Notes to Financial Statements (Unaudited)
1 Significant Accounting Policies
eUnits 2 Year U.S. Market Participation Trust:
Upside to Cap / Buffered Downside (the Trust) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act) as a diversified, closed-end management investment company. The Trust was organized on
November 12, 2009 and remained inactive until January 26, 2012 except for matters relating to its organization and initial sale of 10,000 units of beneficial interest to Eaton Vance Management (EVM), the Trusts investment adviser and
administrator, for $100,000. The Trust issued 2,618,389 units of beneficial interest ($10.00 per unit) in connection with its initial public offering on January 26, 2012. The Trusts units of beneficial interest are hereinafter referred to
as Units. The Trust seeks to provide returns based on the price performance of the S&P 500 Composite Stock Price Index (the Index) by entering into over-the-counter private derivative contracts. If the Index appreciates over the
investment life of the Trust, the Trust seeks to provide a return on the initial net asset value of the Units equal to the percentage change in the price of the Index, up to a maximum return of 17.85%. If the Index depreciates over the investment
life of the Trust by 15% or less, the Trust seeks to return the initial net asset value of the Units. If the Index depreciates by more than 15% over the investment life of the Trust, the Trust seeks to outperform the Index price change by 15% of the
initial Index value. The Trust anticipates concluding its investment activities on or about January 24, 2014 (the Termination Date) and making a liquidating cash distribution to Unit holders within seven business days thereafter. The
Trusts fiscal year is based upon a 52-53 week, ending on the last Wednesday of each January.
The following is a summary of significant accounting
policies of the Trust. The policies are in conformity with accounting principles generally accepted in the United States of America.
A Investment Valuation
U.S. Treasury obligations are generally valued on the basis of valuations provided by third party
pricing services, as derived from such services pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices and yields of other U.S. Treasury obligations. Over-the-counter options
are valued by a third party pricing service using techniques that consider factors including the value of the underlying instrument, the volatility of the underlying instrument and the period of time until option expiration.
B Investment
Transactions
Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized gains and losses on investments sold are determined on the basis
of identified cost.
C Income
Interest income
is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount.
D Federal Taxes
The Trusts policy is to comply with the provisions of the Internal Revenue Code applicable to
regulated investment companies and to distribute to Unit holders each year substantially all of its net investment income, and all or substantially all of its net realized capital gains. Accordingly, no provision for federal income or excise tax is
necessary.
At January 30, 2013, the Trust had a late year ordinary loss of $11,622, which it has elected to defer to the following taxable year
pursuant to income tax regulations. Late year ordinary losses represent certain specified losses realized in that portion of a taxable year after October 31 that are treated as ordinary for tax purposes plus ordinary losses attributable to that
portion of a taxable year after December 31.
As of July 31, 2013, the Trust had no uncertain tax positions that would require financial
statement recognition, de-recognition, or disclosure. The Trust files a U.S. federal income tax return annually after its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three years from the date of
filing.
E Organization and Offering Costs
Costs incurred in connection with the organization of the Trust and the offering of its Units (other than the sales load) were borne directly by EVM.
F Use of Estimates
The
preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
G Indemnifications
Under the Trusts organizational documents, its
officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Trust. Under Massachusetts law, if certain conditions prevail, Unit holders of a Massachusetts business trust
(such as the Trust) could be deemed to have personal liability for the obligations of the Trust. However, the Trusts Declaration of Trust contains an express disclaimer of liability on the part of Trust Unit holders and the By-laws provide
that the Trust shall assume the defense on behalf of any Trust Unit holders. Moreover, the By-laws also provide for indemnification out of Trust property of any Unit holder held personally liable solely by reason of being or having been a Unit
holder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Trust enters into agreements with service providers that may contain indemnification clauses. The Trusts maximum exposure under
these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.
H Structured Options
The Trust entered into structured option contracts, based on the underlying Index, that provide for
the Trust to pay or receive cash at the expiration date of the contracts. Such payments that may be received by the Trust, excluding the additional payout noted below, are capped at a maximum return of 17.85% if the price of the underlying Index
increases by 17.85% or more over the term of the contracts. The Trust will be obligated to pay cash to the counterparties at the expiration date of the contracts if the price of the underlying Index decreases by more than 15% over the term of the
contracts. If the price of the Index is unchanged or declines by 15% or less over the term of the contracts, the Trust is not expected to make or receive any payments upon settlement of the contracts.
eUnits 2 Year U.S. Market Participation Trust:
Upside to Cap / Buffered Downside
July 31,
2013
Notes to Financial Statements (Unaudited)
continued
Each over-the-counter structured option contract consists of two call options and one put option. The values of the structured options are marked-to-market daily in accordance with the Trusts policies on
investment valuations discussed above. Changes in the values are recorded as unrealized gains or losses by the Trust. Gains (losses) are realized upon the expiration of the structured options.
