or are Loan Investors or from other investors in loan interests.
The Trust typically purchases "Assignments" from the Agent or other Loan
Investors. The purchaser of an Assignment typically succeeds to all the rights
and obligations under the Loan Agreement of the assigning Loan Investor and
becomes a Loan Investor under the Loan Agreement with the same rights and
obligations as the assigning Loan Investor. Assignments may, however, be
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Loan Investor.
The Trust also may invest in "Participations." Participations by the Trust in a
Loan Investor's portion of a Senior Loan typically will result in the Trust
having a contractual relationship only with such Loan Investor, not with the
Borrower. As a result, the Trust may have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Loan
Investor selling the Participation and only upon receipt by such Loan Investor
of such payments from the Borrower. In connection with purchasing
Participations, the Trust generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement, nor any rights with respect
to any funds acquired by other Loan Investors through set-off against the
Borrower and the Trust may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Trust may assume the credit risk of both the Borrower and the Loan Investor
selling the Participation. In the event of the insolvency of the Loan Investor
selling a Participation, the Trust may be treated as a general creditor of such
Loan Investor. The selling Loan Investors and other persons interpositioned
between such Loan Investors and the Trust with respect to such Participations
will likely conduct their principal business activities in the banking, finance
and financial services industries. Persons engaged in such industries may be
more susceptible to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
--------------------------------------------------------------------------------
2
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
The Trust will only acquire Participations if the Loan Investor selling the
Participation, and any other persons interpositioned between the Trust and the
Loan Investor, at the time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or P-3 or higher by Moody's Investors Service, Inc.
("Moody's") or comparably rated by another nationally recognized rating agency)
or determined by the Adviser to be of comparable quality. Securities rated Baa
by Moody's have speculative characteristics. Long-term debt rated BBB by S&P is
regarded by S&P as having adequate capacity to pay interest and repay principal
and debt rated Baa by Moody's is regarded by Moody's as a medium grade
obligation, i.e., it is neither highly protected nor poorly secured. Commercial
paper rated A-3 by S&P indicates that S&P believes such obligations exhibit
adequate protection parameters but that adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation and issues of commercial paper
rated P-3 by Moody's are considered by Moody's to have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, the Trust bears a
substantial risk of losing the entire amount invested.
The following table is intended to provide investors with a comparison of
short-term money market rates, a representative base commercial lending rate,
and a representative indicator of the premium over such base lending rate for
Senior Loans. This comparison should not be considered a representation of
future money market rates, spreads of Senior Loans over base reference rates nor
what an investment in the Trust may earn or what an investor's yield or total
return may be in the future.
SEPT. SEPT. SEPT. SEPT. SEPT. SEPT.
1993 1995 1997 1999 2001 2003
--------------------------------------------------------------------------------------------------
3 Month Treasury Bill(1)........................... 2.98% 5.42% 5.11% 4.86% 2.38% 0.95%
3 Month LIBOR(2)................................... 3.21 5.87 5.80 5.57 3.03 1.14
CSFB Leveraged Loan Index(3)....................... 5.71 8.18 8.13 8.04 6.18 4.34
------------
(1) Source: Bloomberg
(2) The London InterBank Offer Rate; Source: Bloomberg
(3) The CSFB Leveraged Loan Index is a representative index of tradable, senior
secured, U.S. dollar-denominated leveraged loans. Investors cannot invest
directly in an index. Source for the CSFB leveraged loan index returns:
Thomson Financial.
LOAN COLLATERAL
In order to borrow money pursuant to a Senior Loan, a Borrower will frequently,
for the term of the Senior Loan, pledge collateral, including but not limited
to, (i) working capital assets, such as accounts receivable and inventory; (ii)
tangible fixed assets, such as real property, buildings and equipment; (iii)
intangible assets, such as trademarks and patent rights (but excluding
goodwill); and (iv) security interests in shares of stock of subsidiaries or
affiliates. In the case of Senior Loans made to non-public companies, the
company's shareholders or owners may provide collateral in the form of secured
guarantees and/or security interests in assets that they own. In many instances,
a Senior Loan may be secured only by stock in the Borrower or its subsidiaries.
Collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan.
--------------------------------------------------------------------------------
3
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
CERTAIN FEES PAID TO THE TRUST
In the process of buying, selling and holding Senior Loans, the Trust may
receive and/or pay certain fees. These fees are in addition to interest payments
received and may include facility fees, commitment fees, amendment fees,
commissions and prepayment penalty fees. When the Trust buys a Senior Loan it
may receive a facility fee and when it sells a Senior Loan it may pay a facility
fee. On an ongoing basis, the Trust may receive a commitment fee based on the
undrawn portion of the underlying line of credit portion of a Senior Loan. In
certain circumstances, the Trust may receive a prepayment penalty fee upon the
prepayment of a Senior Loan by a Borrower. Other fees received by the Trust may
include covenant waiver fees and covenant modification fees.
BORROWER COVENANTS
A Borrower must comply with various restrictive covenants contained in a loan
agreement or note purchase agreement between the Borrower and the holders of the
Senior Loan (the "Loan Agreement"). Such covenants, in addition to requiring the
scheduled payment of interest and principal, may include restrictions on
dividend payments and other distributions to stockholders, provisions requiring
the Borrower to maintain specific minimum financial ratios, and limits on total
debt. In addition, the Loan Agreement may contain a covenant requiring the
Borrower to prepay the Senior Loan with any free cash flow. Free cash flow is
generally defined as net cash flow after scheduled debt service payments and
permitted capital expenditures, and includes the proceeds from asset
dispositions or sales of securities. A breach of a covenant that is not waived
by the Agent, or by the Loan Investors directly, as the case may be, is normally
an event of acceleration; i.e., the Agent, or the Loan Investors directly, as
the case may be, has the right to call the outstanding Senior Loan. The typical
practice of an Agent or a Loan Investor in relying exclusively or primarily on
reports from the Borrower to monitor the Borrower's compliance with covenants
may involve a risk of fraud by the Borrower. In the case of a Senior Loan in the
form of Participation, the agreement between the buyer and seller may limit the
rights of the holder to vote on certain changes that may be made to the Loan
Agreement, such as waiving a breach of a covenant. However, the holder of the
Participation will, in almost all cases, have the right to vote on certain
fundamental issues such as changes in principal amount, payment dates and
interest rate.
ADMINISTRATION OF LOANS
In a typical Senior Loan, the Agent administers the terms of the Loan Agreement.
In such cases, the Agent is normally responsible for the collection of principal
and interest payments from the Borrower and the apportionment of these payments
to the credit of all institutions that are parties to the Loan Agreement. The
Trust will generally rely upon the Agent or an intermediate participant to
receive and forward to the Trust its portion of the principal and interest
payments on the Senior Loan. Furthermore, unless under the terms of a
Participation Agreement the Trust has direct recourse against the Borrower, the
Trust will rely on the Agent and the other Loan Investors to use appropriate
credit remedies against the Borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the Loan Agreement based upon
reports prepared by the Borrower. The seller of the Senior Loan usually does,
but is often not obligated to, notify holders of Senior Loans of any failures of
compliance. The Agent may monitor the value of the collateral and, if the value
of the collateral declines, may accelerate the Senior Loan, may give the
Borrower an opportunity to provide additional collateral or may seek other
protection for the benefit of the participants in the Senior Loan. The Agent is
compensated by the Borrower for providing these services under a Loan Agreement,
and such compensation may include special fees paid upon structuring and funding
the Senior Loan and other fees paid on a continuing basis. With respect to
Senior Loans for which the Agent does not perform such administrative and
enforcement functions, the Trust will perform such tasks on its own behalf,
although a collateral bank will typically hold any collateral on behalf of the
Trust and the other Loan Investors pursuant to the applicable Loan Agreement.
--------------------------------------------------------------------------------
4
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
A financial institution's appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan Agreement should remain available to holders of Senior
Loans. However, if assets held by the Agent for the benefit of the Trust were
determined to be subject to the claims of the Agent's general creditors, the
Trust might incur certain costs and delays in realizing payment on a Senior
Loan, or suffer a loss of principal and/or interest. In situations involving
intermediate participants, similar risks may arise.
PREPAYMENTS
Senior Loans will usually require, in addition to scheduled payments of interest
and principal, the prepayment of the Senior Loan from a portion of free cash
flow, as defined above. The degree to which Borrowers prepay Senior Loans,
whether as a contractual requirement or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among Loan Investors, among other factors. As such,
prepayments cannot be predicted with accuracy. Upon a prepayment, either in part
or in full, the actual outstanding debt on which the Trust derives interest
income will be reduced. However, the Trust may receive both a prepayment penalty
fee from the prepaying Borrower and a facility fee upon the purchase of a new
Senior Loan with the proceeds from the prepayment of the former. Prepayments
generally will not materially affect the Trust's performance because the Trust
typically is able to reinvest prepayments in other Senior Loans that have
similar yields and because receipt of such fees may mitigate any adverse impact
on the Trust's yield.
OTHER INFORMATION REGARDING SENIOR LOANS
From time to time the Adviser and its affiliates may borrow money from various
banks in connection with their business activities. Such banks may also sell
interests in Senior Loans to or acquire them from the Trust or may be
intermediate participants with respect to Senior Loans in which the Trust owns
interests. Such banks may also act as Agents for Senior Loans held by the Trust.
The Trust may acquire interests in Senior Loans that are designed to provide
temporary or "bridge" financing to a Borrower pending the sale of identified
assets or the arrangement of longer-term loans or the issuance and sale of debt
obligations. The Trust may also invest in Senior Loans of Borrowers that have
obtained bridge loans from other parties. A Borrower's use of bridge loans
involves a risk that the Borrower may be unable to locate permanent financing to
replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.
The Trust will be subject to the risk that collateral securing a loan will
decline in value or have no value. Such a decline, whether as a result of
bankruptcy proceedings or otherwise, could cause the Senior Loan to be
undercollateralized or unsecured. In most credit agreements, there is no formal
requirement to pledge additional collateral. In addition, the Trust may invest
in Senior Loans guaranteed by, or secured by assets of, shareholders or owners,
even if the Senior Loans are not otherwise collateralized by assets of the
Borrower; provided, however, that such guarantees are fully secured. There may
be temporary periods when the principal asset held by a Borrower is the stock of
a related company, which may not legally be pledged to secure a Senior Loan. On
occasions when such stock cannot be pledged, the Senior Loan will be temporarily
unsecured until the stock can be pledged or is exchanged for or replaced by
other assets, which will be pledged as security for the Senior Loan. However,
the Borrower's ability to dispose of such securities, other than in connection
with such pledge or replacement, will be strictly limited for the protection of
the holders of Senior Loans and, indirectly, Senior Loans themselves.
--------------------------------------------------------------------------------
5
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
If a Borrower becomes involved in bankruptcy proceedings, a court may invalidate
the Trust's security interest in the loan collateral or subordinate the Trust's
rights under the Senior Loan to the interests of the Borrower's unsecured
creditors or cause interest previously paid to be refunded to the Borrower. If a
court required interest to be refunded, it could negatively affect the Trust's
performance. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Trust. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Senior Loan were not received or retained by
the Borrower, but were instead paid to other persons (such as shareholders of
the Borrower) in an amount that left the Borrower insolvent or without
sufficient working capital. There are also other events, such as the failure to
perfect a security interest due to faulty documentation or faulty official
filings, which could lead to the invalidation of the Trust's security interest
in loan collateral. If the Trust's security interest in loan collateral is
invalidated or the Senior Loan is subordinated to other debt of a Borrower in
bankruptcy or other proceedings, the Trust would have substantially lower
recovery, and perhaps no recovery on the full amount of the principal and
interest due on the Senior Loan.
The Trust may acquire warrants and other equity securities as part of a unit
combining a Senior Loan and equity securities of a Borrower or its affiliates.
The acquisition of such equity securities will only be incidental to the Trust's
purchase of a Senior Loan. The Trust may also acquire equity securities or debt
securities (including non-dollar denominated debt securities) issued in exchange
for a Senior Loan, issued in connection with the debt restructuring or
reorganization of a Borrower, if such acquisition, in the judgment of the
Adviser, may enhance the value of a Senior Loan or if such acquisition would
otherwise be consistent with the Trust's investment policies including its
policy of generally only investing in U.S.-dollar denominated securities.
DEBTOR-IN-POSSESSION FINANCING
The Trust may invest in debtor-in-possession financings (commonly called "DIP
financings"). DIP financings are arranged when an entity seeks the protections
of the bankruptcy court under chapter 11 of the U.S. Bankruptcy Code. These
financings allow the entity to continue its business operations while
reorganizing under chapter 11. Such financings are senior liens on unencumbered
security (i.e., security not subject to other creditors claims). There is a risk
that the entity will not emerge from chapter 11 and be forced to liquidate its
assets under chapter 7 of the Bankruptcy Code. In such event, the Trust's only
recourse will be against the property securing the DIP financing.
LITIGATION INVOLVING EATON VANCE
On October 15, 2001, an amended consolidated complaint was filed in the United
States District Court for the District of Massachusetts against four Eaton Vance
closed-end interval funds (the "Interval Funds"); their Trustees and certain
officers of the Interval Funds; Eaton Vance, the Interval Funds' administrator;
Boston Management and Research, the Interval Funds' investment adviser; and
Eaton Vance Corp., the parent of Eaton Vance and Boston Management and Research.