The option contracts were structured to include an additional payout to the Trust by the counterparties at the expiration date of the contracts. The additional payout is reflected as net premium receivable in the
Statement of Assets and Liabilities and is recorded as unrealized appreciation until the expiration date of the contracts when the amount will be realized. The net premium receivable amount at July 31, 2013 approximated its fair value. If
measured at fair value, the amount would have been considered as Level 2 in the fair value hierarchy (see Note 8) at July 31, 2013.
I Interim Financial Statements
The interim financial statements relating to July 31, 2013 and for the period then
ended have not been audited by an independent registered public accounting firm, but in the opinion of the Trusts management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the
financial statements.
2 Distributions to Unit Holders
The Trust intends to distribute at least annually the amount of its net investment income and net realized capital gains, if any. Distributions are recorded on the ex-dividend date. The Trust distinguishes between
distributions on a tax basis and a financial reporting basis. Accounting principles generally accepted in the United States of America require that only distributions in excess of tax basis earnings and profits be reported in the financial
statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary
income.
3 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for investment advisory services rendered to the Trust. The fee is computed at an annual rate of 0.75%
of the Trusts initial net assets and is payable monthly to the extent of the Trusts available cash. EVM pays all of the normal operating expenses of the Trust, including custody, transfer agent, audit, and printing and postage expenses.
For the period from January 31, 2013 to July 31, 2013, the investment adviser fee amounted to $98,295. Pursuant to a sub-advisory agreement between EVM and Parametric Risk Advisors LLC (PRA), an indirect affiliate of EVM, EVM pays PRA a
portion of its fee received, after deduction of all its costs incurred, for investment advisory services related to the Trusts options strategy. EVM also serves as the administrator of the Trust, but receives no compensation.
Eaton Vance Distributors, Inc. (EVD), an affiliate of EVM, is the sole underwriter of the Trusts Units. EVD received a sales load of $0.20 per Unit (2% of the
initial net asset value) with respect to certain Units sold. The sales load amounted to approximately $389,000, none of which was retained by EVD.
Trustees and officers of the Trust who are members of EVMs organization receive remuneration for their services to the Trust out of the investment adviser
fee. Certain officers and Trustees of the Trust are officers of EVM.
4 Purchases and Sales of Investments
The Trust had no purchases and sales of long-term investments during the period from January 31, 2013 to July 31, 2013.
5 Federal Income Tax Basis of Investments
The cost and unrealized appreciation (depreciation) of investments of the Trust at July 31, 2013, as determined on a federal income tax basis, were as follows:
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Aggregate cost
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$
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25,967,295
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Gross unrealized appreciation
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$
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16,354
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Gross unrealized depreciation
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Net unrealized appreciation
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$
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16,354
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eUnits 2 Year U.S. Market Participation Trust:
Upside to Cap / Buffered Downside
July 31,
2013
Notes to Financial Statements (Unaudited)
continued
6 Units of Beneficial Interest
The Agreement and Declaration of Trust permits the Trust to
issue an unlimited number of full and fractional Units of beneficial interest, $0.01 par value per Unit. Transactions in Units were as follows:
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Period Ended
July 31,
2013
(Unaudited)
(1)
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Period Ended
January 30, 2013
(2)
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Sales (initial public offering)
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2,618,389
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2,618,389
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(1)
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For the period from January 31, 2013 to July 31, 2013.
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(2)
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For the period from the start of business on January 26, 2012 to January 30, 2013.
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7 Financial Instruments
The Trust is
subject to equity price risk in the normal course of pursuing its investment objective. To achieve its investment objective, the Trust invests substantially all its net assets in U.S. Treasury obligations that mature on or shortly prior to the
Termination Date and in structured option contracts that provide for the Trust to pay or receive cash at the contracts settlement, which are scheduled to conclude on the Termination Date. The price performance of the Index embedded in the
structured option contracts corresponds to the price performance that the Trust seeks in accordance with its investment objective as previously described. The Trusts commitments under the structured option contracts are collateralized by its
investment in U.S. Treasuries.