The Complaint, framed as a class action, alleges that for the period between May
25, 1998 and March 5, 2001, the Interval Funds' assets were incorrectly valued
and certain matters were not properly disclosed, in violation of the federal
securities laws. The Complaint seeks unspecified damages. The named defendants
believe that the Complaint is without merit and are vigorously contesting the
lawsuit. Eaton Vance believes that the lawsuit is not likely to have a material
adverse affect on its ability to render services to the Trust.
REGULATORY CHANGES
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make
--------------------------------------------------------------------------------
6
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
loans, particularly in connection with highly leveraged transactions, the
availability of Senior Loans for investment may be adversely affected. Further,
such legislation or regulation could depress the market value of Senior Loans.
CREDIT QUALITY
Many Senior Loans in which the Trust may invest are of below investment grade
credit quality. Accordingly, these Senior Loans are subject to similar or
identical risks and other characteristics described below in relation to
Non-Investment Grade Bonds.
NON-INVESTMENT GRADE BONDS
Investments in Non-Investment Grade Bonds generally provide greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy. Non-Investment Grade Bonds are regarded as predominantly speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. Debt securities in the lowest investment grade category also may be
considered to possess some speculative characteristics by certain rating
agencies. In addition, analysis of the creditworthiness of issuers of
Non-Investment Grade Bonds may be more complex than for issuers of higher
quality securities.
Non-Investment Grade Bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in Non-Investment Grade Bond prices because the
advent of recession could lessen the ability of an issuer to make principal and
interest payments on its debt obligations. If an issuer of Non-Investment Grade
Bonds defaults, in addition to risking payment of all or a portion of interest
and principal, the Trust may incur additional expenses to seek recovery. In the
case of Non-Investment Grade Bonds structured as zero-coupon, step-up or
payment-in-kind securities, their market prices will normally be affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities that pay interest currently and in cash. Eaton Vance seeks to
reduce these risks through diversification, credit analysis and attention to
current developments in both the economy and financial markets.
The secondary market on which Non-Investment Grade Bonds are traded may be less
liquid than the market for investment grade securities. Less liquidity in the
secondary trading market could adversely affect the net asset value of the
Common Shares. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of Non-Investment
Grade Bonds, especially in a thinly traded market. When secondary markets for
Non-Investment Grade Bonds are less liquid than the market for investment grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is no reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Trust may have greater
difficulty selling these securities. The Trust will be more dependent on Eaton
Vance's research and analysis when investing in Non-Investment Grade Bonds.
Eaton Vance seeks to minimize the risks of investing in all securities through
in-depth credit analysis and attention to current developments in interest rate
and market conditions.
A general description of the ratings of securities by S&P, Fitch and Moody's is
set forth in Appendix A to this SAI. Such ratings represent these rating
organizations' opinions as to the quality of the securities they rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, debt obligations with the same maturity, coupon and
rating may have different yields while obligations with the same maturity and
coupon may have the same yield. For these reasons, the use of credit ratings as
the sole method of evaluating Non-Investment Grade Bonds can involve certain
risks. For example, credit ratings evaluate the safety or principal and interest
--------------------------------------------------------------------------------
7
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
payments, not the market value risk of Non-Investment Grade Bonds. Also, credit
rating agencies may fail to change credit ratings in a timely fashion to reflect
events since the security was last rated. Eaton Vance does not rely solely on
credit ratings when selecting securities for the Trust, and develops its own
independent analysis of issuer credit quality.
In the event that a rating agency or Eaton Vance downgrades its assessment of
the credit characteristics of a particular issue, the Trust is not required to
dispose of such security. In determining whether to retain or sell a downgraded
security, Eaton Vance may consider such factors as Eaton Vance's assessment of
the credit quality of the issuer of such security, the price at which such
security could be sold and the rating, if any, assigned to such security by
other rating agencies. However, analysis of the creditworthiness of issuers of
Non-Investment Grade Bonds may be more complex than for issuers of high quality
debt securities.
CONVERTIBLE SECURITIES
The Trust may invest in convertible securities. Convertible securities include
any corporate debt security or preferred stock that may be converted into
underlying shares of common stock. The common stock underlying convertible
securities may be issued by a different entity than the issuer of the
convertible securities. Convertible securities entitle the holder to receive
interest payments paid on corporate debt securities or the dividend preference
on a preferred stock until such time as the convertible security matures or is
redeemed or until the holder elects to exercise the conversion privilege. As a
result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case if
the securities were issued in non-convertible form.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income
security. Holders of convertible securities have a claim on the assets of the
issuer prior to the common stockholders, but may be subordinated to holders of
similar non-convertible securities of the same issuer.
OTHER INVESTMENTS
FIXED INCOME SECURITIES
Fixed income securities include preferred, preference and convertible
securities, equipment lease certificates, equipment trust certificates and
conditional sales contracts. Preference stocks are stocks that have many
characteristics of preferred stocks, but are typically junior to an existing
class of preferred stocks. Equipment lease certificates are debt obligations
secured by leases on equipment (such as railroad cars, airplanes or office
equipment), with the issuer of the certificate being the owner and lessor of the
equipment. Equipment trust certificates are debt obligations secured by an
interest in property (such as railroad cars or airplanes), the title of which is
held by a trustee while the property
--------------------------------------------------------------------------------
8
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
is being used by the borrower. Conditional sales contracts are agreements under
which the seller of property continues to hold title to the property until the
purchase price is fully paid or other conditions are met by the buyer.
Fixed-rate bonds may have a demand feature allowing the holder to redeem the
bonds at specified times. 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,
since they may be retained if interest rates decline. Acquiring these kinds of
bonds provides the contractual right to require the issuer of the bonds to
purchase the security at an agreed upon price, which right is contained in the
obligation itself rather than in a separate agreement or instrument. Since this
right is assignable only with the bond, it will not be assigned any separate
value.
Certain securities may permit the issuer at its option to "call," or redeem, the
securities. If an issuer were to redeem securities during a time of declining
interest rates, the Trust may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The rating assigned to a security by a rating agency does not reflect assessment
of the volatility of the security's market value or of the liquidity of an
investment in the securities. Credit ratings are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of rating, and the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition. Credit
quality in the high yield, high risk bond market can change from time to time,
and recently issued credit ratings may not fully reflect the actual risks posed
by a particular high yield security. In addition to lower rated securities, the
Trust also may invest in higher rated securities. For a description of corporate
bond ratings, see Appendix A.
REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements (the purchase of a security
coupled with an agreement to resell at a higher price) with respect to its
permitted investments. In the event of the bankruptcy of the other party to a
repurchase agreement, the Trust might experience delays in recovering its cash.
To the extent that, in the meantime, the value of the securities the Trust
purchased may have decreased, the Trust could experience a loss. Repurchase
agreements that mature in more than seven days will be treated as illiquid. The
Trust's repurchase agreements will provide that the value of the collateral
underlying the repurchase agreement will always be at least equal to the
repurchase price, including any accrued interest earned on the agreement, and
will be marked to market daily.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations that 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 Trust 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 Trust is required to distribute
its income for each taxable year. Thus, the Trust may have to sell other
investments to obtain cash needed to make income distributions.
INDEXED SECURITIES
The Trust may invest in securities that fluctuate in value with an index. Such
securities generally will either be issued by the U.S. Government or one of its
agencies or instrumentalities or, if privately issued, collateralized by
mortgages that are insured, guaranteed or otherwise backed by the U.S.
Government, its agencies or instrumentalities. The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices, securities prices or other financial indicators ("reference prices").
An indexed security may be leveraged to the extent that the magnitude of any
change in the interest rate or principal payable on an indexed security is a
multiple of the change in the reference price.
--------------------------------------------------------------------------------
9
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
Thus, indexed securities may decline in value due to adverse market changes in
reference prices. Because indexed securities derive their value from another
instrument, security or index, they are considered derivative debt securities,
and are subject to different combinations of prepayment, extension, interest
rate and/or other market risks.
SHORT SALES
The Trust may utilize short sales for hedging purposes. A short sale is effected
by selling a security which the Trust does not own, or, if the Trust does own
the security, is not to be delivered upon consummation of the sale. The Trust
may engage in short sales "against the box" (i.e., short sales of securities the
Trust already owns) for hedging purposes. If the price of the security in the
short sale decreases, the Trust will realize a profit to the extent that the
short sale price for the security exceeds the market price. If the price of the
security increases, the Trust will realize a loss to the extent that the market
price exceeds the short sale price. Selling securities short runs the risk of
losing an amount greater than the initial investment therein.
Purchasing securities to close out the short position can itself cause the price
of the securities to rise further, thereby exacerbating the loss. Short-selling
exposes the Trust to unlimited risk with respect to that security due to the
lack of an upper limit on the price to which an instrument can rise. Although
the Trust reserves the right to utilize short sales, the Adviser is under no
obligation to utilize short sales at all.
FOREIGN INVESTMENTS
The Trust may invest in U.S. dollar denominated securities of non-U.S. issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a domestic company. Volume and liquidity in
most foreign debt markets is less than in the United States and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of securities exchanges, broker-dealers and listed companies than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities before delivery
may be required. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments that could affect investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Foreign securities markets, while growing in
volume and sophistication, are generally not as developed as those in the United
States, and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") may be purchased. ADRs, EDRs and GDRs are
certificates evidencing ownership of shares of a foreign issuer and are
alternatives to purchasing directly the underlying foreign securities in their
national markets and currencies. However, they continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of the
underlying issuer's country. ADRs, EDRs and GDRs may be sponsored or
unsponsored. Unsponsored receipts are established without the participation of
the issuer. Unsponsored receipts may involve higher expenses, they may not pass-
through voting or other shareholder rights, and they may be less liquid.
--------------------------------------------------------------------------------
10
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
OPTIONS
Call options may be purchased to provide exposure to increases in the market
(e.g., with respect to temporary cash positions) or to hedge against an increase
in the price of securities or other investments that the Trust intends to
purchase or has sold short. Similarly, put options may be purchased for
speculative purposes or to hedge against a decrease in the market generally or
in the price of securities or other investments held by the Trust. Buying
options may reduce the Trust's returns, but by no more than the amount of the
premiums paid for the options.
The Trust may write covered call options (i.e., where the Trust owns the
security or other investment that is subject to the call) to enhance returns
when the Adviser perceives that the option premium offered is in excess of the
premium that the Adviser would expect to be offered under existing market
conditions, or if the exercise price of the option is in excess of the price
that the Adviser expects the security or other underlying investment to reach
during the life of the option. Writing covered call options may limit the
Trust's gain on portfolio investments if the option is exercised because the
Trust will have to sell the underlying investments below the current market
price. Purchasing and writing put and call options are highly specialized
activities and entail greater than ordinary market risks.
SECURITIES LENDING
As described in the Prospectus, the Trust may lend a portion of its portfolio
Senior Loans or other securities to broker-dealers or other institutional
borrowers. Loans will be made only to organizations whose credit quality or
claims paying ability is considered by the Adviser to be at least investment
grade. All securities loans will be collateralized on a continuous basis by cash
or U.S. government securities having a value, marked to market daily, of at
least 100% of the market value of the loaned securities. The Trust may receive
loan fees in connection with loans that are collateralized by securities or on
loans of securities for which there is special demand. The Trust may also seek
to earn income on securities loans by reinvesting cash collateral in
mortgage-backed securities ("MBS") or other securities consistent with its
investment objectives and policies, seeking to invest at rates that are higher
than the "rebate" rate that it normally will pay to the borrower with respect to
such cash collateral. Any such reinvestment will be subject to the investment
policies, restrictions and risk considerations described in the Prospectus and
in this SAI.
Senior Loans and other securities may result in delays in recovering, or a
failure of the borrower to return, the loaned securities. The defaulting
borrower ordinarily would be liable to the Trust for any losses resulting from
such delays or failures, and the collateral provided in connection with the loan
normally would also be available for that purpose. Securities loans normally may
be terminated by either the Trust or the borrower at any time. Upon termination
and the return of the loaned securities, the Trust would be required to return
the related cash or securities collateral to the borrower and it may be required
to liquidate longer term portfolio securities in order to do so. To the extent
that such securities have decreased in value, this may result in the Trust
realizing a loss at a time when it would not otherwise do so. The Trust also may
incur losses if it is unable to reinvest cash collateral at rates higher than
applicable rebate rates paid to borrowers and related administrative costs.
These risks are substantially the same as those incurred through investment
leverage, and will be subject to the investment policies, restrictions and risk
considerations described in the Prospectus and in this SAI.
The Trust will receive amounts equivalent to any interest or other distributions
paid on securities while they are on loan, and the Trust will not be entitled to
exercise voting or other beneficial rights on loaned securities. The Trust will
exercise its right to terminate loans and thereby regain these rights whenever
the Adviser considers it to be in the Trust's interest to do so, taking into
account the related loss of reinvestment income and other factors.
SHORT-TERM TRADING
Securities may be sold in anticipation of market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold. In addition, a security may be
--------------------------------------------------------------------------------
11
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
sold and another purchased at approximately the same time to take advantage of
what the Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of fixed income securities or changes in the investment
objectives of investors.
TEMPORARY INVESTMENTS
The Trust 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.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Trust are designated as fundamental
policies and as such cannot be changed without the approval of the holders of a
majority of the Trust's outstanding voting securities, which as used in this SAI
means the lesser of (a) 67% of the shares of the Trust 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 outstanding shares
of the Trust. As a matter of fundamental policy the Trust may not:
(1) Borrow money, except as permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). The 1940 Act currently requires that any
indebtedness incurred by a closed-end investment company have an asset
coverage of at least 300%;
(2) Issue senior securities, as defined in the 1940 Act, other than (i)
preferred shares which immediately after issuance will have asset coverage
of at least 200%, (ii) indebtedness which immediately after issuance will
have asset coverage of at least 300%, or (iii) the borrowings permitted by
investment restriction (1) above. The 1940 Act currently defines "senior
security" as any bond, debenture, note or similar obligation or instrument
constituting a security and evidencing indebtedness, and any stock of a
class having priority over any other class as to distribution of assets or
payment of dividends. Debt and equity securities issued by a closed-end
investment company meeting the foregoing asset coverage provisions are
excluded from the general 1940 Act prohibition on the issuance of senior
securities;
(3) Purchase securities on margin (but the Trust may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The purchase of investment assets with the proceeds of a
permitted borrowing or securities offering will not be deemed to be the
purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as it may
technically be deemed to be an underwriter under the Securities Act of
1933, as amended in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Trust is
authorized to invest in accordance with its investment objectives and
policies, (b) entering into repurchase agreements, (c) lending its
portfolio securities and (d) lending cash consistent with applicable law;
(6) Purchase or sell real estate, although it may purchase and sell securities
that are secured by interests in real estate and securities of issuers that
invest or deal in real estate. The Trust reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of
securities;
--------------------------------------------------------------------------------
12
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
(7) Purchase or sell physical commodities or contracts for the purchase or sale
of physical commodities. Physical commodities do not include futures
contracts with respect to securities, securities indices or other financial
instruments; and
(8) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of a single issuer or purchase more than 10% of
the outstanding voting securities of a single issuer, except obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities and except securities of other investment companies; or
invest 25% or more of its total assets in any single industry (other than
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
The Trust may borrow money as a temporary measure for extraordinary or emergency
purposes, including the payment of dividends and the settlement of securities
transactions which otherwise might require untimely dispositions of Trust
securities. The 1940 Act currently requires that the Trust have 300% asset
coverage with respect to all borrowings other than temporary borrowings.
Pursuant to investment restriction 5(d) above, as disclosed in the Prospectus,
the Trust may make loans to participate in the origination of Senior Loans and
other secured floating-rate loans.
For purposes of construing restriction (8), 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.
The Trust has adopted the following nonfundamental investment policy, which may
be changed by the Board without approval of the Trust's shareholders. As a
matter of nonfundamental policy, the Trust may not make short sales of
securities or maintain a short position, unless at all times when a short
position is open it either owns an equal amount of such securities or owns
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short.
The Trust may invest more than 10% of its total assets in one or more other
management investment companies (or may invest in affiliated investment
companies) to the extent permitted by section 12(d) of the 1940 Act and rules
thereunder.
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 Trust's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances or any subsequent rating change made by a
rating service (or as determined by the Adviser if the security is not rated by
a rating agency) will not compel the Trust to dispose of such security or other
asset. Notwithstanding the foregoing, the Trust must always be in compliance
with the borrowing policies set forth above.
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
Trustees and officers
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. 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., "BMR" refers to Boston Management and
Research, and "EVD" refers to Eaton Vance Distributors Inc. EVC and EV are the
corporate parent and trustee, respectively, of Eaton Vance and BMR.
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE TRUST OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
James B. Hawkes Trustee(2) and Since 5/21/04 Chairman, President and 197 Director of EVC
11/9/41 Vice President Three Years Chief Executive Officer
of BMR, Eaton Vance,
EVC and EV; Director of
EV; Vice President and
Director of EVD.
Trustee and/or officer
of 196 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 Fund.
NON-INTERESTED TRUSTEES
Samuel L. Hayes, III Trustee(2) Since 5/21/04 Jacob H. Schiff 197 Director of
2/23/35 Three Years Professor of Investment Tiffany & Co.
Banking Emeritus, (specialty
Harvard University retailer) and
Graduate School of Telect, Inc.
Business (telecommunication
Administration. services company)
William H. Park Trustee(3) Since 5/21/04 President and Chief 194 None
9/19/47 Three Years Executive 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).
--------------------------------------------------------------------------------
14
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE TRUST OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
Ronald A. Pearlman Trustee(3) Since 5/21/04 Professor of Law, 194 None
7/10/40 Three Years Georgetown University
Law Center (since
1999). Tax Partner,
Covington & Burling,
Washington, DC (1991-
2000).
Norton H. Reamer Trustee(4) Since 5/21/04 President and Chief 197 None
9/21/35 Three Years Executive Officer 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,
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(4) Since 5/21/04 Professor of Law, 197 None
9/14/57 Three Years University of
California at Los
Angeles School of Law
(since July 2001).
Formerly, Professor of
Law, Georgetown
University Law Center.
------------
(1) Includes both master and feeder funds in master-feeder structure.
(2) Class I Trustees whose term expires in 2005.
(3) Class II Trustees whose term expires in 2006.
(4) Class III Trustees whose term expires in 2007.
--------------------------------------------------------------------------------
15
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
TERM OF OFFICE
POSITION(S) AND LENGTH
NAME AND DATE OF BIRTH WITH THE TRUST OF SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
---------------------------------------------------------------------------------------------------------
Payson F. Swaffield President and Since 4/28/04 Vice President of Eaton Vance and BMR.
8/13/56 Chief Executive Officer of 15 registered investment
Officer companies managed by Eaton Vance or BMR.
Thomas E. Faust Jr. Vice President Since 4/28/04 Executive Vice President of Eaton Vance,
5/31/58 BMR, EVC and EV; Chief Investment Officer of
Eaton Vance and BMR and Director of EVC.
Chief Executive Officer of Belair Capital
Fund LLC, Belcrest Capital Fund LLC, Belmar
Capital Fund LLC; Belport Capital Fund LLC
and Belrose Capital Fund LLC (private
investment companies sponsored by Eaton
Vance). Officer of 55 registered investment
companies managed by Eaton Vance or BMR.
Scott H. Page Vice President Since 4/28/04 Vice President of Eaton Vance and BMR.
11/30/59 Officer of 15 registered investment
companies managed by Eaton Vance or BMR.
Michael W. Weilheimer Vice President Since 4/28/04 Vice President of Eaton Vance and BMR.
2/11/61 Officer of 12 registered investment
companies managed by Eaton Vance or BMR.
Barbara E. Campbell Treasurer and Since 4/28/04 Vice President of BMR and Eaton Vance.
6/19/57 Principal Officer of 195 registered investment
Financial and companies managed by Eaton Vance or BMR.
Accounting
Officer
Alan R. Dynner Secretary Since 4/28/04 Vice President, Secretary and Chief Legal
10/10/40 Officer of BMR, Eaton Vance, EVD, EV and
EVC. Officer of 197 registered investment
companies managed by Eaton Vance or BMR.
The Board of Trustees of the Trust has several standing Committees, including
the Governance Committee, the Audit Committee, and the Special Committee. Each
such Committee is comprised of only noninterested Trustees.
The Governance Committee of the Board of Trustees of the Trust is comprised of
the noninterested Trustees. 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
the compensation of noninterested Trustees.
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 to the Governance Committee, contains sufficient
background information concerning the candidate and is received in a
sufficiently timely manner.
--------------------------------------------------------------------------------
16
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
Messrs. Reamer (Chairman), Hayes, Park 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 functions include (i)
overseeing the Trust's accounting and financial reporting policies and
practices, its internal audit controls and procedures, the internal controls of
certain service providers, as appropriate, and the quality and integrity of the
Trust's financial statements and independent audit thereof; (ii) approving the
selection, evaluation and, when appropriate, replacement of the Trust's
Independent Registered Public Accounting Firm; and (iii) evaluating the
qualification, independence, and performance of the Trust's Independent
Registered Public Accounting Firm.
Messrs. Hayes (Chairman), Park, Pearlman, Reamer and Ms. Stout are currently
members of the Special Committee of the Board of Trustees of the Trust. 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 Trust, including
advisory, subadvisory, transfer agency, custodial and fund accounting,
distribution services and administrative services; (ii) any and all other
matters in which any of the Trust service providers (including Eaton Vance or
any affiliated entity thereof) has an actual or potential conflict of interest
with the interests of the Trust, 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 of the Trust. In addition, the Special Committee has established a
Contract Review Subcommittee whose duties and powers include evaluating proposed
new or amended or existing contracts for services provided to the Trust and
making recommendations to the Board of Trustees with respect to all matters
involving an actual or potential conflict of interest between the interests of
Eaton Vance or any of its affiliated companies, on the one hand, and the Trust
on the other hand. The members of the Contract Review Subcommittee are
.
As of the date of this SAI, each of the Committees has held meetings.
When considering approval of the Advisory Agreement between the Trust and the
Adviser, the Contract Review Sub-Committee of the Special Committee considered,
among other things, the following:
+ A report comparing the fees and expenses of the Trust and certain
profitability analyses prepared by Eaton Vance;
+ Information on the relevant peer group(s) of funds;
+ The economic outlook and the general investment outlook in the relevant
investment markets;
+ Eaton Vance's results and financial condition and the overall organization of
the Adviser;
+ Arrangements regarding the distribution of Trust shares;
+ The procedures used to determine the fair value of the Trust's assets;
+ The allocation of brokerage, including allocations to soft dollar brokerage
and allocations to firms that sell Eaton Vance fund shares;
+ Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;
+ The resources devoted to Eaton Vance's compliance efforts undertaken on
behalf of the funds it manages and the record of compliance with the
investment policies and restrictions and with policies on personal securities
transactions;
+ The quality nature, cost and character of the administrative and other
non-investment management services provided by Eaton Vance and its
affiliates;
+ Investment management staffing;
--------------------------------------------------------------------------------
17
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
+ Operating expenses (including transfer agency expenses) to be paid to third
parties; and
+ Information to be provided to investors, including the Trust's shareholders.
In evaluating the Advisory Agreement between the Trust and Eaton Vance, the
Contract Review Subcommittee of the Special Committee reviewed material
furnished by Eaton Vance at the initial Board meeting held on May 21, 2004,
including the above referenced considerations and information relating to the
education, experience and number of investment professionals and other personnel
who would provide services under the Advisory Agreement. The Contract Review
Subcommittee also took into account the time and attention to be devoted by
senior management to the Trust and the other funds in the complex. The Contract
Review Subcommittee evaluated the level of skill required to manage the Trust
and concluded that the human resources available at Eaton Vance were appropriate
to fulfill effectively the duties of the Adviser on behalf of the Trust. The
Contract Review Subcommittee also considered the business reputation of the
Adviser, its financial resources and professional liability insurance coverage
and concluded that Eaton Vance would be able to meet any reasonably foreseeable
obligations under the Advisory Agreement.
The Contract Review Subcommittee of the Special Committee received information
concerning the investment philosophy and investment process to be applied by
Eaton Vance in managing the Trust. In this regard, the Contract Review
Subcommittee considered Eaton Vance's in-house research capabilities as well as
other resources available to Eaton Vance personnel, including research services
that may be available to Eaton Vance as a result of securities transactions
effected for the Trust and other investment advisory clients. The Contract
Review Subcommittee concluded that Eaton Vance's investment process, research
capabilities and philosophy were well suited to the Trust, given the Trust's
investment objectives and policies.
In addition to the factors mentioned above, the Contract Review Subcommittee of
the Special Committee also reviewed the level of the Adviser's profits in
respect of the management of the Eaton Vance funds, including the Trust. The
Contract Review Subcommittee considered the profits realized by Eaton Vance and
its affiliates in connection with the operation of the Trust. The Contract
Review Subcommittee also considered profit margins of Eaton Vance in comparison
with available industry data.
The Contract Review Subcommittee of the Special Committee did not consider any
single factor as controlling in determining whether or not to approve the
Advisory Agreement. Nor are the items described herein all encompassing of the
matters considered by the Contract Review Subcommittee. In assessing the
information provided by Eaton Vance and its affiliates, the Contract Review
Subcommittee also took into consideration the benefits to shareholders of
investing in a fund that is part of a large family of funds which provides a
large variety of shareholder services. Based on its consideration of all factors
that it deemed material and assisted by the advice of its independent counsel,
the Contract Review Subcommittee of the Special Committee concluded that the
approval of the Advisory Agreement, including the fee structure (described
herein) is in the interests of shareholders.
--------------------------------------------------------------------------------
18
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
SHARE OWNERSHIP
The following table shows the dollar range of equity securities beneficially
owned by each Trustee in the Trust and all Eaton Vance funds overseen by the
Trustee as of December 31, 2003.
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 TRUST EATON VANCE FUND COMPLEX
------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
James B. Hawkes............................. None over $100,000
NONINTERESTED TRUSTEES
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 $50,001 - $100,000
As of December 31, 2003, 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, 2002 and December 31, 2003, 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; (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; (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, 2002 and December 31, 2003, 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 Trust who are not affiliated with the 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 Trust 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
Trust's assets, liabilities, and net income per share, and will not obligate the
Trust to retain the services of any Trustee or obligate the Trust to pay any
particular level of compensation to the Trustee. The Trust does not have a
retirement plan for its Trustees.
--------------------------------------------------------------------------------
19
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
The fees and expenses of the Trustees of the Trust are paid by the Trust. (A
Trustee of the Trust who is a member of the Eaton Vance organization receives no
compensation from the Trust.) During the Trust's fiscal year ending May 31,
2005, it is anticipated that the Trustees of the Trust will earn the following
compensation in their capacities as Trustees. For the year ended December 31,
2003, the Trustees earned the compensation set forth below in their capacities
as Trustees from the funds in the Eaton Vance fund complex(1).
SAMUEL L. WILLIAM H. RONALD A. NORTON H. LYNN A.
SOURCE OF COMPENSATION HAYES, III PARK PEARLMAN REAMER STOUT
-------------------------------------------------------------------------------------------------
Trust*............................. $ $ $ $ $
Fund Complex....................... $ $ $ $ $
------------
* Estimated
(1) As of April 30, 2004, the Eaton Vance fund complex consisted of 198
registered investment companies or series thereof.
PROXY VOTING POLICY
The Trust is subject to the Eaton Vance Funds Proxy Voting Policy and Procedures
(the "Fund Policy"), pursuant to which the Trustees have delegated proxy voting
responsibility to the Adviser and adopted the Adviser's proxy voting policies
and procedures (the "Policies"), which are described below. The Trustees will
review the Trust'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 Trust's shareholders and the Adviser or
any of its affiliates or any affiliate of the Trust, the Adviser will generally
refrain from voting the proxies related to the companies giving rise to such
conflict until it consults with the Board of the Trust except as contemplated
under the Fund Policy. The Board's Special Committee will instruct the 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 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 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 Registered Public
Accounting Firm, executive compensation, corporate structure and anti-takeover
defenses. The 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 Adviser will monitor situations that may result in a conflict
of interest between the Trust's shareholders and the Adviser or any of its
affiliates or any affiliate of the Trust by maintaining a list of significant
existing and prospective corporate clients. The Adviser's personnel responsible
for reviewing and voting proxies on behalf of the Trust will report any proxy
received or expected to be received from a company included on that list to
members of senior management of the Adviser identified in the Policies. Such
members of senior management will determine if a conflict exists. If a conflict
does exist, the proxy will either be voted strictly in accordance with the
Policies or the Adviser will seek instruction on how to vote from the Special
Committee. Effective August 31, 2004, information on how the Trust voted proxies
relating to portfolio securities during the 12 month period ended June 30, 2004
will be 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.
--------------------------------------------------------------------------------
20
Investment advisory and other services
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and of investment companies
since 1931. They maintain a large staff of experienced fixed-income, senior loan
and equity investment professionals to service the needs of their clients. The
fixed-income group focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The senior loan group focuses on senior floating
rate loans, unsecured loans and other floating rate debt securities such as
notes, bonds and asset backed securities. The equity group covers stocks ranging
from blue chip to emerging growth companies. Eaton Vance and its affiliates act
as adviser to a family of mutual funds, and individual and various institutional
accounts, including corporations, hospitals, retirement plans, universities,
foundations and trusts.
The Trust will be responsible for all of its costs and expenses not expressly
stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Trust
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; rating agency fees and preferred share remarketing
expenses; expenses of reports to shareholders, proxy statements and other
expenses of shareholders' meetings; insurance premiums; printing and mailing
expenses; interest, taxes and corporate fees; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with Eaton Vance; expenses
of conducting repurchase offers for the purpose of repurchasing Trust shares;
and investment advisory and administration fees. The Trust will also bear
expenses incurred in connection with any litigation in which the Trust is a
party and any legal obligation to indemnify its officers and Trustees with
respect thereto, to the extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect to October 20, 2005
and 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 or of
the Adviser 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 interests of the Trust. The Trust's
Administration Agreement continues in effect from year to year so long as such
continuance is approved at least annually by the vote of a majority of the
Trust's Trustees. Each agreement may be terminated at any time without penalty
on sixty (60) days' written notice by the Trustees of the Trust or Eaton Vance,
as applicable, or by vote of the majority of the outstanding shares of the
Trust. Each agreement will terminate automatically in the event of its
assignment. Each agreement provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Trust under such agreements on the part of Eaton Vance, Eaton Vance shall
not be liable to the Trust for any loss incurred, to the extent not covered by
insurance.
Eaton Vance is a business trust organized under Massachusetts law. EV serves as
trustee of Eaton Vance. Eaton Vance and EV are subsidiaries of EVC, a Maryland
corporation and publicly-held holding company. EVC through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities. The Directors of EVC are James B. Hawkes, John G. L.
Cabot, Thomas E. Faust Jr., Leo I. Higdon, Jr., John M. Nelson, Vincent M.
O'Reilly 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. James B. Hawkes, Jeffrey P. Beale, Alan R. Dynner, Thomas E. Faust, Jr.,
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 or its affiliates). 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
--------------------------------------------------------------------------------
21
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------
by certain of the officers of BMR and Eaton Vance and its affiliates who are
also officers, or officers and Directors of EVC and EV. As indicated under
"Trustees and Officers", all of the officers of the Trust (as well as Mr. Hawkes
who is also a Trustee) hold positions in the Eaton Vance organization.
EVC and its affiliates and their officers and employees from time to time have
transactions with various banks, including the custodian of the Trust, 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 Trust and such banks.
INVESTMENT ADVISORY SERVICES
Under the general supervision of the Trust's Board of Trustees, Eaton Vance will
carry out the investment and reinvestment of the assets of the Trust, will
furnish continuously an investment program with respect to the Trust, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. Eaton Vance will furnish to the Trust investment
advice and provide related office facilities and personnel for servicing the
investments of the Trust. Eaton Vance will compensate all Trustees and officers
of the Trust who are members of the Eaton Vance organization and who render
investment services to the Trust, and will also compensate all other Eaton Vance
personnel who provide research and investment services to the Trust.
ADMINISTRATIVE SERVICES
Under the Administration Agreement, Eaton Vance is responsible for managing the
business affairs of the Trust, subject to the supervision of the Trust's Board
of Trustees. Eaton Vance will furnish to the Trust all office facilities,
equipment and personnel for administering the affairs of the Trust. Eaton Vance
will compensate all Trustees and officers of the Trust who are members of the
Eaton Vance organization and who render executive and administrative services to
the Trust, and will also compensate all other Eaton Vance personnel who perform
management and administrative services for the Trust. Eaton Vance's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Trust's custodian and transfer agent, providing assistance
in connection with the Trustees and shareholders' meetings, providing services
in connection with quarterly repurchase offers, if any, and other administrative
services necessary to conduct the Trust's business.
CODE OF ETHICS
The Adviser and the Trust have adopted a Code of Ethics governing personal
securities transactions. Under the Code of Ethics, Eaton Vance employees may
purchase and sell securities (including securities held or eligible for purchase
by the Trust) subject to certain pre-clearance and reporting requirements and
other procedures.
The Code of Ethics can be reviewed and copied 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 the SEC's public reference section, Washington, DC
20549-0102, or by electronic mail at publicinfo@sec.gov.
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
Determination of net asset value
The net asset value per Common Share of the Trust is determined no less
frequently than daily, generally on each day of the week that the New York Stock
Exchange (the "Exchange") is open for trading, as of the close of regular
trading on the Exchange (normally 4:00 p.m. New York time). The Trust's net
asset value per Common Share is determined by IBT, in the manner authorized by
the Trustees of the Trust. Net asset value is computed by dividing the value of
the Trust's total assets, less its liabilities by the number of shares
outstanding.
The Adviser uses an independent pricing service to value most loans and other
debt securities at their market value. The Adviser may use the fair value method
to value loans or other securities if market quotations for them are not readily
available or are deemed unreliable, or if events occurring after the close of a
securities market and before the Trust values its assets would materially affect
net asset value. 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 Trustees have approved and monitor the procedures under which Senior Loans,
CLOs and CDOs are valued. The Adviser and the Valuation Committee may implement
new pricing methodologies or expand mark-to-market valuation of Senior Loans,
CLOs and CDOs in the future, which may result in a change in the Trust's net
asset value per share. The Trust's net asset value per share will also be
affected by fair value pricing decisions and by changes in the market for Senior
Loans, CLOs and CDOs. In determining the fair value of a Senior Loan, CLOs and
CDOs, the Adviser will consider relevant factors, data, and information,
including: (i) the characteristics of and fundamental analytical data relating
to the Senior Loan (or underlying collateral in the case of CLOs and CDOs),
including the cost, size, current interest rate, period until next interest rate
reset, maturity and base lending rate of the Senior Loan (or underlying
collateral in the case of CLOs and CDOs), the terms and conditions of the Senior
Loan (or underlying collateral in the case of CLOs and CDOs) and any related
agreements, and the position of the Senior Loan (or underlying collateral in the
case of CLOs and CDOs) in the Borrower's debt structure; (ii) the nature,
adequacy and value of the collateral, including the Trust's rights, remedies and
interests with respect to the collateral; (iii) the creditworthiness of the
Borrower, based on an evaluation of its financial condition, financial
statements and information about the Borrower's business, cash flows, capital
structure and future prospects; (iv) information relating to the market for the
Senior Loan (or underlying collateral in the case of CLOs and CDOs), including
price quotations for and trading in the Senior Loan (or underlying collateral in
the case of CLOs and CDOs) and interests in similar Senior Loans (or underlying
collateral in the case of CLOs and CDOs) and the market environment and investor
attitudes towards the Senior Loan and interests in similar Senior Loans (or
underlying collateral in the case of CLOs and CDOs); (v) the experience,
reputation, stability and financial condition of the Agent and any intermediate
participants in the Senior Loan (or underlying collateral in the case of CLOs
and CDOs); and (vi) general economic and market conditions affecting the fair
value of the Senior Loan (or underlying collateral in the case of CLOs and
CDOs). The fair value of each Senior Loan, CLO and CDO is reviewed and approved
by the Adviser's Valuation Committee and the Trust's Trustees.
Non-loan holdings (other than debt securities, including short term obligations)
may be valued on the basis of prices furnished by one or more pricing services
that determine prices for normal, institutional-size trading units of such
securities using market information, transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. In certain circumstances, portfolio securities will be
valued at the last sale price on the exchange that is the primary market for
such securities, or the average of the last quoted bid price and asked price for
those securities for which the over-the-counter market is the primary market or
for listed securities in which there were no sales during the day. Marketable
securities listed on the NASDAQ National
--------------------------------------------------------------------------------
23
DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------------------------------
Market System are valued at the NASDAQ official closing price. The value of
interest rate swaps will be based upon a dealer quotation.
Debt securities for which the over-the-counter market is the primary market are
normally valued on the basis of prices furnished by one or more pricing services
at the mean between the latest available bid and asked prices. OTC options are
valued at the mean between the bid and asked prices provided by dealers.
Financial futures contracts listed on commodity exchanges and exchange-traded
options are valued at closing settlement prices. Short-term obligations having
remaining maturities of less than 60 days are valued at amortized cost, which
approximates value, unless the Trustees determine that under particular
circumstances such method does not result in fair value. As authorized by the
Trustees, debt securities (other than short-term obligations) may be valued on
the basis of valuations furnished by a pricing service that determines
valuations based upon market transactions for normal, institutional-size trading
units of such securities. Securities for which there is no such quotation or
valuation and all other assets are valued at fair value as determined in good
faith by or at the direction of the Trust's Trustees.
Generally, trading in the foreign securities owned by the Trust is substantially
completed each day at various times prior to the close of the Exchange. The
values of these securities used in determining the net asset value of the Trust
generally are computed as of such times. Occasionally, events affecting the
value of foreign securities may occur between such times and the close of the
Exchange, which will not be reflected in the computation of the Trust's net
asset value (unless the Trust deems that such events would materially affect its
net asset value, in which case an adjustment would be made and reflected in such
computation). The Trust may rely on an independent fair valuation service in
making any such adjustment. Foreign securities and currency held by the Trust
will be valued in U.S. dollars; such values will be computed by the custodian
based on foreign currency exchange rate quotations supplied by an independent
quotation service.
Portfolio trading
Decisions concerning the execution of portfolio Senior Loan and other security
transactions, including the selection of the market and the executing firm, are
made by the Adviser. The Adviser is also responsible for the execution of
transactions for all other accounts managed by it. The Adviser places the
portfolio security transactions of the Trust and of all other accounts managed
by it for execution with many firms. The Adviser uses its best efforts to obtain
execution of portfolio security transactions at prices that are advantageous to
the Trust and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, the 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,
the value of the brokerage and research services provided, the responsiveness of
the firm to the 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 this and other transactions, and
the reasonableness of the spread or commission, if any.
The Trust will acquire Senior Loans from major international banks, selected
domestic regional banks, insurance companies, finance companies and other
financial institutions. In selecting financial institutions from which Senior
Loans may be acquired, the Adviser will consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. While these financial institutions are generally
not required to repurchase Senior Loans that they have sold, they may act as
principal or on an agency basis in connection with their sale by the Trust.
--------------------------------------------------------------------------------
24
PORTFOLIO TRADING
--------------------------------------------------------------------------------
Other fixed income obligations that may be purchased and sold by the Trust are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers or banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuers of
such obligations. The Trust may also purchase fixed income and other securities
from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters.
Transactions on stock exchanges and other agency transactions involve the
payment of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size of
the transaction and the volume of business done with such broker-dealer.
Transactions in foreign securities often involve the payment of brokerage
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the over-the-
counter markets, but the price paid or received usually includes an undisclosed
dealer markup or markdown.
Although spreads or commissions paid on portfolio security transactions will, in
the judgment of the Adviser, be reasonable in relation to the value of the
services provided, commissions exceeding those that another firm might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Adviser's clients in part for providing brokerage and research
services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, as
amended, a broker or dealer who executes a portfolio transaction on behalf of
the Trust 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 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 on the basis of that particular transaction or on the
basis of overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the advisers
of investment companies, institutions and other investors to receive research,
analytical, statistical and quotation services, data, information and other
services, products and materials that assist such advisers in the performance of
their investment responsibilities ("Research Services") from broker-dealer firms
that execute portfolio transactions for the clients of such advisers and from
third parties with which such broker-dealers have arrangements. Consistent with
this practice, the Adviser receives Research Services from many broker-dealer
firms with which the Adviser places the Trust's transactions and from third
parties with which these broker-dealers have arrangements. These Research
Services include such matters as general economic, political, business and
market information, industry and company reviews, evaluations of securities and
portfolio strategies and transactions, proxy voting data and analysis services,
technical analysis of various aspects of the securities market, recommendations
as to the purchase and sale of securities and other portfolio transactions,
financial, industry and trade publications, news and information services,
pricing and quotation equipment and services, and research oriented computer
hardware, software, databases and services. Any particular Research Service
obtained through a broker-dealer may be used by the Adviser in connection with
client
--------------------------------------------------------------------------------
25
PORTFOLIO TRADING
--------------------------------------------------------------------------------
accounts other than those accounts that pay commissions to such broker-dealer.
Any such Research Service may be broadly useful and of value to the 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 advisory fee paid by the Trust is not reduced
because the Adviser receives such Research Services. The Adviser evaluates the
nature and quality of the various Research Services obtained through
broker-dealer firms and attempts to allocate sufficient portfolio security
transactions to such firms to ensure the continued receipt of Research Services
that the Adviser believes are useful or of value to it in rendering investment
advisory services to its clients.
The Trust and the Adviser may also receive Research Services from underwriters
and dealers in fixed-price offerings, which Research Services are reviewed and
evaluated by the Adviser in connection with its investment responsibilities. The
investment companies sponsored by the Adviser or its affiliates may allocate
trades in such offerings to acquire information relating to the performance,
fees and expenses of such investment companies and other mutual funds, which
information is used by the Trustees of such investment companies to fulfill
their responsibility to oversee the quality of the services provided by various
entities, including the Adviser, to such investment companies. Such investment
companies may also pay cash for such information.
Subject to the requirement that the Adviser shall use its best efforts to seek
and execute portfolio Senior Loan and other security transactions at
advantageous prices and at reasonably competitive spreads or commission rates,
the Adviser is authorized to consider as a factor in the selection of any
broker-dealer firm with whom portfolio orders may be placed the fact that such
firm has sold or is selling shares of the Trust or of other investment companies
sponsored by the Adviser. This policy is not inconsistent with a rule of the
National Association of Securities Dealers, Inc. ("NASD"), which rule provides
that no firm which is a member of the NASD shall favor or disfavor the
distribution of shares of any particular investment company or group of
investment companies on the basis of brokerage commissions received or expected
by such firm from any source.
Securities considered as investments for the Trust may also be appropriate for
other investment accounts managed by the Adviser or its affiliates. Whenever
decisions are made to buy or sell securities by the Trust and one or more of
such other accounts simultaneously, the 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 Trust 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 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
Trust from time to time, it is the opinion of the Trustees of the Trust that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
--------------------------------------------------------------------------------
26
Taxes
The following discussion of federal income tax matters is based on the advice of
Kirkpatrick & Lockhart LLP, counsel to the Trust.
The following is a summary discussion of the material U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of the Common Shares of the Trust. This discussion addresses only U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, banks and financial institutions, insurance companies,
dealers in securities or foreign currencies, foreign shareholders, shareholders
who hold their shares as or in a hedge against currency risk, a constructive
sale, or a conversion transaction, shareholders who are subject to the
alternative minimum tax, or tax-exempt or tax-deferred plans, accounts, or
entities. In addition, the discussion does not address any state, local, or
foreign tax consequences, and it does not address any U.S. federal tax
consequences other than U.S. federal income tax consequences. The discussion is
based upon present provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change or
differing interpretations (possibly with retroactive effect). No attempt is made
to present a detailed explanation of all U.S. federal income tax concerns
affecting the Trust and its shareholders, and the discussion set forth herein
does not constitute tax advice. Investors are urged to consult their own tax
advisers to determine the specific tax consequences to them of investing in the
Trust, including the applicable federal, state, local and foreign tax
consequences to them and the effect of possible changes in tax laws.
The Trust intends to elect to be treated and to qualify each year as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). Accordingly, the Trust 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 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 Trust will not be subject to federal income tax
on income paid to its shareholders in the form of dividends or capital gain
distributions.
In order to avoid incurring a nondeductible 4% federal excise tax obligation,
the Code requires that the Trust distribute (or be deemed to have distributed)
by December 31 of each calendar year an amount at least equal to the sum of (i)
98% of its ordinary income for such year and (ii) 98% of its capital gain net
income (which is the excess of its realized net long-term capital gain over its
realized net short-term capital loss), 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, plus 100% of any ordinary income and
capital gain net income from the prior year (as previously computed) that were
not paid out during such year and on which the Trust paid no federal income tax.
Under current law, provided that the Trust qualifies as a RIC for federal income
tax purposes, the Trust should not be liable for any income, corporate excise or
franchise tax in The Commonwealth of Massachusetts.
If the Trust does not qualify as a RIC for any taxable year, the Trust'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 Trust may be required to recognize
unrealized gains, pay substantial taxes and interest, and make certain
distributions.
The Trust'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
--------------------------------------------------------------------------------
27
TAXES
--------------------------------------------------------------------------------
the Trust and, in order to avoid a tax payable by the Trust, the Trust may be
required to liquidate securities that it might otherwise have continued to hold
in order to generate cash so that the Trust may make required distributions to
its shareholders.
The Trust may invest a portion of its total assets in "high yield" securities,
commonly known as "junk bonds." Investments in these types of securities may
present special tax issues for the Trust. Federal income tax rules are not
entirely clear about issues such as when the Trust may cease to accrue interest,
original issue discount or market discount, when and to what extent deductions
may be taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income and
whether exchanges of debt obligations in a bankruptcy or workout context are
taxable. These and other issues will be addressed by the Trust, in the event it
invests in such debt securities, in order to seek to preserve its status as a
regulated investment company and to not become subject to U.S. federal income or
excise tax.
Any recognized gain or income attributable to market discount on long-term debt
obligations (i.e., on obligations with a term of more than one year except to
the extent of a portion of the discount attributable to original issue discount)
purchased by the Trust 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.
The Trust'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 Trust, defer Trust losses, cause adjustments in the
holding periods of securities held by the Trust, 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 shareholders. The Trust may be required to limit its activities
in options and futures contracts in order to enable it to maintain its RIC
status.
Any loss realized upon the sale or exchange of Trust shares with a holding
period of 6 months or less will be treated as a long-term capital loss to the
extent of any capital gain distributions received with respect to such shares.
In addition, all or a portion of a loss realized on a redemption or other
disposition of Trust shares may be disallowed under "wash sale" rules to the
extent the shareholder acquires other shares of the same Trust (whether through
the reinvestment of distributions or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of the Common
Shares. 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 cannot be taken into account for
purposes of determining gain or loss on a sale 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 Trust (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 Trust's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Trust'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 Trust'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 Trust's net asset value also reflects
--------------------------------------------------------------------------------
28
TAXES
--------------------------------------------------------------------------------
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 addition,
certain other distributions made after the close of a taxable year of the Trust
may be "spilled back" and treated as paid by the Trust (except for purposes of
the 4% excise tax) during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the
distributions were actually made. Dividends paid out of the Trust's investment
company taxable income are generally taxable to a shareholder as ordinary income
to the extent of the Trust's earnings and profits. Dividends with respect to the
Common Shares generally will not constitute "qualified dividend income" for
federal income tax purposes and thus will not be eligible for the favorable
long-term capital gains tax rates.
Amounts paid by the Trust to individuals and certain other shareholders who have
not provided the Trust 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 Trust has received certain
information from the IRS or a broker may be subject to "backup" withholding of
federal income tax arising from the Trust's taxable dividends and other
distributions as well as the gross proceeds of sales of shares, at a rate of up
to 28% for amounts paid during 2004. An individual's TIN is generally his or her
social security number. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from payments made to a shareholder
may be refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The Trust will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including ordinary income and net capital gain. A class's proportionate share of
a particular type of income for a year is determined according to the percentage
of total dividends paid by the RIC during that year to the class. Accordingly,
the Trust intends to designate a portion of its distributions as capital gain
dividends in proportion to the relative interests of its Common Shares and, when
issued, its preferred shares in accordance with the IRS position.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart LLP,
counsel to the Trust, under current law the manner in which the Trust intends to
allocate items of ordinary income and net capital gain among the Common Shares
and, when issued, preferred shares will be respected for federal income tax
purposes. It is possible that the IRS could disagree with counsel's opinion and
attempt to reallocate the Trust's net capital gain or other taxable income.
STATE AND LOCAL TAXES
Shareholders should consult their own tax advisers as the state or local tax
consequences of investing in the Trust.
Other information
The Trust is an organization of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with the Trust property or the acts,
obligations or affairs of the Trust. The Declaration of Trust, in cooridination
with the Trust's By-laws, also provides for indemnification out of the Trust
property of any shareholder held personally liable for the claims and
--------------------------------------------------------------------------------
29
OTHER INFORMATION
--------------------------------------------------------------------------------
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust itself is unable to meet its obligations. The Trust has been advised
by its counsel that the risk of any shareholder incurring any liability for the
obligations of the Trust is remote.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to the Trust or its shareholders
to which he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office. Voting rights are not cumulative, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees and, in such event, the holders of the remaining
less than 50% of the shares voting on the matter will not be able to elect any
Trustees.
The Declaration of Trust provides that no person shall serve as a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Trust's custodian or
by votes cast at a meeting called for that purpose. The Declaration of Trust
further provides that the Trustees of the Trust shall promptly call a meeting of
the shareholders for the purpose of voting upon a question of removal of any
such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10 per centum of the outstanding shares.
The Trust's Prospectus and this SAI do not contain all of the information set
forth in the Registration Statement that the Trust has filed with the SEC. The
complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its Rules and Regulations.
Independent Registered Public Accounting Firm
Deloitte & Touche LLP, Boston, Massachusetts are the Independent Registered
Public Accounting Firm for the Trust, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the SEC.
--------------------------------------------------------------------------------
30
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT
To the Trustees and Shareholder of
Eaton Vance Floating-Rate Income Trust:
We have audited the accompanying statement of assets and liabilities of Eaton
Vance Floating-Rate Income Trust (the "Trust") as of June 14, 2004 and the
related statement of operations for the period from April 28, 2004 (date of
organization) through June 14, 2004. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eaton Vance Floating-Rate
Income Trust as of June 14, 2004, and the results of its operations for the
period from April 28, 2004 (date of organization) through June 14, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 15, 2004
--------------------------------------------------------------------------------
31
--------------------------------------------------------------------------------
Eaton Vance Floating-Rate Income Trust
STATEMENT OF ASSETS AND LIABILITIES
JUNE 14, 2004
ASSETS
Cash...................................................... $100,000
Offering costs............................................ 500,000
Receivable from Adviser................................... 7,500
--------
Total assets.............................................. $607,500
========
LIABILITIES
Accrued offering costs.................................... $500,000
Accrued organization costs................................ 7,500
--------
Total liabilities......................................... $507,500
========
Net assets applicable to 5,000 common shares of beneficial
interest issued and outstanding........................... $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 20.00
========
STATEMENT OF OPERATIONS
PERIOD FROM APRIL 28, 2004 (DATE OF ORGANIZATION) THROUGH JUNE 14, 2004.
INVESTMENT INCOME........................................... $ --
--------
EXPENSES
Organization costs........................................ $ 7,500
Expense reimbursement..................................... (7,500)
--------
Net expenses........................................... $ --
--------
NET INVESTMENT INCOME....................................... $ --
========
See notes to financial statements.
--------------------------------------------------------------------------------
32
Notes to financial statements
NOTE 1: ORGANIZATION
The Eaton Vance Floating-Rate Income Trust (the "Trust") was organized as a
Massachusetts business trust on April 28, 2004, and has been inactive since that
date except for matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
the sale of 5,000 common shares to Eaton Vance Management, the Trust's
Investment Adviser.
Eaton Vance Management, or an affiliate, has agreed to reimburse all
organizational costs, estimated at approximately $7,500.
Eaton Vance Management, or an affiliate, has agreed to pay all offering costs
(other than sales loads) that exceed $0.04 per common share.
The Trust's investment objective is to provide a high level of current income.
The Trust may, as a secondary objective, also seek preservation of capital to
the extent consistent with its primary goal of high current income.
NOTE 2: ACCOUNTING POLICIES
The Trust's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require the
use of management estimates. Actual results may differ from those estimates.
The Trust's share of offering costs will be recorded within paid in capital as a
reduction of the proceeds from the sale of common shares upon the commencement
of Trust operations. The offering costs reflected above assume the sale of
12,500,000 common shares.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment advisory agreement between the Adviser and the Trust,
the Trust has agreed to pay an investment advisory fee, payable on a monthly
basis, at an annual rate of 0.75% of the average daily gross assets of the
Trust. Gross assets of the Trust shall be calculated by deducting accrued
liabilities of the Trust not including the amount of any preferred shares
outstanding or the principal amount of any indebtedness for money borrowed.
In addition, Eaton Vance has contractually agreed to reimburse the Trust for
fees and other expenses in the amount of 0.20% of the average daily gross assets
for the first 5 full years of the Trust's operations, 0.15% of average weekly
gross assets in year 6, 0.10% in year 7 and 0.05% in year 8. This reimbursement
is exclusive of the Trust's organizational and offering costs.
NOTE 4: FEDERAL INCOME TAXES
The Trust intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income, including any net realized gain on investments. Accordingly, no
provision for federal income tax is required.
--------------------------------------------------------------------------------
33
APPENDIX A: RATINGS
--------------------------------------------------------------------------------
Description of securities ratings+
Moody's Investors Service, Inc.
LONG-TERM DEBT SECURITIES RATINGS
AAA: Bonds that 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 that 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 that make the
long term risk appear somewhat larger than the Aaa securities.
A: Bonds that 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 that 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 that 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 that 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 that 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 that 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 that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
---------------
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this 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 that would be given to these securities on the date of the Trust's
fiscal year end.
--------------------------------------------------------------------------------
A-1
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
SHORT-TERM DEBT SECURITIES RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
--------------------------------------------------------------------------------
A-2
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
--------------------------------------------------------------------------------
A-3
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
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.
COMMERCIAL PAPER
COMMERCIAL PAPER RATING DEFINITIONS
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from A for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating category
is used when payments on an obligation 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 payments on
an obligation are jeopardized.
--------------------------------------------------------------------------------
A-4
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information.
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.
--------------------------------------------------------------------------------
A-5
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Trust is dependent on the Adviser's judgment,
analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
--------------------------------------------------------------------------------
A-6
EATON VANCE FLOATING-RATE INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 2004
---------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
255 State Street
Boston, MA 02109
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
(800) 331-1710
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Included in Part A:
Not applicable.
Included in Part B:
Independent Auditor's Report
Statement of Assets and Liabilities
Notes to Financial Statement
(2) EXHIBITS:
(a) Agreement and Declaration of Trust dated April 28, 2004 is
incorporated herein by reference to the Registrant's initial Registration
Statement on Form N-2 (File Nos. 333-115087 and 811-21574) as to the
Registrant's common shares of beneficial interest ("Common Shares") filed with
the Securities and Exchange Commission on May 3, 2004 (Accession No.
0000898432-04-000406) ("Initial Common Shares Registration Statement").
(b) By-Laws are incorporated herein by reference to the Registrant's
Initial Common Shares Registration Statement.
(c) Not applicable.
(d) Form of Specimen Certificate for Common Shares of Beneficial
Interest is incorporated by reference to the Pre-Effective Amendment No. 1 to
the Registrant's Initial Common Shares Registration Statement as filed with the
Commission on May 24, 2004 (Accession No. 0000950135-04-002778) ("Pre-Effective
Amendment No. 1 to the Registrant's Initial Common Shares Registration
Statement").
(e) Dividend Reinvestment Plan is incorporated by reference to the
Pre-Effective Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement.
(f) Not applicable.
(g) (1) Investment Advisory Agreement dated May 21, 2004, is
incorporated by reference to the Pre-Effective Amendment No. 1 to
the Registrant's Initial Common Shares Registration Statement.
(2) Expense Reimbursement Arrangement dated May 21, 2004 is
incorporated by reference to the Pre-Effective Amendment No. 1 to
the Registrant's Initial Common Shares Registration Statement.
(h) (1) Form of Underwriting Agreement is incorporated by reference to
the Pre-Effective Amendment No. 1 to the Registrant's Initial Common
Shares Registration Statement.
(2) Form of Master Agreement Among Underwriters is incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registrant's
Initial Common Shares Registration Statement.
(3) Form of Master Selected Dealers Agreement is incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registrant's
Initial Common Shares Registration Statement.
(i) 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).
(j) (1) Master Custodian Agreement with Investors Bank & Trust Company
dated May 21, 2004 is incorporated by reference to the Pre-Effective
Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement.
(2) 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 with the Commission on
January 23, 2001 (Accession No. 0000940394-01-500027) and
incorporated herein by reference.
(3) 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 Nos. 333-32267,
811-05808) filed April 3, 2002 (Accession No. 0000940394-01-500126)
and incorporated herein by reference.
(k) (1) Supplement to the Transfer Agency and Services Agreement dated
May 21, 2004 is incorporated by reference to the Pre-Effective
Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement.
(2) Transfer Agency and Services Agreement as amended and restated
on June 16, 2003, filed as Exhibit (k)(2) to the Registration
Statement of Eaton Vance Tax-Advantaged Dividend Income Fund (File
Nos. 333-107050 and 811-21400) filed July 15, 2003 (Accession No.
0000898432-03-000638) and incorporated herein by reference.
(3) Administration Agreement dated May 21, 2004 is incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registrant's
Initial Common Shares Registration Statement.
(4) Form of Shareholder Servicing Agreement is incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registrant's
Initial Common Shares Registration Statement.
(5) Form of Additional Compensation Agreement is incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registrant's
Initial Common Shares Registration Statement.
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP as to Registrant's
Common Shares filed herein.
(m) Not applicable.
(n) Consent of Independent Registered Public Accounting Firm filed
herein.
(o) Not applicable.
(p) Letter Agreement with Eaton Vance Management filed herein.
(q) Not applicable.
(r) 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 June 4, 2002, filed as
Exhibit (p) to Post-Effective Amendment No. 45 of Eaton Vance Investment Trust
(File Nos. 33-1121, 811-4443) filed July 24, 2002 (Accession No.
0000940394-02-000462) and incorporated herein by reference.
(s) Power of Attorney dated May 21, 2004 is incorporated by reference to
the Pre-Effective Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement.
ITEM 25. MARKETING ARRANGEMENTS
See Form of Underwriting Agreement filed herein.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The approximate expenses in connection with the offering are as follows:
Registration and Filing Fees $98,826
National Association of Securities Dealers, Inc. Fees $30,500
New York Stock Exchange Fees $40,000
Costs of Printing and Engraving $250,000
Accounting Fees and Expenses $16,000
Legal Fees and Expenses $125,000
Other $13,000
=======
Total $573,326
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below is the number of record holders as of June 21, 2004, of
each class of securities of the Registrant:
Title of Class Number of Record Holders
-------------- ------------------------
Common Shares of Beneficial interest, par value 1
$0.01 per share
ITEM 29. INDEMNIFICATION
The Registrant's By-Laws filed in the Registrant's Initial Common Shares
Registration Statement contain and the form of Underwriting Agreement filed in
Pre-Effective Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement contain provisions limiting the liability, and providing
for indemnification, of the Trustees and officers under certain circumstances.
Registrant's Trustees and officers are insured under a standard investment
company errors and omissions insurance policy covering loss incurred by reason
of negligent errors and omissions committed in their official capacities as
such. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the caption
Investment advisory and other services" in the Statement of Additional
Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 001-8100); and (iii) the Form ADV of Eaton Vance
Management (File No. 801-15930) filed with the Commission, all of which are
incorporated herein by reference.
ITEM 31. 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, 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 Eaton Vance Management, The Eaton Vance Building, 255 State Street,
Boston, MA 02109. Registrant is informed that all applicable accounts, books and
documents required to be maintained by registered investment advisers are in the
custody and possession of Eaton Vance Management.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend offering of Common Shares until
the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to 497(h) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective; and
b. for the purpose of determining any liability under the
Securities Act, each post- effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance
Floating-Rate Income Trust is on file with the Secretary of the Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the Trustees, officers or shareholders individually, but
are binding only upon the assets and property of the Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to the 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 the 22nd day of June 2004.
EATON VANCE FLOATING-RATE INCOME TRUST
By: /s/ Payson F. Swaffield
-----------------------
Payson F. Swaffield
President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------------------------------------- ----------------------------------------- --------------------
/s/ Payson F. Swaffield President and Principal Executive Officer June 22, 2004
-----------------------
Payson F. Swaffield
Barbara E. Campbell* Treasurer and Principal Financial and June 22, 2004
----------------------- Accounting Officer
Barbara E. Campbell
/s/ James B. Hawkes Trustee June 22, 2004
-------------------
James B. Hawkes
Samuel L. Hayes III* Trustee June 22, 2004
--------------------
Samuel L. Hayes
William H. Park* Trustee June 22, 2004
----------------
William H. Park
Ronald A. Pearlman* Trustee June 22, 2004
-------------------
Ronald A. Pearlman
Norton H. Reamer* Trustee June 22, 2004
-----------------
Norton H. Reamer
Lynn A. Stout* Trustee June 22, 2004
--------------
Lynn A. Stout
*By: /s/Alan R. Dynner
----------------------
Alan R. Dynner
(As Attorney-in-Fact)
INDEX TO EXHIBITS
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP as to Registrant's
Common Shares
(n) Consent of Independent Registered Public Accounting Firm
(p) Letter Agreement with Eaton Vance Management
EX-99.(L)
2
b50762evexv99wxly.txt
OPINION AND CONSENT OF KIRKPATRICK & LOCKHART LLP
EXHIBIT (L)
[KIRKPATRICK & LOCKHART LETTERHEAD]
June 22, 2004
Eaton Vance Floating-Rate Income Trust
255 State Street
Boston, MA 02109
Dear Sirs:
This opinion is furnished in connection with the registration by Eaton Vance
Floating-Rate Income Trust, a business trust organized under the laws of the
Commonwealth of Massachusetts ("Trust"), of 39,000,000 of shares of beneficial
interest, per value of $.01 per share ("Shares"), under the Securities Act of
1933, as amended, pursuant to a registration statement on form N-2 (File No.
333-115087), as amended ("Registration Statement"), in the amounts set forth
under "Amount Being Registered" on the facing page of the Registration
Statement.
As counsel for the Trust, we are familiar with the proceedings taken by it in
connection with the authorization, issuance and sale of the Shares. In addition,
we have examined and are familiar with the Agreement and Declaration of Trust of
the Trust, the By-Laws of the Trust, and such other documents as we have deemed
relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon issuance
and sale in the manner referred to in the Registration Statement, will be
legally issued, fully paid and non-assessable (except as described in the
Registration Statement) shares of beneficial interest of the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus constituting
a part thereof.
Very truly yours,
/s/Kirkpatrick & Lockhart LLP
-----------------------------
Kirkpatrick & Lockhart LLP
EX-99.(N)
3
b50762evexv99wxny.txt
CONSENT OF INDEPENDENT ACCOUNTING FIRM
EXHIBIT (n)
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT
We consent to the use in this Pre-Effective Amendment No. 2 to the Registration
Statement of Eaton Vance Floating-Rate Income Trust on Form N-2 filed by the
Trust under the Securities Act of 1933, as amended (the "Act") (Registration No.
333-115087) and under the Investment Company Act of 1940, as amended (the "1940
Act") (Registration No. 811-21574) of our report dated June 15, 2004, relating
to the financial statements of Eaton Vance Floating-Rate Income Trust as of June
14, 2004, in the Statement of Additional Information which is part of such
registration statement.
We also consent to the references to our Firm under the heading "Independent
Registered Public Accounting Firm" in the Prospectus and Statement of Additional
Information.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 22, 2004
EX-99.(P)
4
b50762evexv99wxpy.txt
LETTER AGREEMENT WITH EATON VANCE
Exhibit (p)
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
Telephone: (617) 482-8260
Telecopy: (617) 338-8054
June 14, 2004
Eaton Vance Floating-Rate Income Trust
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
Ladies and Gentlemen:
With respect to our purchase from you, at the purchase price of $100,000
of 5,000 shares of beneficial interest, net asset value of $20.00 per share
("Initial Shares") in Eaton Vance Floating-Rate Income Trust, we hereby advise
you that we are purchasing such Initial Shares for investment purposes without
any present intention of redeeming or reselling.
Very truly yours,
EATON VANCE MANAGEMENT
By: /s/ William M. Steul
----------------------------
William M. Steul
Treasurer and Vice President
Page 1
CORRESP
5
filename5.txt
EATON VANCE FLOATING-RATE INCOME TRUST
The Eaton Vance Building
255 State Street
Boston, MA 02109
Telephone: (617) 482-8260
Telecopy: (617) 338-8054
June 22, 2004
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Vincent DiStefano
Division of Investment Management
Re: Eaton Vance Floating-Rate Income Trust (the "Trust")
1933 Act Registration Statement (File No. 333-115087)
1940 Act Registration Statement (File No. 811-21574)
Gentlemen:
Pursuant to Rule 461 under the Securities Act of 1933, as amended (the
"1933 Act"), the Trust hereby requests that the staff of the Division of
Investment Management accelerate the effective date of the Trust's 1933 Act
Registration Statement on Form N-2, as amended, to 3:00 p.m., New York City
time, on Wednesday, June 23, 2004, or as soon thereafter as possible.
Very truly yours,
EATON VANCE FLOATING-RATE INCOME TRUST
By: /s/Alan R. Dynner
--------------------------------
Alan R. Dynner
Secretary
cc: Mr. Richard Pfordte, Branch Chief
Division of Investment Management
CORRESP
6
filename6.txt
[UBS Securities LLC Letterhead]
June 22, 2004
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Division of Investment Management
Re: Eaton Vance Floating-Rate Income Trust
Form N-2 Registration Statement (File No. 333-115087)
Dear Sir or Madam:
In connection with the above-referenced Registration Statement, and pursuant to
Rule 461 under the Securities Act of 1933, UBS Securities LLC, as representative
of the several Underwriters, hereby joins the above-referenced registrant in
requesting that the effective date of such Registration Statement be accelerated
so that it will be declared effective by 3 p.m. EST on June 23, 2004, or as soon
thereafter as possible.
The following information with respect to the expected approximate distribution
of Preliminary Prospectuses dated May 26, 2004, and distributed between May 26,
2004, and June 22, 2004, is furnished pursuant to Rule 460 under the Securities
Act of 1933:
EATON VANCE FLOATING-RATE INCOME TRUST
No. of Copies
-------------
To Individuals / Institutions / Prospective Underwriters 180,225
To Statistical, Public Services, NASD, NYSE 25
-------
TOTAL 180,250
With respect to Rule 15c2-8 under the Securities Exchange Act of 1934 (the
"Rule"), we wish to advise the Commission that the Underwriters will distribute
copies of the Preliminary Prospectus to any person who is expected to receive a
confirmation of sale at least 48 hours prior to the date we expect to mail such
confirmations. Selected dealers, if any, represent that they will comply with
the Rule.
Yours truly,
UBS SECURITIES LLC
By: /s/ John Key
------------
John Key
Director
COVER
7
filename7.txt
June 23, 2004
Vincent J. Di Stefano, Esq.
Senior Counsel
Securities and Exchange Commission
Division of Investment Management
450 Fifth Street, N.W.
Washington, DC 20949
Re: Eaton Vance Floating-Rate Income Trust
File Nos. 333-115087 and 811-21574
Dear Mr. Di Stefano:
Transmitted electronically with this letter for filing pursuant to the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, on behalf of Eaton Vance Eaton Vance Floating-Rate Income Trust (the
"Fund") is Pre-Effective Amendment No. 2 to the Fund's registration statement on
Form N-2 relating to Registrant's initial issuance of common shares of
beneficial interest, par value $.01 per share ("Pre-Effective Amendment No. 2").
In connection with this Pre-Effective Amendment No. 2, the Fund is registering
32,500,000 shares of beneficial interest, per value of $.01 per share
("Shares"), under the Securities Act of 1933, as amended, pursuant to a
registration statement on form N-2 (File No. 333-115087), as amended
("Registration Statement"), in the amounts set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
Thank you for your letter transmitting your comments concerning the
Registration Statement on Form N-2 for the Fund filed with the Securities and
Exchange Commission ("SEC") on May 3, 2004. For your convenience of reference,
we have restated each of your comments below followed by the Fund's response. As
we discussed, and as indicated below, a number of these comments have been
addressed in Pre-Effective Amendment No. 1 to the Fund's Registration Statement
filed with the Commission on May 24, 2004 ("Pre-Effective Amendment No. 1"). The
remaining responses are addressed in this Pre-Effective Amendment No. 2.
Included with this Pre-Effective Amendment No. 2, both the underwriters
and the Fund formally request acceleration of effectiveness of the Registration
Statement to 3:00 p.m. on Wednesday June 23, 2004.
Page 2 of 11
PROSPECTUS
GENERAL
COMMENT: We note that portions of the filing are incomplete. We may have
additional comments on such portions when you complete them in a pre-effective
amendment, on disclosures made in response to this letter, on information
supplied supplementally, or on exhibits added in any further pre-effective
amendments.
RESPONSE: The Fund understands this comment. All proposed responses to
your comments are provided herein and detailed in the enclosed marked portions
of the Registration Statement.
COMMENT: Please inform the staff of the information the Fund proposes to
omit from the final pre-effective amendment pursuant to Rule 430A under the
Securities Act.
RESPONSE: The Fund intends only to omit certain pricing information from
Pre-Effective Amendment No. 2. This would include the total number of shares
sold, the total proceeds of the offering, the total sales loads paid and the
allocation of shares sold among the several underwriters. This information will
be omitted, as it will not be known at the time of filing. Per standard
underwriting procedures, definitive "sizing" of the offering will take place
within a day or two of the date the Registration Statement is declared
effective. The Fund intends to file pursuant to Rule 497(h) a definitive
prospectus and SAI containing any omitted information in compliance with the
requirements of Rule 430A.
COVER
Investment Objectives and Policies
COMMENT: Please clarify whether the Fund will, or will not, seek
preservation of capital as a secondary objective.
RESPONSE: The Fund has amended this language in Pre-Effective Amendment
No. 1 to clarify that the Fund will seek preservation of capital as a secondary
objective, the sentence now appears as follows:
"THE TRUST WILL, AS A SECONDARY OBJECTIVE, ALSO SEEK PRESERVATION OF
CAPITAL TO THE EXTENT CONSISTENT WITH ITS PRIMARY GOAL OF HIGH CURRENT INCOME."
Portfolio Contents
COMMENT: Please disclose that the Fund will invest at least 80% of its
total assets in floating-rate Senior Loans.
RESPONSE: The Fund has used the defined term "Senior Loans" in the 80%
policy. This term is defined in the preceding paragraphs to be "senior, secured
floating rate loans."
Page 3 of 11
The Fund believes that the defined term adequately describes the type of
instruments included in the 80% policy and respectfully maintains that repeating
this reference in the requested place would be redundant and unnecessary.
Pricing Table
COMMENT: Please confirm that the pricing table will be located on the
outside front cover of the prospectus. See Item 1.1 of Form N-2.
RESPONSE: The subject disclosure appeared in a prominent place on the
outside cover page in Pre-Effective Amendment No. 1 and will remain in such
place in Pre-Effective Amendment No. 2.
COMMENT: Since the underwriters have an over-allotment option, please
present maximum-minimum information in the price table or a note thereto, based
on the purchase of all or none of the shares subject to the option. See
Instruction 4 to Item 1.1.g. of Form N-2.
RESPONSE: The Fund believes that the price table in its current form is
fully responsive to Item 1.1g of Form N-2. This table contains a line item
providing full information in the absence of any exercise of the over-allotment
option (i.e., the minimum offering size) and another line item immediately below
that providing full information assuming full exercise (i.e., the maximum
offering size) of the overallotment option. The Fund notes that this is a
standard format that has been used in substantially identical form for many
years in closed-end offerings without objection by the staff, including in
several recent Eaton Vance closed-end fund offerings. In particular, the Fund
notes that the same comment was received in connection with the Eaton Vance
Tax-Advantaged Global Dividend Income Fund (File Nos. 811-21470 and 333-110634)
and the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund File Nos.
811-21519 and 333-113177) and the Staff agreed that the price table could remain
in this format.
COMMENT: Please remove the disclosure relating to the Fund's lack of
public trading history and status as a closed-end company from under the heading
"Exchange Listing." Display the disclosure prominently on the outside front
cover of the prospectus. See Item 1.1.i of Form N-2
RESPONSE: The Fund will remove the disclosure from under the heading
"Exchange Listing" and display it on the front cover in the forth paragraph.
SUMMARY
Investment Objectives and Policies
COMMENT: Since the Fund may hold securities in default, please include a
description of the attendant risks.
RESPONSE: The Fund provides a detailed description of the risk associated
with holding defaulted securities. This discussion may be found on page 14 in
the body of the prospectus as the fourth paragraph under the heading "Senior
Loans" in the section
Page 4 of 11
"Investment objectives, policies and risks." The Fund believes that this
disclosure sufficiently details the risks associated with such securities and
respectfully maintains that additional disclosure in the summary section is not
required. The disclosure reads as follows:
"THE TRUST MAY PURCHASE AND RETAIN IN ITS PORTFOLIO SENIOR LOANS
WHERE THE BORROWERS HAVE EXPERIENCED, OR MAY BE PERCEIVED TO BE LIKELY TO
EXPERIENCE, CREDIT PROBLEMS, INCLUDING DEFAULT, INVOLVEMENT IN OR RECENT
EMERGENCE FROM BANKRUPTCY REORGANIZATION PROCEEDINGS OR OTHER FORMS OF DEBT
RESTRUCTURING. AT TIMES, IN CONNECTION WITH THE RESTRUCTURING OF A SENIOR LOAN
EITHER OUTSIDE OF BANKRUPTCY COURT OR IN THE CONTEXT OF BANKRUPTCY COURT
PROCEEDINGS, THE TRUST MAY DETERMINE OR BE REQUIRED TO ACCEPT EQUITY SECURITIES
OR JUNIOR DEBT SECURITIES IN EXCHANGE FOR ALL OR A PORTION OF A SENIOR LOAN."
COMMENT: Please disclose the percentage of assets the Fund will invest in
foreign and, if applicable, emerging market securities. Also disclose the risks
attendant with such investments.
RESPONSE: The Fund may invest up to 15% in foreign securities including
emerging markets. The Fund currently discusses the risks of investing in foreign
securities in both the Summary section -- as the twelfth sub-heading under
"Special Risk Considerations" and in the body of the prospectus as the twelfth
sub-heading under "Special Risk Consideration" in the "Investment objectives,
policies and risks" section. The Fund believes that the amount and placement of
these disclosures is commensurate with the Fund's expected level of investment
in foreign securities. The Fund proposes to add the following sentences as the
lead sentence under "Foreign security risk" in both the summary and body of the
prospectus:
"THE TRUST MAY INVEST UP TO 15% OF ITS TOTAL ASSETS IN FOREIGN
SECURITIES INCLUDING EMERGING MARKETS."
Leverage
COMMENT: Please disclose that, since holders of the Fund's debt or
preferred shares will not pay fees, common shareholders will pay higher fees
when the Fund uses leverage.
RESPONSE: The Fund currently discloses this information to shareholders in
the last sentence in the summary section under heading "Leverage" and also in
the third sentence in the third paragraph under "Use Of Leverage And Related
Risks" in the "Investment objectives, policies and risks" section in the body of
the prospectus. That sentence reads as follows:
"DURING PERIODS IN WHICH THE TRUST IS USING LEVERAGE, THE FEES PAID
TO EATON VANCE FOR INVESTMENT ADVISORY SERVICES WILL BE HIGHER THAN IF THE TRUST
DID NOT USE LEVERAGE BECAUSE THE FEES PAID WILL BE CALCULATED ON THE BASIS OF
THE TRUST'S GROSS ASSETS, INCLUDING THE PROCEEDS FROM THE ISSUANCE OF PREFERRED
SHARES."
Page 5 of 11
Non-Investment Grade Bond Risk
COMMENT: Please disclose the percentage of Fund assets to be invested in
non-investment grade bonds.
RESPONSE: The Fund may invest up to 20% of its assets in Non-Investment
Grade Bonds. The following new disclosure (indicated as the underlined text)
will be added in the summary section under the heading "Investment Objectives
and Policies" in the second paragraph and in the body of the prospectus in the
first paragraph under the heading "Investment objectives, policies and risks --
Primary Investment Policies -- General composition of the Trust"
"THE TRUST MAY INVEST UP TO 20% OF ITS TOTAL ASSETS IN CORPORATE
BONDS OF BELOW INVESTMENT GRADE QUALITY ("NON-INVESTMENT GRADE BONDS"), COMMONLY
REFERRED TO AS "JUNK BONDS." NON-INVESTMENT GRADE BONDS ARE BONDS THAT ARE RATED
BELOW INVESTMENT GRADE BY EACH OF THE NATIONALLY RECOGNIZED STATISTICAL RATING
AGENCIES ("RATING AGENCIES") WHO COVER THE SECURITY, OR, IF UNRATED, ARE
DETERMINED TO BE OF COMPARABLE QUALITY BY THE ADVISER."
Interest Rate Risk
COMMENT: Please include a discussion of the effects of a decline in
portfolio value and asset coverage ratios when the Fund is leveraged. Please
state affirmatively that interest rates are currently at or near all-time lows.
RESPONSE: In Pre-Effective Amendment No. 1, the Fund added disclosure
discussing the effects of a decline in portfolio value and asset coverage ratios
when the Fund is leveraged in the summary section as the last sentence under
"Special Risk Considerations -- Effects of leverage." Similar disclosure also
appears in footnote 2 to the fee table on page 9 of Pre-Effective Amendment No.
1 and is identical to the disclosure found in another recent Eaton Vance
closed-end fund common share offering -- Eaton Vance Tax-Advantaged Global
Dividend Opportunities Fund (811-21519 and 333-113177). The disclosure reads as
follows:
"THE COSTS OF AN OFFERING OF PREFERRED SHARES AND/OR BORROWING
PROGRAM WILL BE BORNE BY COMMON SHAREHOLDERS AND CONSEQUENTLY WILL RESULT IN A
REDUCTION OF THE NET ASSET VALUE OF COMMON SHARES."
Additionally, the added disclosure also states affirmatively that interest
rates are currently at or near all-time lows in both the summary section in the
fourth sentence in the first paragraph under the heading "Special Risk
Considerations -- Interest rate risk," and in the body of the prospectus in the
fourth sentence in the first paragraph under the heading Investment objectives,
policies and risks -- Additional Risk Considerations -- Interest Rate Risk." The
disclosure reads as follows:
"BECAUSE MARKET INTEREST RATES ARE CURRENTLY NEAR THEIR LOWEST
LEVELS IN MANY YEARS, THERE IS A GREATER THAN NORMAL RISK THAT THE TRUST'S
PORTFOLIO WILL DECLINE IN VALUE DUE TO RISING INTEREST RATES."
Page 6 of 11
SUMMARY OF FUND EXPENSES
COMMENT: Please ensure that all footnote text accompanying the fee table
is in a font size smaller than that of the fee table itself.
RESPONSE: The Fund confirms that the text to all footnotes will appear in
a font size that is smaller than the font size used for the fee table. As you
are aware, EDGAR may not recognize differences in font sizes.
COMMENT: Please include in the body of the fee table the costs of the
Fund's offering of preferred shares, currently located in footnote 2 to the fee
table.
RESPONSE: The 0.97% in the fee table line item "Expenses borne by the
Trust" reflected in Pre-Effective Amendment No.1 includes the 0.20% attributable
to Common Shares offering costs and the 0.77% attributable to the offering costs
associated with Preferred Shares as set forth in footnotes 1 and 2 to the fee
table. This is the same presentation used in another recently completed
closed-end fund offering for Eaton Vance Tax-Advantaged Global Dividend
Opportunities Fund (811-21519 and 333-113177) made in response to a similar
comments from the Staff with respect to that fund.
COMMENT: Please file the expense reimbursement contract referenced in
footnote 5 to the fee table as an exhibit to a pre-effective amendment.
RESPONSE: This document was filed as Exhibit (g)(2) to Pre-Effective
Amendment No. 1.
GENERAL COMPOSITION OF THE TRUST
COMMENT: Will the Fund count investments in other investment companies
towards the requirement that at least 80% of total assets be invested in senior
floating-rate securities? If so, please confirm that the Fund will only count
funds investing at least 80% of their assets in senior floating-rate securities.
RESPONSE: The Fund's investments in other investment companies will be
included in its 80% policy. Additionally, the Fund confirms that only those
investment companies investing at least 80% of their assets in senior
floating-rate securities will count towards the Fund's 80% policy. Furthermore,
as set forth on page 13 of the prospectus under "Investment objective, policies
and risks -- Primary Investment Policies -- General composition of the Trust"
such investments are limited to 10% of total assets overall, with no more than
5% invested in any one issuer.
COLLATERALIZED LOAN OBLIGATIONS
COMMENT: Please advise us supplementally of the status, with respect to
the Investment Company Act of 1940, of the special purpose vehicles issuing the
collateralized loan and debt obligations the Fund may purchase. Will the Fund be
subject to the ownership limitations imposed by Section 12(d)(1) of the
Investment Company Act?
Page 7 of 11
RESPONSE: The special purpose vehicles are organized and operate in
accordance with Rule 3a-7 promulgated under the Investment Company Act of 1940,
as amended (the "1940 Act"). The Fund confirms that the special purpose vehicles
established for purposes of offering the collateralized loan obligations will
not be considered "affiliated persons" of the Fund as that term is defined in
the 1940 Act. The Fund further confirms that it will be subject to ownership
restrictions as set forth in Section 12(d)(1) of the 1940 Act.
COMMENT: Please disclose how the Fund will value collateralized loan and
debt obligations.
RESPONSE: In Pre-Effective Amendment No. 2, the Fund proposes to amend the
disclosure relating to net asset value found in the in the Statement of
Additional Information under the heading "Determination of Net Asset Value" to
clarify that collateralized loan and debt obligations will be valued similarly
to senior loans.
SAMIS AND OTHER SENIOR LOAN BASED DERIVATIVES
COMMENT: What is the Fund's asset percentage limitation on investing in
SAMIs? Will the Fund count investments in derivatives towards satisfaction of
the 80% requirement of Rule 35d-1 under the Investment Company Act?
RESPONSE: To the extent the Fund invest in SAMIs, such investments will be
counted towards the Fund's 80% policy. As set forth in Pre-Effective Amendment
No. 1, on page 13 of the prospectus under "Investment objective, policies and
risks -- Primary Investment Policies -- General composition of the Trust" the
Fund may not invest more than 5% of its total assets in such investments.
CREDIT-LINKED NOTES
COMMENT: Please provide additional disclosure as to the nature of the
reference obligations involved in the Fund's investments in credit-linked notes.
RESPONSE: The Fund proposes to add the following disclosure to discuss the
risks associated with the Fund's investment in credit-linked notes. This
proposed disclosure would be added as a new third sentence to the discussion of
credit-linked notes found on page 20 in the body of the prospectus under the
heading "Investment objectives, policies and risks -- Additional Investment
Practices -- Credit-linked notes."
"IN THIS TYPE OF INVESTMENT, THE TRUST IS SUBJECT TO CREDIT RISKS,
INCLUDING, BUT NOT LIMITED TO, DEFAULT RISKS, ASSOCIATED WITH THE ISSUER OF THE
CLN'S REFERENCE OBLIGATION. MATERIAL EVENTS OR CIRCUMSTANCES IMPACTING THE
ISSUER OF THE CLN'S REFERENCE OBLIGATION WILL AFFECT THE PAYMENTS BETWEEN THE
DERIVATIVE INSTRUMENT'S PARTIES BECAUSE SUCH EVENTS OR CIRCUMSTANCES WILL IMPACT
THE PERFORMANCE OF THE REFERENCE OBLIGATION. THE REFERENCE OBLIGATION MAY BE
LOAN OBLIGATIONS SUCH AS SENIOR LOANS AND OTHER DEBT OBLIGATIONS."
UNDERWRITING
Page 8 of 11
COMMENT: What is the total of all payments to Underwriters of the Fund, in
terms of percentage of Fund assets?
RESPONSE: At the time of pricing, the Fund will not be able to determine
the precise total payments to be made to each underwriter. As disclosed, the
sales load will be 4.5% for each common share. Additionally, underwriters who
meet certain sales targets as disclosed in the Additional Compensation Agreement
(filed in Pre-Effective Amendment No. 1) will be paid additional compensation by
Eaton Vance of up to 0.15% annually, paid quarterly in arrears, of the Fund's
average daily gross assets attributable to those common shares sold by such
qualifying underwriters. Additionally, Eaton Vance and UBS have entered into a
Shareholder Servicing Agreement, whereby Eaton Vance will pay UBS 0.10% of the
Fund's average daily gross assets.
Although unable to calculate the precise total payments to be made to each
underwriter at the time of pricing, the Fund will disclose a cap pursuant to
NASD Rule 2830 of the common shares' aggregate initial offering price for
qualifying underwriters pursuant to the Additional Compensation Agreement and
UBS pursuant to the Shareholder Servicing Agreement. The Fund will not be able
to be able to calculate these caps or determine qualifying underwriters, if any,
until the day of pricing. The Fund will track these payments to ensure total
payments to any underwriter do not exceed 9.0%.
COMMENT: Did the Fund's Board consider the fee arrangement between the
Adviser and qualifying underwriters when approving the Advisory Agreement?
Please indicate what services are provided pursuant to the agreement. Clarify
whether the services [are] for distribution and therefore subject to the NASD
sales load cap. Please file the agreement as an exhibit to the registration
statement.
RESPONSE: The Fund confirms that its Board did consider the fee
arrangement between Eaton Vance Management, as the adviser, and the qualifying
underwriters in approving the Advisory Agreement.
As disclosed in the prospectus under the section "Shareholder Servicing
Agent, custodian and transfer agent" the Shareholder Servicing Agent is paid by
the Adviser not the Fund for providing shareholder services, including, but not
limited to the following: the Shareholder Servicing Agent (i) undertakes to make
available public information pertaining to the Fund on an ongoing basis and to
communicate to investors and prospective investors the Fund's features and
benefits (including arranging periodic seminars or conference calls for Eaton
Vance to communicate to investors, responding to questions from current or
prospective shareholders and contacting specific shareholders, where
appropriate); (ii) makes available to investors and prospective investors market
price, net asset value, yield and other information regarding the Fund, if
reasonably obtainable, for the purpose of maintaining the visibility of the Fund
in the investor community; (iii) provide certain economic research and
statistical information and reports, if reasonably obtainable, to Eaton Vance or
the Fund and consult with representatives of Eaton Vance and/or Trustees of the
Fund in connection therewith, which information and reports shall include: (a)
statistical and financial market information; and (b)
Page 9 of 11
comparative information regarding the Fund and other closed-end management
investment companies with respect to (1) the net asset value, (2) market
performance of the Fund and such other companies, and (3) other relevant
performance indicators; and (iv) provides information to and consult with Eaton
Vance and/or the Board of Trustees of the Fund with respect to applicable
strategies designed to address market value discounts, which may include share
repurchases, tender offers, modifications to dividend policies or capital
structure, repositioning or restructuring of the Fund, conversion of the Fund to
an open-end investment company, liquidation or merger; including providing
information concerning the use and impact of the above strategic alternatives by
other market participants.
The Fund confirms that the services provided to the Fund pursuant to the
Additional Compensation Agreement and the Shareholder Services Agreement are
subject to the NASD's sales load cap and in that respect will not exceed such
cap imposed.
The Shareholder Services Agreement and the Additional Compensation
Agreement were filed as Exhibits (k)(4) and (k)(5), respectively, in
Pre-Effective Amendment No. 1.
COMMENT: Please advise whether the NASD has reviewed and approved the
terms of the underwriting agreement.
RESPONSE: The Fund has confirmed that the NASD has reviewed the terms of
the underwriting agreement and will provide final approval of such agreement
prior to the Fund's effective date.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
COMMENT: Please advise us whether the fee to be paid to the Shareholder
Servicing Agent is included in the fee table. Supplementally advise us whether
Eaton Vance or other Eaton Vance funds have ever requested the information
described in this section. If so, please provide us with copies of any such
reports.
RESPONSE: This fee is not included in the fee table because it is a fee to
be paid by the Adviser and not the Fund. Eaton Vance currently expects that from
time-to-time it will request certain or all of the information covered by the
Shareholder Servicing Agreement with respect to the Fund. As discussed, we have
supplementally provided you a copy of a Shareholder Servicing Report recently
provided to the Board.
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT RESTRICTIONS
COMMENT: Please explain in the narrative the extent to which the Fund may
lend cash consistent with applicable law.
RESPONSE: The Fund proposes to add the following additional disclosure as
the second paragraph in the narrative discussion of the Fund's investment
limitations:
Page 10 of 11
"PURSUANT TO INVESTMENT RESTRICTION 5(D) ABOVE, AS DISCLOSED IN THE
PROSPECTUS, THE TRUST MAY MAKE LOANS TO PARTICIPATE IN THE ORIGINATION OF SENIOR
LOANS AND OTHER SECURED FLOATING-RATE LOANS."
Page 11 of 11
As agreed to in our telephone conversations, we believe that this
submission fully responds to your comments. Please feel free to call me at any
time at 617-261-3246. In my absence, please address any questions or concerns to
Mark Goshko at 617-261-3163 or Marc Stahl at 617-261-3187.
Sincerely,
/s/Clair E. Pagnano
Clair E. Pagnano
Enclosures
cc: Richard Pfordte
Securities and Exchange Commission, Division of Investment Management
Fred Marius
Eaton Vance Management
Mark P. Goshko
Kirkpatrick & Lockhart LLP
Marc O. Stahl
Kirkpatrick & Lockhart LLP
Thomas Hale
Skadden, Arps, Slate, Meagher & Flom LLP
Joshua Ratner
Skadden, Arps, Slate, Meagher & Flom LLP