The over-the-counter structured options in which the Trust invests are subject to the risk that the counterparty to the
contract fails to perform its obligations under the contract. At July 31, 2013, the maximum amount of loss the Trust would incur due to counterparty risk was $4,462,303, with the highest amount from any one counterparty being $1,500,149. To
mitigate this risk, the Trust has entered into master netting agreements with all its derivative counterparties, which allows it and a counterparty to aggregate amounts owed by each of them for derivative transactions under the agreement into a
single net amount payable by either the Trust or the counterparty. Counterparties are required to pledge collateral in the form of cash or U.S. Treasuries for the benefit of the Trust if the net amount due from the counterparty with respect to a
derivative contract exceeds a certain threshold. The amount of collateral posted by the counterparties with respect to such contracts would also reduce the amount of any loss incurred. Collateral pledged for the benefit of the Trust is held in a
segregated account by the Trusts custodian. The portion of such collateral representing cash is reflected as restricted cash with a corresponding liability on the Statement of Assets and Liabilities. The carrying amount of the liability at
July 31, 2013 approximated its fair value. If measured at fair value, the liability for cash collateral for structured options would have been considered as Level 2 in the fair value hierarchy (see Note 8) at July 31, 2013.
In addition, if a counterparty fails to meet its obligation to pay the net premium receivable due upon expiration of a structured option contract, EVM will not
collect the remaining portion of its investment adviser fee attributable to such contract up to the net premium receivable.
A summary of open financial
instruments at July 31, 2013 is as follows:
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Over-The-Counter Structured Options
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Description
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Counterparty
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Notional
Amount
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Expiration
Date
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Market
Value
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Net
Unrealized
Appreciation
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Long Call Spread plus Short Put Single Pay Contract
(1)
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Barclays Bank PLC
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$
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8,727,967
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1/24/2014
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$
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1,382,424
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$
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1,477,559
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Long Call Spread plus Short Put Single Pay Contract
(2)
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Credit Suisse International
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8,727,967
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1/24/2014
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1,389,460
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1,484,595
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Long Call Spread plus Short Put Single Pay Contract
(3)
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Morgan Stanley & Co. International PLC
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8,827,956
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1/24/2014
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1,403,924
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1,500,149
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$
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26,283,890
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$
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4,175,808
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$
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4,462,303
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(1)
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Contract represents 3 embedded options on the S&P 500 Index consisting of 1) a
purchased call option with a strike price of $1,318.43, 2) a written call option with a strike price of $1,553.77 and 3) a written put option with a strike price of $1,120.67.
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eUnits 2 Year U.S. Market Participation Trust:
Upside to Cap / Buffered Downside
July 31,
2013
Notes to Financial Statements (Unaudited)
continued
(2)
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Contract represents 3 embedded options on the S&P 500 Index consisting of 1) a
purchased call option with a strike price of $1,318.43, 2) a written call option with a strike price of $1,555.09 and 3) a written put option with a strike price of $1,120.67.
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(3)
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Contract represents 3 embedded options on the S&P 500 Index consisting of 1) a
purchased call option with a strike price of $1,318.43, 2) a written call option with a strike price of $1,554.82 and 3) a written put option with a strike price of $1,120.67.
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The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk
exposure is equity price risk at July 31, 2013 was as follows:
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Fair Value
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Derivative
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Asset Derivative
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Liability Derivative
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Over-The-Counter Structured Options
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$
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4,175,808
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(1)
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$
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(1)
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Statement of Assets and Liabilities location: Structured options, at value.
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During the current reporting period, the Fund adopted the new disclosure requirements for offsetting assets and liabilities, pursuant to which an entity is required to disclose both gross and net information for
assets and liabilities related to derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions that are eligible for offset or subject to an enforceable master netting or similar agreement.
The Funds derivative assets and liabilities by type, which are reported gross in the Statement of Assets and Liabilities, are presented in the table above. Derivative assets subject to master netting agreements, net of amounts available for
offset, which were none, and net of the related cash collateral pledged to the Fund of $1,270,000, and securities collateral pledged to the Fund of $2,700,734, were $205,074 as of July 31, 2013.
The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary
underlying risk exposure is equity price risk for the period from January 31, 2013 to July 31, 2013 was as follows: