PROSPECTUS January 15, 2003
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$265,625,000
EATON VANCE INSURED
MUNICIPAL BOND FUNDS
[EATON VANCE LOGO]
EATON VANCE INSURED MUNICIPAL EATON VANCE INSURED MASSACHUSETTS EATON VANCE INSURED NEW YORK
BOND FUND II MUNICIPAL BOND FUND MUNICIPAL BOND FUND II
1,750 SHARES, SERIES A 620 SHARES 900 SHARES
1,750 SHARES, SERIES B
EATON VANCE INSURED EATON VANCE INSURED MICHIGAN EATON VANCE INSURED OHIO
CALIFORNIA MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MUNICIPAL BOND FUND II 540 SHARES 875 SHARES
1,350 SHARES
EATON VANCE INSURED FLORIDA EATON VANCE INSURED NEW JERSEY EATON VANCE INSURED PENNSYLVANIA
MUNICIPAL BOND FUND MUNICIPAL BOND FUND MUNICIPAL BOND FUND
900 SHARES 900 SHARES 1,040 SHARES
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
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INVESTMENT OBJECTIVE. Each of Eaton Vance Insured Municipal Bond Fund II (the
"National Fund"), Eaton Vance Insured California Municipal Bond Fund II (the
"California Fund"), Eaton Vance Insured Florida Municipal Bond Fund (the
"Florida Fund"), Eaton Vance Insured Massachusetts Municipal Bond Fund (the
"Massachusetts Fund"), Eaton Vance Insured Michigan Municipal Bond Fund (the
"Michigan Fund"), Eaton Vance Insured New Jersey Municipal Bond Fund (the "New
Jersey Fund"), Eaton Vance Insured New York Municipal Bond Fund II (the "New
York Fund"), Eaton Vance Insured Ohio Municipal Bond Fund (the "Ohio Fund"), and
Eaton Vance Insured Pennsylvania Municipal Bond Fund (the "Pennsylvania Fund")
(each a "Fund" and together the "Funds") is a recently organized,
non-diversified, closed-end management investment company. Each Fund's
investment objective is to provide current income exempt from federal income
tax, including alternative minimum tax, and, in the cases of the California
Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund, the New
Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania Fund, certain
relevant state and local taxes (as described below).
INVESTMENT ADVISER. Each Fund's investment adviser is Eaton Vance Management
("Eaton Vance" or the "Adviser"). Eaton Vance manages 64 different municipal
bond funds with combined assets of about $10.1 billion as of December 31, 2002.
INVESTING IN APS INVOLVES CERTAIN RISKS, SEE "INVESTMENT OBJECTIVES, POLICIES
AND RISKS--RISK CONSIDERATIONS."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
ESTIMATED OFFERING
PUBLIC OFFERING PRICE SALES LOAD(1) EXPENSES PROCEEDS TO FUND
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National Fund $87,500,000 $875,000 $194,050 $86,430,950
California Fund $33,750,000 $337,500 $85,905 $33,326,595
Florida Fund $22,500,000 $225,000 $63,270 $22,211,730
Massachusetts Fund $15,500,000 $155,000 $49,186 $15,295,814
Michigan Fund $13,500,000 $135,000 $45,163 $13,319,837
New Jersey Fund $22,500,000 $225,000 $63,270 $22,211,730
New York Fund $22,500,000 $225,000 $63,270 $22,211,730
Ohio Fund $21,875,000 $218,750 $62,013 $21,594,237
Pennsylvania Fund $26,000,000 $260,000 $70,311 $25,669,689
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(1) Each Fund and Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
The Underwriters are offering the Auction Preferred Shares subject to various
conditions. The Underwriters expect to deliver the APS in book-entry form,
through the facilities of The Depository Trust Company to purchasers on or about
January 17, 2003.
UBS WARBURG
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
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(continued from the previous page)
Capitalized terms not otherwise defined are defined in the Glossary that appears
at the end of this Prospectus. The APS are offered at a price per share of
$25,000 subject to a sales load of $250 per share.
Dividends on the APS of each Fund offered hereby will be cumulative from the
Date of Original Issue and payable commencing on the dates specified below (an
"Initial Dividend Payment Date") and, generally, on a weekly basis thereafter on
the days specified below, subject to certain exceptions. The cash dividend rate
(the "Applicable Rate") on the APS for the Initial Dividend Period on such dates
will be the per annum rate specified below:
INITIAL DIVIDEND NORMAL WEEKLY INITIAL
PAYMENT DATE PAYMENT DAY APPLICABLE RATE
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National Fund
Series A January 30, 2003 Thursday 1.00%
Series B(1) February 3, 2003 Monday 1.35%
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California Fund January 30, 2003 Thursday 0.95%
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Florida Fund January 28, 2003 Tuesday 1.00%
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Massachusetts Fund January 31, 2003 Friday 0.95%
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Michigan Fund January 29, 2003 Wednesday 0.95%
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New Jersey Fund January 28, 2003 Tuesday 0.95%
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New York Fund January 29, 2003 Wednesday 0.95%
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Ohio Fund February 3, 2003 Monday 0.95%
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Pennsylvania Fund January 31, 2003 Friday 0.95%
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(1) The Initial Dividend Period for Series B of the National Fund will be a
Dividend Period of 360 days ending January 11, 2004. The National Fund will
pay the Series B accumulated dividends on the first Business Day of each
month and the final dividend payment will be made on January 12, 2004.
The APS will not be registered on any stock exchange or on any automated
quotation system. APS may only be bought or sold through an order at an auction
with or through a broker-dealer that has entered into an agreement with the
auction agent of the applicable Fund, or in a secondary market that may be
maintained by certain broker-dealers. These broker-dealers are not required to
maintain this market and it may not provide you with liquidity. An increase in
the level of interest rates, particularly during any Special Dividend Period
that is a Long Term Dividend Period as discussed in "Description of
APS--Dividends and dividend periods--General," likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus and the
relevant Fund's Statement of Additional Information and should note that (i) an
Order constitutes an irrevocable commitment to hold, purchase or sell APS based
upon the results of the related Auction, (ii) the Auctions will be conducted
through telephone communications, (iii) settlement for purchases and sales will
be on the Business Day following the Auction and (iv) ownership of APS will be
maintained in book-entry form by or through the Securities Depository. In
certain circumstances, holders of APS may be unable to sell their APS in an
Auction and thus may lack liquidity of investment. The APS may only be
transferred pursuant to a Bid or a Sell Order placed in an Auction through a
Broker-Dealer to the Auction Agent or in the secondary market, if any.
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(continued from the previous page)
This Prospectus sets forth concisely information you should know before
investing in the APS. Please read and retain this Prospectus for future
reference. A Statement of Additional Information for each Fund dated January 15,
2003 has been filed with the SEC and can be obtained without charge by calling
1-800-225-6265 or by writing to the applicable Fund. Tables of contents to the
Statements of Additional Information are located at pages 67 through 71 of this
Prospectus. This Prospectus incorporates by reference the entire Statement of
Additional Information of each Fund. The Statements of Additional Information
are available along with other Fund-related materials at the SEC's internet web
site (http://www.sec.gov). Each Fund's address is The Eaton Vance Building, 255
State Street, Boston, Massachusetts 02109 and its telephone number is
1-800-225-6265.
The APS 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 Funds have not authorized any other person to provide
you with different information. No Fund is making an offer of these securities
in any state where the offer is not permitted. You should not assume that the
information appearing in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus.
TABLE OF CONTENTS
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Prospectus summary.................... 1
Financial highlights.................. 7
The Funds............................. 17
Use of proceeds....................... 18
Capitalization........................ 18
Portfolio composition................. 21
Investment objectives, policies and
risks............................... 24
Management of the Funds............... 34
Description of APS.................... 35
The Auctions.......................... 47
Taxes................................. 54
Description of capital structure...... 60
Certain provisions of the Declarations
of Trust............................ 62
Underwriting.......................... 64
Shareholder Servicing Agent, custodian
and transfer agent.................. 65
Legal opinions........................ 65
Independent auditors.................. 66
Additional information................ 66
National Fund Table of contents for
the Statement of Additional
Information......................... 67
California Fund Table of contents for
the Statement of Additional
Information......................... 67
Florida Fund Table of contents for the
Statement of Additional
Information......................... 68
Massachusetts Fund Table of contents
for the Statement of Additional
Information......................... 68
Michigan Fund Table of contents for
the Statement of Additional
Information......................... 69
New Jersey Fund Table of contents for
the Statement of Additional
Information......................... 69
New York Fund Table of contents for
the Statement of Additional
Information......................... 70
Ohio Fund Table of contents for the
Statement of Additional
Information......................... 70
Pennsylvania Fund Table of contents
for the Statement of Additional
Information......................... 71
Glossary.............................. 72
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Prospectus summary
This is only a summary. You should review the more detailed information
contained in this Prospectus and in each Fund's Statement of Additional
Information.
THE FUNDS
Each of Eaton Vance Insured Municipal Bond Fund II ("National Fund"), Eaton
Vance Insured California Municipal Bond Fund II ("California Fund"), Eaton Vance
Insured Florida Municipal Bond Fund ("Florida Fund"), Eaton Vance Insured
Massachusetts Municipal Bond Fund ("Massachusetts Fund"), Eaton Vance Insured
Michigan Municipal Bond Fund ("Michigan Fund"), Eaton Vance Insured New Jersey
Municipal Bond Fund ("New Jersey Fund"), Eaton Vance Insured New York Municipal
Bond Fund II ("New York Fund"), Eaton Vance Insured Ohio Municipal Bond Fund
("Ohio Fund"), and Eaton Vance Insured Pennsylvania Municipal Bond Fund
("Pennsylvania Fund") (each a "Fund" and together the "Funds") is a recently
organized, non-diversified, closed-end management investment company. Each of
the Funds was organized as a Massachusetts business trust on October 3, 2002.
Each Fund has registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). Each Fund's principal office is located at The Eaton Vance
Building, 255 State Street, Boston, MA 02109, and its telephone number is
1-800-225-6265. Each Fund commenced operations on November 29, 2002 upon the
closing of an initial public offering of its common shares of beneficial
interest, par value $0.01 per share ("Common Shares"). The Common Shares of each
Fund are traded on the American Stock Exchange ("AMEX") under the following
symbols: EIV for the National Fund, EIA for the California Fund, EIF for the
Florida Fund, MAB for the Massachusetts Fund, MIW for the Michigan Fund, EMJ for
the New Jersey Fund, NYH for the New York Fund, EIO for the Ohio Fund and EIP
for the Pennsylvania Fund. In connection with the initial public offering of
each Fund's Common Shares, the underwriters were granted an option to purchase
additional shares to cover over-allotments.
The Trustees of each Fund have determined that for cost savings and other
reasons it is appropriate for the Funds to employ this combined Prospectus with
respect to the offering of the APS. However, each Fund offers only its own
shares of beneficial interest, including the APS. All statements made in this
Prospectus by a Fund are intended to apply only with respect to that Fund and
its APS offered hereby. In approving the use of this combined Prospectus, the
Trustees of each Fund considered the possibility that a Fund might nevertheless
become liable for a misstatement or omission in the Prospectus regarding another
Fund.
Certain of the capitalized terms used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
THE OFFERING
Each of the Funds is offering, pursuant to this Prospectus, preferred shares of
beneficial interest, par value $0.01 per share, which have been designated
Auction Preferred Shares for each of the California Fund, the Florida Fund, the
Massachusetts Fund, the Michigan Fund, the New Jersey Fund, the New York Fund,
the Ohio Fund and the Pennsylvania Fund and Series A and Series B for the
National Fund (collectively, the "APS"). See "The Funds." Issuance of the APS
represents the leveraging financing contemplated in connection with the offering
of the Common Shares of each Fund.
1
Each Fund is offering an aggregate of the following number of APS of each Series
at a purchase price of $25,000 per share plus accumulated dividends, if any,
from the Date of Original Issue:
National Fund Michigan Fund........................ 540
Series A--......................... 1,750 New Jersey Fund...................... 900
Series B--......................... 1,750 New York Fund........................ 900
California Fund...................... 1,350 Ohio Fund............................ 875
Florida Fund......................... 900 Pennsylvania Fund.................... 1,040
Massachusetts Fund................... 620
The APS are being offered through UBS Warburg LLC, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, A.G. Edwards & Sons, Inc., and Prudential Securities
Incorporated (collectively, the "Underwriters"). See "Underwriting".
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and, in the case of the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania Fund,
the particular state and local income taxes set forth below ("state taxes"):
California Fund........ California State New Jersey New Jersey Gross Income
Personal Income Tax Fund............. Tax
Florida Fund........... Florida Intangibles Tax New York Fund.... New York State and New
York City Personal
Income Taxes
Massachusetts Fund..... Massachusetts State Ohio Fund........ Ohio State Personal
Personal Income Tax Income Tax
Michigan Fund.......... Michigan State and City Pennsylvania Pennsylvania State and
Income and Single Fund............. Local Income Taxes and
Business Taxes Pennsylvania Personal
Property Tax
Securities will be purchased and sold in an effort to maintain a competitive
yield and to enhance return based upon the relative value of the securities
available in the marketplace. There is no assurance that a Fund will achieve its
investment objective.
During normal market conditions, at least 80% of each Fund's net assets will be
invested in municipal obligations, the interest on which is exempt from federal
income tax, including alternative minimum tax, and, in the case of the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania Fund,
applicable state taxes ("municipal obligations" or "municipal bonds"), and that
are insured as to principal and interest payments. Such insurance will be from
insurers having a claims-paying ability rated Aaa by Moody's Investors Service,
Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or Fitch
Ratings ("Fitch"). This insurance does not protect the market value of such
obligations or the net asset value of a Fund. The value of an obligation will be
affected by the credit standing of its insurer.
Each Fund primarily invests in high grade municipal obligations. At least 80% of
each Fund's net assets will normally be invested in municipal obligations rated
in the highest category at the time of investment (which is Aaa by Moody's or
AAA by S&P or Fitch or, if unrated, determined to be of comparable quality by
the Adviser). Up to 20% of each Fund's net assets may be invested in obligations
rated below Aaa or AAA (but not lower than BBB or Baa and, in the case of the
California Fund, not lower than A) and comparable unrated obligations.
Accordingly, each Fund does not intend
2
to invest any of its assets in obligations rated below investment grade or in
comparable unrated obligations. From time to time, each Fund may hold
obligations that are unrated but judged to be of comparable quality by the
Adviser. Under normal market conditions, each Fund expects to be fully invested
(at least 95% of its net assets) in accordance with its investment objective.
A Fund will not invest in an obligation if the interest on that obligation is
subject to the federal alternative minimum tax.
A Fund will not invest in municipal obligations that are collateralized by the
proceeds from class action or other litigation against the tobacco industry.
A Fund may invest up to 10% of its total assets in residual interest municipal
obligations known as inverse floaters. Compared to similar fixed rate municipal
obligations, the value of these obligations will fluctuate to a greater extent
in response to changes in prevailing long-term interest rates. Moreover, the
income earned on residual interest municipal obligations will fluctuate in
response to changes in prevailing short-term interest rates. Thus, when such
obligations are held by a Fund, an increase in short- or long-term market
interest rates will adversely affect the income received from such obligations
or the net asset value of a Fund's shares. To the extent a Fund has preferred
shares outstanding, an increase in short-term rates would also result in an
increased cost of leverage, which would adversely affect the Fund's income
available for distribution.
Each Fund may purchase and sell various kinds of financial futures contracts and
related options, including futures contracts and related options based on
various debt securities and securities indices, as well as interest rate swaps
and forward rate contracts, to seek to hedge against changes in interest rates
or for other risk management purposes. Distributions by a Fund of any income or
gains realized on a Fund's transactions in such instruments generally will be
taxable. Guidelines of any rating organization that rates any preferred shares
issued by a Fund may limit a Fund's ability to engage in such transactions.
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance, an indirect wholly-owned subsidiary of Eaton Vance Corp., is each
Fund's investment adviser and administrator. The Adviser and certain of its
subsidiaries manage 6 national municipal funds, 49 single state municipal funds,
8 limited maturity municipal funds and 1 money market municipal fund with
combined assets of about $10.1 billion as of December 31, 2002. See "Management
of the Funds."
RISK FACTORS SUMMARY
Risk is inherent in all investing. Therefore, before investing in a Fund you
should consider certain risks carefully. The primary risks of investing in APS
are:
+ If an auction fails you may not be able to sell some or all of your APS;
+ Because of the nature of the market for APS, you may receive less than the
price you paid for your shares if you sell them outside of the auction,
especially when market interest rates are rising;
+ A rating agency could downgrade APS, which could affect liquidity;
+ A Fund may be forced to redeem your APS to meet regulatory or rating agency
requirements or may elect to redeem your APS in certain circumstances;
+ In extraordinary circumstances, a Fund may not earn sufficient income from
its investments to pay dividends;
+ If long-term interest rates rise, the value of a Fund's investment portfolio
will decline, reducing the asset coverage for its APS;
3
+ If an issuer of a municipal bond in which a Fund invests is downgraded or
defaults, there may be a negative impact on the income and/or asset value of
the Fund's portfolio;
+ Each Fund is a non-diversified management investment company and therefore
may be more susceptible to any single economic, political or regulatory
occurrence; and
+ The policies of each of the California, Florida, Massachusetts, Michigan, New
Jersey, New York, Ohio and Pennsylvania Funds investing primarily in
municipal obligations of issuers located in such Fund's respective state,
makes such Funds more susceptible to adverse economic, political or
regulatory occurrences affecting those issuers. To the extent that a
particular industry sector represents a larger portion of a state's total
economy, the greater the impact that a downturn in such sector is likely to
have on the state's economy.
For additional general risks of investing in APS of the Funds, see "Investment
objectives, policies and risks--Risk considerations."
TRADING MARKET
APS are not listed on an exchange. Instead, you may buy or sell APS at an
auction that normally is held weekly by submitting orders to a broker-dealer
that has entered into an agreement with the auction agent and each Fund (a
"Broker-Dealer"), or to a broker-dealer that has entered into a separate
agreement with a Broker-Dealer. In addition to the auctions, Broker-Dealers and
other broker-dealers may maintain a secondary trading market in APS outside of
auctions, but may discontinue this activity at any time. There is no assurance
that a secondary market will provide shareholders with liquidity. You may
transfer APS outside of auctions only to or through a Broker-Dealer, or a
broker-dealer that has entered into a separate agreement with a Broker-Dealer.
The table below shows the first auction date for each series of APS of each Fund
and the day on which each subsequent auction will normally be held for each such
series. The first auction date for each series of APS of each Fund will be the
Business Day before the dividend payment date for the initial dividend period
for each such series. The start date for subsequent dividend periods normally
will be the Business Day following the auction date unless the then-current
dividend period is a Special Dividend Period, or the day that normally would be
the auction date or the first day of the subsequent dividend period is not a
Business Day.
FIRST AUCTION DATE(1) SUBSEQUENT AUCTION(1)
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National Fund
Series A............................................ January 29 February 5
Series B............................................ January 9, 2004 To be determined
California Fund....................................... January 29 February 5
Florida Fund.......................................... January 27 February 3
Massachusetts Fund.................................... January 30 February 6
Michigan Fund......................................... January 28 February 4
New Jersey Fund....................................... January 27 February 3
New York Fund......................................... January 28 February 4
Ohio Fund............................................. January 31 February 7
Pennsylvania Fund..................................... January 30 February 6
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(1) All dates are 2003 except for Series B of the National Fund which will have
an Initial Dividend Period of 360 days ending January 11, 2004. The
National Fund will pay the Series B accumulated dividends on the first
Business Day of each month, and the final dividend payment will be made on
January 12, 2004.
4
DIVIDENDS AND DIVIDEND PERIODS
The table on the next page shows the dividend rate for the initial dividend
period of the APS offered in this Prospectus. For subsequent dividend periods,
APS shares will pay dividends based on a rate set at auctions, normally held
weekly. In most instances dividends are also paid weekly, on the day following
the end of the dividend period. The rate set at auction will not exceed the
Maximum Rate. See "The Auction--Auction procedures."
Finally the table below shows the numbers of days of the initial dividend period
for the APS. Subsequent dividend periods generally will be 7 days. The dividend
payment date for Special Dividend Periods of more than 28 days will be set out
in the notice designating a Special Dividend Period. See "Description of
APS--Dividends and dividend periods."
DIVIDEND
PAYMENT NUMBER OF
DATE OF DATE FOR DAYS OF
INITIAL ACCUMULATION INITIAL SUBSEQUENT INITIAL
DIVIDEND OF INITIAL DIVIDEND DIVIDEND DIVIDEND
RATE RATE(1) PERIOD(1) PAYMENT DATE PERIOD
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National Fund
Series A...................... 1.00% January 17 January 30 February 6 13
Series B...................... 1.35% January 17 February 3 March 3 360
California Fund................. 0.95% January 17 January 30 February 6 13
Florida Fund.................... 1.00% January 17 January 28 February 4 11
Massachusetts Fund.............. 0.95% January 17 January 31 February 7 14
Michigan Fund................... 0.95% January 17 January 29 February 5 12
New Jersey Fund................. 0.95% January 17 January 28 February 4 11
New York Fund................... 0.95% January 17 January 29 February 5 12
Ohio Fund....................... 0.95% January 17 February 3 February 10 17
Pennsylvania Fund............... 0.95% January 17 January 31 February 7 14
---------------
(1) All dates are 2003 except for Series B of the National Fund which will have
an Initial Dividend Period of 360 days ending January 11, 2004. The
National Fund will pay the Series B accumulated dividends on the first
Business Day of each month, and the final dividend payment will be made on
January 12, 2004.
TAXATION
Because under normal circumstances each Fund will invest substantially all of
its assets in municipal bonds that pay interest exempt from federal income tax,
including alternative minimum tax, and, in the cases of the California Fund, the
Florida Fund, the Massachusetts Fund, the Michigan Fund, the New Jersey Fund,
the New York Fund, the Ohio Fund and the Pennsylvania Fund, applicable state
taxes, the income you receive will ordinarily be similarly exempt. To the extent
that the California Fund, the Florida Fund, the Massachusetts Fund, the Michigan
Fund, the New Jersey, the New York Fund, the Ohio Fund or the Pennsylvania Fund
invests in obligations of issuers not located in those respective states, your
income from such Funds may be subject to applicable state taxes. Taxable income
or gain earned by a Fund will be allocated proportionately to holders of APS and
Common Shares, based on the percentage of total dividends paid to each class for
that year. Accordingly, certain specified APS dividends may be subject to
regular federal income tax on income or gains attributed to a Fund. Each Fund
intends to notify shareholders, before any applicable auction for a dividend
period of 28 days or less, of the amount of any taxable income and gain for
regular federal income tax purposes only, to be paid for the period relating to
that auction. For longer periods, a Fund may notify shareholders. In certain
circumstances, a Fund will make shareholders whole for taxes owing on dividends
paid to shareholders that include taxable income and gains. See "Description of
APS--Dividends and dividend periods--Additional dividends" and "Taxes."
5
REDEMPTION
Although each Fund will not ordinarily redeem APS, it may be required to redeem
APS if, for example, the Fund does not meet an asset coverage ratio required by
law or in order to correct a failure to meet a rating agency guideline in a
timely manner. See "Description of APS--Redemption--Mandatory redemption." A
Fund voluntarily may redeem APS in certain circumstances. See "Description of
APS--Redemption--Optional redemption."
LIQUIDATION PREFERENCE
The liquidation preference of the APS of each series is $25,000 per share, plus
an amount equal to accumulated but unpaid dividends (whether or not earned or
declared). See "Description of APS--Liquidation rights." In addition, holders of
APS may be entitled to receive Additional Dividends in the event of the
liquidation of a Fund, as provided herein. See "Description of APS--Dividends
and dividend periods--Additional dividends" and "Liquidation rights."
RATING
Shares of APS of each Fund will be issued with a credit quality rating of AAA
from S&P. Each Fund may at some future time look to have its APS rated by an
additional or a substitute rating agency. Because each Fund is required to
maintain at least one rating, it must own portfolio securities of sufficient
value with adequate credit quality to meet the rating agency's guidelines. See
"Description of APS--Rating agency guidelines and asset coverage."
VOTING RIGHTS
The 1940 Act requires that the holders of APS and any other preferred shares of
a Fund, voting as a separate class, have the right to elect at least two
Trustees of that Fund at all times and to elect a majority of the Trustees at
any time when two years' dividends on the APS or any other preferred shares are
unpaid. The holders of APS and any other preferred shares of a Fund will vote as
a separate class on certain other matters as required under each Fund's
Agreement and Declaration of Trust ("Declaration of Trust") and the 1940 Act.
See "Description of APS--Voting rights" and "Certain provisions of the
Declarations of Trust."
6
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Financial highlights
Information contained in the tables below under the headings "Per share
operating performance" and "Ratios/Supplemental data" shows the unaudited
operating performance of each Fund from the commencement of the Fund's
investment operations on November 25, 2002 until December 31, 2002. Since each
Fund commenced operations on November 25, 2002, the tables cover approximately
five weeks of operations, during which a substantial portion of the Funds'
assets were invested in high-quality, short-term municipal debt securities.
Accordingly, the information presented may not provide a meaningful picture of
each Fund's operating performance.
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
NATIONAL FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.044
Net realized and unrealized gain............................ 0.321
-----------
Total income from operations................................ $ 0.365
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.660
-----------
Market value -- End of period............................... $ 15.010
-----------
Total Investment Return on Net Asset Value(4)............... 2.34 %
-----------
Total Investment Return on Market Value(4).................. 4.78 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 139,340
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.65 %(5)
Net investment income..................................... 3.40 %(5)
Portfolio Turnover.......................................... 26 %
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+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such action
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 0.85 %(5)
Net investment income........................... 3.20 %(5)
Net investment income per share................... $ 0.041
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
8
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
CALIFORNIA FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.040
Net realized and unrealized gain............................ 0.245
-----------
Total income from operations................................ $ 0.285
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.580
-----------
Market value -- End of period............................... $ 15.000
-----------
Total Investment Return on Net Asset Value(4)............... 1.78 %
-----------
Total Investment Return on Market Value(4).................. 4.71 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 54,043
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.72 %(5)
Net investment income..................................... 3.15 %(5)
Portfolio Turnover.......................................... 24 %
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.03 %(5)
Net investment income........................... 2.84 %(5)
Net investment income per share................... $ 0.036
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
9
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
FLORIDA FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.032
Net realized and unrealized gain............................ 0.273
-----------
Total income from operations................................ $ 0.305
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.600
-----------
Market value -- End of period............................... $ 15.030
-----------
Total Investment Return on Net Asset Value(4)............... 1.92 %
-----------
Total Investment Return on Market Value(4).................. 4.92 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 35,136
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.77 %(5)
Net investment income..................................... 2.55 %(5)
Portfolio Turnover.......................................... 9 %
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.17 %(5)
Net investment income........................... 2.15 %(5)
Net investment income per share................... $ 0.027
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
10
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
MASSACHUSETTS FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.035
Net realized and unrealized gain............................ 0.230
-----------
Total income from operations................................ 0.265
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.560
-----------
Market value -- End of period............................... $ 15.280
-----------
Total Investment Return on Net Asset Value(4)............... 1.64 %
-----------
Total Investment Return on Market Value(4).................. 6.67 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 23,750
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.76 %(5)
Net investment income..................................... 2.78 %(5)
Portfolio Turnover.......................................... 28 %
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.29 %(5)
Net investment income........................... 2.25 %(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
11
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
MICHIGAN FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.035
Net realized and unrealized gain............................ 0.200
-----------
Total income from operations................................ $ 0.235
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.530
-----------
Market value -- End of period............................... $ 15.170
-----------
Total Investment Return on Net Asset Value(4)............... 1.43 %
-----------
Total Investment Return on Market Value(4).................. 5.90 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 20,800
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.66 %(5)
Net investment income..................................... 2.73 %(5)
Portfolio Turnover.......................................... 17 %
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.22 %(5)
Net investment income........................... 2.17 %(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
12
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
NEW JERSEY FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.038
Net realized and unrealized gain............................ 0.367
-----------
Total income from operations................................ $ 0.405
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.700
-----------
Market value -- End of period............................... $ 15.010
-----------
Total Investment Return on Net Asset Value(4)............... 2.62 %
-----------
Total Investment Return on Market Value(4).................. 4.78 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 35,369
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.65 %(5)
Net investment income..................................... 2.94 %(5)
Portfolio Turnover.......................................... 23 %
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.04 %(5)
Net investment income........................... 2.55 %(5)
Net investment income per share................... $0.033
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
13
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
NEW YORK FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.036
Net realized and unrealized gain............................ 0.289
-----------
Total income from operations................................ $ 0.325
-----------
Common Share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.620
-----------
Market value -- End of period............................... $ 15.000
-----------
Total Investment Return on Net Asset Value(4)............... 2.06 %
-----------
Total Investment Return on Market Value(4).................. 4.71 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 36,646
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.70 %(5)
Net investment income..................................... 2.79 %(5)
Portfolio Turnover.......................................... 18 %
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.09 %(5)
Net investment income........................... 2.40 %(5)
Net investment income per share................... $0.031
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
14
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
OHIO FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.033
Net realized and unrealized gain............................ 0.272
-----------
Total income from operations................................ $ 0.305
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.600
-----------
Market value -- End of period............................... $ 15.350
-----------
Total Investment Return on Net Asset Value(4)............... 1.92 %
-----------
Total Investment Return on Market Value(4).................. 7.16 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 34,403
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.76 %(5)
Net investment income..................................... 2.60 %(5)
Portfolio Turnover.......................................... 5 %
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.17 %(5)
Net investment income........................... 2.19 %(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
15
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002 (1)(2)
PENNSYLVANIA FUND ----------------- ------
Net asset value -- Beginning of period(3)................... $ 14.325
-----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.033
Net realized and unrealized gain............................ 0.242
-----------
Total income from operations................................ $ 0.275
-----------
Common share offering costs................................. $ (0.030)
-----------
Net asset value -- End of period............................ $ 14.570
-----------
Market value -- End of period............................... $ 15.060
-----------
Total Investment Return on Net Asset Value(4)............... 1.71 %
-----------
Total Investment Return on Market Value(4).................. 5.13 %
-----------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 39,433
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.68 %(5)
Net investment income..................................... 2.54 %(5)
Portfolio Turnover.......................................... 29 %
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.04 %(5)
Net investment income........................... 2.18 %(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1) For the period from the start of business, November 29, 2002, to December
31, 2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
The Funds
Each of Eaton Vance Insured Municipal Bond Fund (the "National Fund"), Eaton
Vance Insured California Municipal Bond Fund II (the "California Fund"), Eaton
Vance Insured Florida Municipal Bond Fund (the "Florida Fund"), Eaton Vance
Insured Massachusetts Municipal Bond Fund (the "Massachusetts Fund"), Eaton
Vance Insured Michigan Municipal Bond Fund (the "Michigan Fund"), Eaton Vance
Insured New Jersey Municipal Bond Fund (the "New Jersey Fund"), Eaton Vance
Insured New York Municipal Bond Fund II (the "New York Fund"), Eaton Vance
Insured Ohio Municipal Bond Fund (the "Ohio Fund") and Eaton Vance Insured
Pennsylvania Municipal Bond Fund (the "Pennsylvania Fund") (each a "Fund" and
together the "Funds") is a non-diversified, closed-end management investment
company. Each Fund was organized as a Massachusetts business trust on October 3,
2002. Each Fund has registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). Each Fund's principal office is The Eaton Vance
Building, 255 State Street, Boston, MA 02109, and its telephone number is
1-800-225-6265.
Each Fund commenced operations on November 25, 2002 upon the closing of an
initial public offering of shares of its common shares of beneficial interest,
$0.01 par value (the "Common Shares"). The proceeds of such offerings were as
follows after the payment of offering expenses: National Fund--$130,084,500;
California Fund--$50,747,250; Florida Fund--$32,878,500; Massachusetts Fund--
$22,157,250; Michigan Fund--$19,298,250; New Jersey Fund--$32,878,500; New York
Fund--$34,308,000; Ohio Fund--$32,163,750; and Pennsylvania Fund--$37,167,000.
In connection with the initial public offering of each Fund's Common Shares, the
underwriters were granted an option to purchase, at a price of $14.325 per
Common Share, the following amounts of additional Common Shares to cover
over-allotments: National Fund--1,365,000; California Fund--532,500; Florida
Fund--345,000; Massachusetts Fund--232,500; Michigan Fund--202,500; New Jersey
Fund--345,000; New York Fund--360,000; Ohio Fund--337,500; and Pennsylvania
Fund--390,000. On December 20, 2002, the underwriters partially exercised the
over-allotment with respect to each Fund and purchased the following amounts of
Common Shares: National Fund--400,000; California Fund--150,000; Florida
Fund--100,000; Massachusetts Fund--75,000; Michigan Fund--75,000; New Jersey
Fund--100,000; New York Fund--100,000; Ohio Fund--100,000; and Pennsylvania
Fund--100,000. Additionally, on January 10, 2003, the underwriters again
partially exercised the over-allotment with respect to each Fund and purchased
the following amount of common shares: National Fund--397,891; California
Fund--144,565; Florida Fund--135,523; Massachusetts Fund--111,768; Michigan
Fund--75,707; New Jersey Fund--146,634; New York Fund--46,647; Ohio
Fund--146,446; and Pennsylvania Fund--230,531.
The Trustees of each Fund have determined that for cost savings and other
reasons it is appropriate for the Funds to employ this combined Prospectus with
respect to the offering of the APS. However, each Fund offers only its own
shares of beneficial interest, including the APS. All statements made in this
Prospectus by a Fund are intended to apply only with respect to that Fund and
its APS offered hereby. In approving the use of this combined Prospectus, the
Trustees of each Fund considered the possibility that a Fund might nevertheless
become liable for a misstatement or omission in the Prospectus regarding another
Fund.
Certain of the capitalized terms used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
Use of proceeds
The net proceeds of this offering will be approximately as follows after the
payment of the sales load and expected offering costs: National
Fund--$86,430,950; California Fund--$33,326,595; Florida Fund--$22,211,730;
Massachusetts Fund--$15,295,814; Michigan Fund--$13,319,837; New Jersey
Fund--$22,211,730; New York Fund--$22,211,730; Ohio Fund--$21,594,237; and
Pennsylvania Fund--$25,669,689. See "Underwriting."
Each Fund will invest the net proceeds of the offering in accordance with its
investment objective and policies stated below. It is presently anticipated that
each Fund will be able to invest substantially all of the net proceeds in
municipal obligations that meet those investment objectives and policies during
a period estimated not to exceed three months from the completion of the
offering of the APS depending on market conditions and the availability of
appropriate securities. Pending such investment, it is anticipated that the
proceeds will be invested in high quality short-term, tax-exempt securities.
Capitalization
The following table sets forth the unaudited capitalization of each Fund as of
December 31, 2002 as if the Common Shares of each Fund purchased by the
Underwriters pursuant to their overallotment option ("Overallotment Common
Shares") had been issued on that date and as adjusted to give effect to the
issuance of the APS offered hereby.
NATIONAL FUND ACTUAL AS ADJUSTED
-----------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 3,500, as adjusted, at $25,000 per share
liquidation preference)................................... $ -- $ 87,500,000
============ ============
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (9,904,558 shares
issued and outstanding)................................... $ 99,046 $ 99,046
Capital in excess of par value attributable to Common
Shares.................................................... 141,491,306 140,422,256
Net undistributed investment income......................... 410,679 410,679
Net accumulated realized gain (loss)........................ 191,815 191,815
Net unrealized appreciation on investments.................. 2,834,999 2,834,999
------------ ------------
Net Assets.................................................. $145,027,845 $143,958,795
============ ============
--------------------------------------------------------------------------------
18
CAPITALIZATION
--------------------------------------------------------------------------------
CALIFORNIA FUND ACTUAL AS ADJUSTED
-----------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 1,350, as adjusted, at $25,000 per share
liquidation preference)................................... $ -- $ 33,750,000
============ ============
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (3,851,232 shares
issued and outstanding)................................... $ 38,512 $ 38,512
Capital in excess of par value attributable to Common
Shares.................................................... 55,019,545 54,596,140
Net undistributed investment income......................... 143,404 143,404
Net accumulated realized gain (loss)........................ 81,919 81,919
Net unrealized appreciation on investments.................. 826,663 826,663
------------ ------------
Net Assets.................................................. $ 56,110,043 $ 55,686,638
============ ============
FLORIDA FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 900, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $22,500,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (2,542,190 shares
issued and outstanding)................................... $ 25,422 $ 25,422
Capital in excess of par value attributable to Common
Shares.................................................... 36,319,879 36,031,609
Net undistributed investment income......................... 75,309 75,309
Net accumulated realized gain (loss)........................ 18,998 18,998
Net unrealized appreciation on investments.................. 634,025 634,025
----------- -----------
Net Assets.................................................. $37,073,633 $36,785,363
=========== ===========
MASSACHUSETTS FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 620, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $15,500,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (1,743,435 shares
issued and outstanding)................................... $ 17,434 $ 17,434
Capital in excess of par value attributable to Common
Shares.................................................... 24,909,665 24,705,479
Net undistributed investment income......................... 55,409 55,409
Net accumulated realized gain (loss)........................ 21,305 21,305
Net unrealized appreciation on investments.................. 344,039 344,039
----------- -----------
Net Assets.................................................. $25,347,852 $25,143,666
=========== ===========
--------------------------------------------------------------------------------
19
CAPITALIZATION
--------------------------------------------------------------------------------
MICHIGAN FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 540, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $13,500,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (1,507,374 shares
issued and outstanding)................................... $ 15,074 $ 15,074
Capital in excess of par value attributable to Common
Shares.................................................... 21,537,533 21,357,370
Net undistributed investment income......................... 48,946 48,946
Net accumulated realized gain (loss)........................ 17,940 17,940
Net unrealized appreciation on investments.................. 263,213 263,213
----------- -----------
Net Assets.................................................. $21,882,706 $21,702,543
=========== ===========
NEW JERSEY FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 900, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $22,500,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (2,553,301 shares
issued and outstanding)................................... $ 25,533 $ 25,533
Capital in excess of par value attributable to Common
Shares.................................................... 36,478,600 36,190,330
Net undistributed investment income......................... 89,854 89,854
Net accumulated realized gain (loss)........................ 35,768 35,768
Net unrealized appreciation on investments.................. 835,178 835,178
----------- -----------
Net Assets.................................................. $37,464,933 $37,176,663
=========== ===========
NEW YORK FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 900, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $22,500,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (2,553,314 shares
issued and outstanding)................................... $ 25,533 $ 25,533
Capital in excess of par value attributable to Common
Shares.................................................... 36,478,786 36,190,516
Net undistributed investment income......................... 88,813 88,813
Net accumulated realized gain (loss)........................ 22,040 22,040
Net unrealized appreciation on investments.................. 697,216 697,216
----------- -----------
Net Assets.................................................. $37,312,388 $37,024,118
=========== ===========
--------------------------------------------------------------------------------
20
CAPITALIZATION
--------------------------------------------------------------------------------
OHIO FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 875, as adjusted, at $25,000 per share liquidation
preference)............................................... $ -- $21,875,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (2,503,113 shares
issued and outstanding)................................... $ 25,031 $ 25,031
Capital in excess of par value attributable to Common
Shares.................................................... 35,761,665 35,480,902
Net undistributed investment income......................... 75,339 75,339
Net accumulated realized gain (loss)........................ 2,880 2,880
Net unrealized appreciation on investments.................. 631,099 631,099
----------- -----------
Net Assets.................................................. $36,496,014 $36,215,251
=========== ===========
PENNSYLVANIA FUND ACTUAL AS ADJUSTED
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 1,040, as adjusted, at $25,000 per share
liquidation preference)................................... $ -- $26,000,000
=========== ===========
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (2,937,198 shares
issued and outstanding)................................... $ 29,372 $ 29,372
Capital in excess of par value attributable to Common
Shares.................................................... 41,962,568 41,632,257
Net undistributed investment income......................... 87,221 87,221
Net accumulated realized gain (loss)........................ 23,936 23,936
Net unrealized appreciation on investments.................. 625,099 625,099
----------- -----------
Net Assets.................................................. $42,728,196 $42,397,885
=========== ===========
Portfolio composition
As of December 31, 2002, the following tables indicate the approximate
percentage of each Fund's portfolio invested in long-term and short-term
municipal obligations. Also included in these tables is other information with
respect to the composition of each Fund's investment portfolio as of the same
date.
NATIONAL FUND (92.2% long-term; 4.5% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
--------------------------------------------------------------------
AAA Aaa AAA 26 $110,302,680 74.9%
AA Aa AA 4 25,414,851 17.3%
A A A 2 6,610,000 4.5%
Cash...................... -- 4,863,784 3.3%
-- ------------ ------
Total..................... 32 $147,191,315 100.0%
== ============ ======
--------------------------------------------------------------------------------
21
PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
CALIFORNIA FUND (99.1% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 31 $51,890,583 94.5%
AA Aa AA 1 2,525,375 4.6%
Cash...................... -- 506,107 0.9%
-- ----------- ------
Total..................... 32 $54,922,065 100.0%
== =========== ======
FLORIDA FUND (91.8% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 27 $29,140,926 80.3%
AA Aa AA 2 3,533,395 9.7%
A A A 1 640,718 1.8%
Cash...................... -- 2,955,820 8.2%
-- ----------- ------
Total..................... 30 $36,270,859 100.0%
== =========== ======
MASSACHUSETTS FUND (91.5% long-term; 8.5% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 18 $18,432,545 78.3%
AA Aa AA 4 3,094,315 13.2%
A A A 1 1,000,000 4.2%
BBB Baa BBB 1 1,004,520 4.3%
Cash...................... -- -- 0.0%
-- ----------- ------
Total..................... 24 $23,531,380 100.0%
== =========== ======
MICHIGAN FUND (87.7% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 18 $15,339,367 74.3%
AA Aa AA 1 1,009,130 4.9%
A A A 2 1,766,675 8.5%
Cash...................... -- 2,540,238 12.3%
-- ----------- ------
Total..................... 21 $20,655,410 100.0%
== =========== ======
--------------------------------------------------------------------------------
22
PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
NEW JERSEY FUND (94.9% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 21 $30,000,990 85.6%
A A A 2 3,259,500 9.3%
Cash...................... -- 1,778,929 5.1%
-- ----------- ------
Total..................... 23 $35,039,419 100.0%
== =========== ======
NEW YORK FUND (96.9% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 22 $28,702,190 79.3%
AA Aa AA 2 4,779,838 13.2%
A A A 1 1,608,960 4.4%
Cash...................... -- 1,119,416 3.1%
-- ----------- ------
Total..................... 25 $36,210,404 100.0%
== =========== ======
OHIO FUND (86.7% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 20 $30,345,056 85.2%
AA Aa AA 1 514,360 1.5%
Cash...................... -- 4,741,702 13.3%
-- ----------- ------
Total..................... 21 $35,601,118 100.0%
== =========== ======
PENNSYLVANIA FUND (83.5% long-term; 0.0% short-term)
NUMBER OF
S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
-------------------------------------------------------------------
AAA Aaa AAA 23 $31,536,440 80.6%
A A A 1 778,297 2.0%
BBB Baa BBB 1 349,720 0.9%
Cash...................... -- 6,442,900 16.5%
-- ----------- ------
Total..................... 25 $39,107,357 100.0%
== =========== ======
------------
(1) Ratings: Using the higher of S&P's, Moody's or Fitch's ratings on a Fund's
municipal obligation. S&P and Fitch rating categories may be modified
further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings.
Moody's rating categories may be modified further by a 1, 2 or 3 in Aa, A,
Baa, Ba and B ratings.
--------------------------------------------------------------------------------
23
--------------------------------------------------------------------------------
Investment objectives, policies and risks
INVESTMENT OBJECTIVES
Each Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and, in the cases of the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania Fund,
the particular state and local income taxes set forth below ("state taxes"):
California Fund California State Personal Income Tax
Florida Fund Florida Intangibles Tax
Massachusetts Fund Massachusetts State Personal Income Tax
Michigan Fund Michigan State and City Income and Single Business
Taxes
New Jersey Fund New Jersey State Gross Income Tax
New York Fund New York State and New York City Personal Income Taxes
Ohio Fund Ohio State Personal Income Tax
Pennsylvania Fund Pennsylvania State and Local Income Taxes and
Pennsylvania Personal Property Tax
This income will be earned by investing primarily in high grade municipal
obligations (as defined below) that are insured as to the timely payment of
principal and interest. Securities will be purchased and sold in an effort to
maintain a competitive yield and to enhance return based upon the relative value
of the securities available in the marketplace. Investments are based on Eaton
Vance's research and ongoing credit analysis, the underlying materials for which
are generally not available to individual investors.
Eaton Vance seeks to find municipal obligations of high quality that have been
undervalued in the marketplace. Eaton Vance's team of research analysts, traders
and portfolio managers are devoted exclusively to analyzing municipal
securities. The team's goal is to find municipal bonds of high quality that have
been undervalued in the marketplace due to differing dynamics in individual
sectors of the municipal bond market, municipal bond supply, and the structure
of individual bonds, especially in regard to maturities, coupons, and call
dates. Eaton Vance's team of professionals monitors historical and current yield
spreads to find relative value in the marketplace. This research capability is
key to identifying trends that impact the yield-spread relationship of all
bonds, including those in the insured sector.
PRIMARY INVESTMENT POLICIES
GENERAL COMPOSITION OF EACH FUND
During normal market conditions, at least 80% of each Fund's net assets will be
invested in municipal obligations, the interest on which is exempt from federal
income tax, including alternative minimum tax, and, in the cases of the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania Fund,
applicable state taxes ("municipal obligations" or "municipal bonds") and that
are insured as to principal and interest payments. Such insurance will be from
insurers having a claims-paying ability rated Aaa by Moody's Investors Service,
Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or Fitch
Ratings ("Fitch"). This insurance does not protect the market value of such
obligations or the net asset value of a Fund. The value of an insured municipal
obligation will be affected by the credit standing of its insurer.
Each Fund primarily invests in high grade municipal obligations. At least 80% of
each Fund's net assets will normally be invested in municipal obligations rated
in the highest category at the time of
--------------------------------------------------------------------------------
24
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
investment (which is Aaa by Moody's or AAA by S&P or Fitch or, if unrated,
determined to be of comparable quality by the Adviser). Up to 20% of each Fund's
net assets may be invested in obligations rated below Aaa or AAA (but not lower
than BBB or Baa and, in the case of the California Fund, not lower than A) and
comparable unrated obligations. Accordingly, each Fund does not intend to invest
any of its assets in obligations rated below investment grade or in comparable
unrated obligations. From time to time, each Fund may hold obligations that are
unrated but judged to be of comparable quality by the Adviser. Under normal
market conditions, each Fund expects to be fully invested (at least 95% of its
net assets) in accordance with its investment objective.
The foregoing credit quality policies apply only at the time a security is
purchased, and each Fund is not required to dispose of a security in the event
that a rating agency downgrades its assessment of the credit characteristics of
a particular issue or withdraws its assessment. 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 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.
Each Fund has adopted certain fundamental investment restrictions set forth in
its respective Statement of Additional Information, which may not be changed
without a shareholder vote. Except for such restrictions and the 80% requirement
pertaining to investment in municipal and insured municipal obligations set
forth above, the investment objective and policies of each Fund may be changed
by the Board of Trustees (the "Board") without shareholder action.
A Fund will not invest in an obligation if the interest on that obligation is
subject to the federal alternative minimum tax.
A Fund will not invest in municipal obligations that are collateralized by the
proceeds from class action or other litigation against the tobacco industry.
MUNICIPAL OBLIGATIONS
Municipal obligations include bonds, notes and commercial paper issued by a
municipality for a wide variety of both public and private purposes, the
interest on which is, in the opinion of issuer's counsel (or on the basis of
other reliable authority), exempt from federal income tax. The municipal
obligations in which the California Fund, the Florida Fund, the Massachusetts
Fund, the Michigan Fund, the New Jersey Fund, the New York Fund, the Ohio Fund
and the Pennsylvania Fund will invest are generally issued by municipal issuers
in those respective states and pay interest that is, in the opinion of issuer's
counsel (or on the basis of other reliable authority), exempt from applicable
state taxes, in addition to federal income tax, including alternative minimum
tax. Each Fund may also invest in municipal obligations issued by United States
territories (such as Puerto Rico or Guam) the interest on which is exempt from
federal income tax and, in the cases of the California Fund, the Florida Fund,
the Massachusetts Fund, the Michigan Fund, the New Jersey Fund, the New York
Fund, the Ohio Fund and the Pennsylvania Fund, applicable state taxes.
Public purpose municipal bonds include general obligation and revenue bonds.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
or from the proceeds of a specific revenue source. Some revenue bonds are
payable solely or partly from funds that are subject to annual appropriations by
a state's legislature. Municipal notes include bond anticipation, tax
anticipation and revenue anticipation notes. Bond, tax and revenue anticipation
notes are short-term obligations that will be retired with the proceeds of an
anticipated bond issue, tax revenue or facility revenue, respectively.
A Fund may invest up to 10% of its total assets in residual interest municipal
obligations knows as inverse floaters. Compared to similar fixed rate municipal
obligations, the value of these obligations will fluctuate to a greater extent
in response to changes in prevailing long-term interest rates.
--------------------------------------------------------------------------------
25
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Moreover, the income earned on residual interest municipal obligations will
fluctuate in response to changes in prevailing short-term interest rates. Thus,
when such obligations are held by a Fund, an increase in short- or long-term
market interest rates will adversely affect the income received from such
obligations or the net asset value of a Fund's shares. To the extent a Fund has
preferred shares outstanding, an increase in short-term rates would also result
in an increased cost of leverage, which would adversely affect the Fund income
available for distribution.
Some of the securities in which each Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. A Fund is required to take into account income from zero-coupon bonds
on a current basis, even though it does not receive that income currently in
cash, and such Fund is required to distribute substantially all of its income
for each taxable year. Thus, a Fund may have to sell other investments to obtain
cash needed to make income distributions.
MUNICIPAL OBLIGATION INSURANCE GENERALLY
Insured municipal obligations held by each Fund will be insured as to their
scheduled payment of principal and interest under (i) an insurance policy
obtained by the issuer or underwriter of the Fund municipal obligation at the
time of its original issuance ("Original Issue Insurance"), (ii) an insurance
policy obtained by the Fund or a third party subsequent to the Fund municipal
obligation's original issuance ("Secondary Market Insurance"), or (iii) another
municipal insurance policy purchased by the Fund ("Portfolio Insurance"). This
insurance does not protect the market value of such obligations or the net asset
value of a Fund. Each Fund expects initially to emphasize investments in
municipal bonds insured under bond-specific insurance policies (i.e., Original
Issue or Secondary Market Insurance). Each Fund may obtain Portfolio Insurance
from the insurers described in Appendix D to the Statement of Additional
Information. Each Fund, as a non-fundamental policy that can be changed by the
Fund's Board, will only obtain policies of Portfolio Insurance issued by
insurers whose claims-paying ability is rated "Aaa" by Moody's or "AAA" by S&P
or Fitch. There is no limit on the percentage of each Fund's assets that may be
invested in municipal bonds insured by any one insurer.
Municipal bonds covered by Original Issue Insurance or Secondary Market
Insurance are themselves typically assigned a rating of "Aaa" or "AAA", as the
case may be, by virtue of the rating of the "Aaa" or "AAA" claims-paying ability
of the insurer and would generally be assigned a lower rating if the ratings
were based primarily upon the credit characteristics of the issuer without
regard to the insurance feature. By way of contrast, the ratings, if any,
assigned to municipal bonds insured under Portfolio Insurance will be based
primarily upon the credit characteristics of the issuer, without regard to the
insurance feature, and generally will carry a rating that is below "Aaa" or
"AAA." While in the portfolio of a Fund, however, a municipal bond backed by
Portfolio Insurance will effectively be of the same credit quality as a
municipal bond issued by an issuer of comparable credit characteristics that is
backed by Original Issue Insurance or Secondary Market Insurance.
Each Fund's policy of investing in municipal bonds insured by insurers whose
claims-paying ability is rated "Aaa" or "AAA" applies only at the time of
purchase of a security, and the Fund will not be required to dispose of the
securities in the event Moody's, S&P or Fitch, as the case may be, downgrades
its assessment of the claims-paying ability of a particular insurer or the
credit characteristics of a particular issuer or withdraws its assessment. In
this connection, it should be noted that in the event Moody's, S&P or Fitch (or
all of them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal bonds insured by such insurer, and municipal bonds insured
under Portfolio Insurance issued by such insurer also would be of reduced
quality in the portfolio of the
--------------------------------------------------------------------------------
26
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Fund. Moody's, S&P and Fitch continually assess the claims-paying ability of
insurers and the credit characteristics of issuers, and there can be no
assurance that they will not downgrade or withdraw their assessments subsequent
to the time the Fund purchases securities.
The value of municipal bonds covered by Portfolio Insurance that are in default
or in significant risk of default will be determined by separately establishing
a value for the municipal bond and a value for the Portfolio Insurance.
ORIGINAL ISSUE INSURANCE
Original Issue Insurance is purchased with respect to a particular issue of
municipal bonds by the issuer thereof or a third party in conjunction with the
original issuance of such municipal bonds. Under this insurance, the insurer
unconditionally guarantees to the holder of the municipal bond the timely
payment of principal and interest on such obligations when and as these payments
become due but not paid by the issuer, except that in the event of the
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default or otherwise, the payments guaranteed may be made in the
amounts and at the times as payment of principal would have been due had there
not been any acceleration. The insurer is responsible for these payments less
any amounts received by the holder from any trustee for the municipal bond
issuer or from any other source. Original Issue Insurance does not guarantee
payment on an accelerated basis, the payment of any redemption premium (except
with respect to certain premium payments in the case of certain small issue
industrial development and pollution control municipal bonds), the value of a
Fund's shares, the market value of municipal bonds, or payments of any tender
purchase price upon the tender of the municipal bonds. Original Issue Insurance
also does not insure against nonpayment of principal or interest on municipal
bonds resulting from the insolvency, negligence or any other act or omission of
the trustee or other paying agent for these bonds.
Original Issue Insurance remains in effect as long as the municipal bonds it
covers remain outstanding and the insurer remains in business, regardless of
whether a Fund ultimately disposes of these municipal bonds. Consequently,
Original Issue Insurance may be considered to represent an element of market
value with respect to the municipal bonds so insured, but the exact effect, if
any, of this insurance on the market value cannot be estimated.
SECONDARY MARKET INSURANCE
Subsequent to the time of original issuance of a municipal bond, each Fund or a
third party may, upon the payment of a single premium, purchase insurance on
that security. Secondary Market Insurance generally provides the same type of
coverage as Original Issue Insurance and, as with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal bonds it
covers remain outstanding and the insurer remains in business, regardless of
whether the Fund ultimately disposes of these municipal bonds.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal bond would be to enable a Fund to enhance the value of the
security. A Fund, for example, might seek to purchase a particular municipal
bond and obtain Secondary Market Insurance for it if, in the Adviser's opinion,
the market value of the security, as insured, less the cost of the Secondary
Market Insurance, would exceed the current value of the security without
insurance. Similarly, if a Fund owns but wishes to sell a municipal bond that is
then covered by Portfolio Insurance, the Fund might seek to obtain Secondary
Market Insurance for it if, in the Adviser's opinion, the net proceeds of the
Fund's sale of the security, as insured, less the cost of the Secondary Market
Insurance, would exceed the current value of the security. In determining
whether to insure municipal bonds the Fund owns, an insurer will apply its own
standards, which correspond generally to the standards the insurer has
--------------------------------------------------------------------------------
27
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
established for determining the insurability of new issues of municipal bonds.
See "Original Issue Insurance" above.
PORTFOLIO INSURANCE
Portfolio Insurance guarantees the payment of principal and interest on
specified eligible municipal bonds purchased by a Fund and presently held by the
Fund. Except as described below, Portfolio Insurance generally provides the same
type of coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal bonds insured under a Portfolio Insurance policy would
generally not be insured under any other policy. A municipal bond is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to holders of Common Shares of a Fund.
If a municipal obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then the security is not required to be additionally
insured under any Portfolio Insurance that a Fund may purchase. All premiums
respecting municipal bonds covered by Original Issue Insurance or Secondary
Market Insurance are paid in advance by the issuer or other party obtaining the
insurance.
Portfolio Insurance policies are effective only as to municipal bonds owned by
and held by a Fund, and do not cover municipal bonds for which the contract for
purchase fails. A "when-issued" municipal obligation will be covered under a
Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal bond.
In determining whether to insure municipal bonds held by each Fund, an insurer
will apply its own standards, which correspond generally to the standards it has
established for determining the insurability of new issues of municipal bonds.
See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable and will remain in effect
so long as a Fund is in existence, the municipal bonds covered by the policy
continue to be held by the Fund, and the Fund pays the premiums for the policy.
Each insurer will generally reserve the right at any time upon 90 days' written
notice to a Fund to refuse to insure any additional bonds purchased by the Fund
after the effective date of such notice. Each Fund's Board generally will
reserve the right to terminate each policy upon seven days' written notice to an
insurer if it determines that the cost of such policy is not reasonable in
relation to the value of the insurance to the Fund.
Each Portfolio Insurance policy will terminate as to any municipal bond that has
been redeemed from or sold by a Fund on the date of redemption or the settlement
date of sale, and an insurer will not have any liability thereafter under a
policy for any municipal bond, except that if the redemption date or settlement
date occurs after a record date and before the related payment date for any
municipal bond, the policy will terminate for that municipal bond on the
business day immediately following the payment date. Each policy will terminate
as to all municipal bonds covered thereby on the date on which the last of the
covered municipal bonds mature, are redeemed or are sold by the Fund.
One or more Portfolio Insurance policies may provide a Fund, pursuant to an
irrevocable commitment of the insurer, with the option to exercise the right to
obtain permanent insurance ("Permanent Insurance") for a municipal bond that is
sold by the Fund. A Fund would exercise the right to obtain Permanent Insurance
upon payment of a single, predetermined insurance premium payable from the sale
proceeds of the municipal bond. Each Fund expects to exercise the right to
obtain Permanent Insurance for a municipal bond only if, in the Adviser's
opinion, upon the exercise the net proceeds from the sale of the municipal bond,
as insured, would exceed the proceeds from the sale of the security without
insurance.
--------------------------------------------------------------------------------
28
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
The Portfolio Insurance premium for each municipal bond is determined based upon
the insurability of each security as of the date of purchase and will not be
increased or decreased for any change in the security's creditworthiness unless
the security is in default as to payment of principal or interest, or both. If
such event occurs, the Permanent Insurance premium will be subject to an
increase predetermined at the date of the Fund's purchase.
Because each Portfolio Insurance policy will terminate for municipal bonds sold
by a Fund on the date of sale, in which event the insurer will be liable only
for those payments of principal and interest that are then due and owing (unless
Permanent Insurance is obtained by the Fund), the provision for this insurance
will not enhance the marketability of the Fund's obligations, whether or not the
obligations are in default or in significant risk of default. On the other hand,
because Original Issue Insurance and Secondary Market Insurance generally will
remain in effect as long as the municipal bonds they cover are outstanding,
these insurance policies may enhance the marketability of these bonds even when
they are in default or in significant risk of default, but the exact effect, if
any, on marketability, cannot be estimated. Accordingly, each Fund may determine
to retain or, alternatively, to sell municipal bonds covered by Original Issue
Insurance or Secondary Market Insurance that are in default or in significant
risk of default.
Premiums for a Portfolio Insurance policy are paid monthly, and are adjusted for
purchases and sales of municipal bonds covered by the policy during the month.
The yield on a Fund is reduced to the extent of the insurance premiums it pays.
Depending upon the characteristics of the municipal bonds held by a Fund, the
annual premium rate for policies of Portfolio Insurance is estimated to range
from 12 to 18 basis points of the value of the municipal bonds covered under the
policy.
Although the insurance feature reduces certain financial risks, the premiums for
insurance and the higher market price paid for insured obligations may reduce a
Fund's current yield. Insurance generally will be obtained from insurers with a
claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The insurance
does not guarantee the market value of the insured obligation or the net asset
value of the Fund's Common Shares.
OTHER TYPES OF CREDIT SUPPORT
Each Fund may also invest in uninsured municipal obligations that are secured by
an escrow or trust account that contains securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, that are backed by the full
faith and credit of the United States, and sufficient, in combination with
available trustee-held funds, in amount to ensure the payment of interest on and
principal of the secured obligation ("collateralized obligations"). These
collateralized obligations generally will not be insured and will include, but
are not limited to, municipal bonds that have been advance refunded where the
proceeds of the refunding have been used to buy U.S. Government or U.S.
Government agency securities that are placed in escrow and whose interest or
maturing principal payments, or both, are sufficient to cover the remaining
scheduled debt service on that municipal bond. Collateralized obligations
generally are regarded as having the credit characteristics of the underlying
U.S. Government, U.S. Government agency or instrumentality securities. These
obligations will not be subject to original Issue Insurance, Secondary Market
Insurance or Portfolio Insurance. Accordingly, despite the existence of these
credit support characteristics, these obligations will not be considered to be
insured obligations for purposes of the Fund's policy of investing at least 80%
of its net assets in insured obligations. The credit quality of companies that
provide such credit enhancements will affect the value of those securities.
ADDITIONAL INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis, which means that
payment and delivery occur on a future settlement date. The price and yield of
such securities are generally fixed on the date
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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of commitment to purchase. However, the market value of the securities may
fluctuate prior to delivery and upon delivery the securities may be worth more
or less than what a Fund agreed to pay for them. A Fund may be required to
maintain a segregated account of liquid assets equal to outstanding purchase
commitments. Each Fund may also purchase instruments that give the Fund the
option to purchase a municipal obligation when and if issued.
FUTURES TRANSACTIONS
Each Fund 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 a Fund's initial investment in these contracts. Each Fund 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 a Fund. Distributions by a Fund of any gains realized on
the Fund's transactions in futures and options on futures will be taxable.
Rating agency guidelines on the APS to be issued by the Fund limit use of these
transactions.
INTEREST RATE SWAPS AND FORWARD RATE CONTRACTS
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. Each Fund will only enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted out
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments. Each Fund may also enter forward rate contracts. Under these
contracts, the buyer locks in an interest rate at a future settlement date. If
the interest rate on the settlement date exceeds the lock rate, the buyer pays
the seller the difference between the two rates. If the lock rate exceeds the
interest rate on the settlement date, the seller pays the buyer the difference
between the two rates. Any such gain received by a Fund would be taxable.
If the other party to an interest rate swap or forward rate contract defaults, a
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. The net amount of the excess, if any, of each
Fund's obligations over its entitlements will be maintained in a segregated
account by the Fund's custodian. Each Fund will not enter into any interest rate
swap or forward rate contract unless the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction. These
instruments are traded in the over-the-counter market.
INVESTMENT COMPANY SECURITIES
Each Fund may purchase common shares of closed-end investment companies that
have a similar investment objective and policies to the Fund. In addition to
providing tax-exempt income, such securities may provide capital appreciation.
Such investments, which may also be leveraged and subject to the same risks as
the Fund, will not exceed 10% of total assets, and no such company will be
affiliated with Eaton Vance. These companies bear fees and expenses that a Fund
will incur indirectly.
MUNICIPAL LEASES
Each Fund may invest in municipal leases and participations therein. Municipal
leases are obligations in the form of a lease or installment purchase
arrangement which is issued by the state or local government to acquire
equipment and facilities.
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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RISK CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company security
involves risk, including the risk that you may receive little or no return on
your investment or even that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in APS.
INTEREST RATE RISK
Each Fund issues APS, which pay dividends based on short-term interest rates,
and uses the proceeds to buy municipal obligations, which pay interest based on
longer-term yields. Longer-term municipal obligation yields are typically,
although not always, higher than short-term interest rates. Both long-term and
short-term interest rates may fluctuate. If short-term interest rates rise, APS
rates may rise such that the amount of dividends paid to APS holders exceeds the
income from the portfolio securities purchased with the proceeds from the sale
of APS. Because income from each Fund's entire investment portfolio (not just
the portion purchased with the proceeds of the APS offering) is available to pay
APS dividends, however, APS dividend rates would need to greatly exceed the
Fund's net portfolio income before the Fund's ability to pay APS dividends would
be jeopardized. If long-term rates rise, the value of each Fund's investment
portfolio will decline, reducing the amount of assets serving as asset coverage
for the APS.
AUCTION RISK
Holders of APS may not be able to sell APS at an Auction if the auction fails;
that is, if there are more APS offered for sale than there are buyers for those
APS. Also, if a hold order is placed at an auction (an order to retain APS) only
at a specified rate, and that bid rate exceeds the rate set at the Auction, the
APS will not be retained. Finally, if you elect to buy or retain APS without
specifying a rate below which you would not wish to continue to hold those APS,
and the auction sets a below market rate, you may receive a lower rate of return
on your APS then the market rate. See "Description of APS" and "The
Auction--Auction procedures."
SECONDARY MARKET RISK
It may not be possible to sell APS between auctions or it may only be possible
to sell them for a price of less than $25,000 per share plus any accumulated
dividends. If a Fund has designated a Special Dividend Period (a dividend period
of more than 7 days), changes in interest rates could affect the price of APS
sold in the secondary market. The National Fund has elected a Special Dividend
Period for its Series B Preferred Shares as its Initial Dividend Period.
Broker-dealers may maintain a secondary trading market in the APS outside of
Auctions; however, they have no obligation to do so and there can be no
assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the broker-dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling Shareholder may
sell APS between Auctions at a price per share of less than $25,000. Accrued APS
dividends, however, should at least partially compensate for the increased
market interest rate.
RATINGS AND ASSET COVERAGE RISK
While S&P assigns a rating of "AAA" to the APS, the ratings do not eliminate or
necessarily mitigate the risks of investing in APS. A rating agency could
downgrade APS, which may make APS less liquid at an Auction or in the secondary
market, although the downgrade would probably result in higher dividend rates.
If a rating agency downgrades APS of a Fund, the Fund will alter its portfolio
or redeem APS. Each Fund may voluntarily redeem APS under certain circumstances.
A preferred stock
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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rating is an assessment of the capacity and willingness of an issuer to pay
preferred stock obligations. The ratings on the Preferred Shares are not
recommendations to purchase, hold, or sell those shares, inasmuch as the ratings
do not comment as to market price or suitability for a particular investor. The
rating agency guidelines described above also do not address the likelihood that
an owner of the Preferred Shares will be able to sell such shares in an auction
or otherwise. See "Description of APS--Rating agency guidelines and asset
coverage" for a description of the asset maintenance tests each Fund must meet.
INCOME RISK
The income investors receive from a Fund is based primarily on the interest it
earns from its investments, which can vary widely over the short- and long-term.
If long-term interest rates drop, a Fund's income available over time to make
dividend payments with respect to APS could drop as well if the Fund purchases
securities with lower interest coupons.
CALL AND OTHER REINVESTMENT RISKS
If interest rates fall, it is possible that issuers of callable bonds with high
interest coupons will "call" (or prepay) their bonds before their maturity date.
If a call were exercised by the issuer during a period of declining interest
rates, a Fund is likely to replace such called security with a lower yielding
security. If that were to happen, it could decrease the Fund's dividends and
possibly could affect the market price of Common Shares. Similar risks exist
when a Fund invests the proceeds from matured or traded municipal obligations at
market interest rates that are below the Fund's current earnings rate.
CREDIT RISK
Credit risk is the risk that one or more municipal obligations in a Fund'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. In general, lower rated municipal bonds carry a greater degree of risk
that the issuer will lose its ability to make interest and principal payments,
which could have a negative impact on a Fund's net asset value or dividends.
Securities rated in the fourth highest category are considered investment grade
but they also may have some speculative characteristics.
Changes in the credit quality of the issuers of municipal obligations held by a
Fund will affect the principal value of (and possibly the income earned on) such
obligations. In addition, the value of such securities are affected by changes
in general economic conditions and business conditions affecting the relevant
economic sectors. Changes by Rating Agencies in their ratings of a security and
in the ability of the issuer to make payments of principal and interest may also
affect the value of a Fund's investments. The amount of information about the
financial condition of an issuer of municipal obligations may not be as
extensive as that made available by corporations whose securities are publicly
traded.
If rating agencies lower their ratings of municipal obligations in a Fund's
portfolio, the value of those municipal obligations could decline, which could
jeopardize the rating agencies' ratings of the APS. Because the primary source
of income for each Fund is the interest and principal payments on the municipal
obligations in which it invests, any default by an issuer of a municipal
obligation could have a negative impact on a Fund's ability to pay dividends on
the APS and could result in the redemption of some or all of the APS.
Each Fund may invest in municipal leases and participations in municipal leases.
The obligation of the issuer to meet its obligations under such leases is often
subject to the appropriation by the appropriate legislative body, on an annual
or other basis, of funds for the payment of the obligations. Investments in
municipal leases are thus subject to the risk that the legislative body will not
make the necessary appropriation and the issuer will not otherwise be willing or
able to meet its obligation.
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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STATE CONCENTRATION
The California Fund, the Florida Fund, the Massachusetts Fund, the Michigan
Fund, the New Jersey Fund, the New York Fund, the Ohio Fund and the Pennsylvania
Fund will invest substantially all of their respective net assets in municipal
obligations that are exempt from the taxes of their respective jurisdictions. A
Fund is therefore susceptible to political, economic or regulatory factors
affecting issuers of those municipal obligations. For a brief summary of some of
the general factors that may impact certain issuers of municipal obligations for
these jurisdictions, please see Appendix A and each such Fund's Statement of
Additional Information.
TERRITORY CONCENTRATION
Each Fund may invest 25% or more of its total assets in municipal obligations of
issuers located in the same U.S. territory. This may make a Fund more
susceptible to adverse economic, political, or regulatory occurrences affecting
a particular territory.
LIQUIDITY RISK
At times, a portion of each Fund's assets may be invested in securities as to
which the Fund, by itself or together with other accounts managed by Eaton Vance
and its affiliates, holds a major portion of all of such securities. The
secondary market for some municipal obligations is less liquid than that for
taxable debt obligations or other more widely traded municipal obligations. No
established resale market exists for certain of the municipal obligations in
which each Fund may invest. The Fund has no limitation on the amount of its
assets that may be invested in securities which are not readily marketable or
are subject to restrictions on resale. In certain situations, a Fund could find
it more difficult to sell such securities at desirable times and/or prices. The
Fund will not invest more than 15% of its net assets in illiquid securities.
MUNICIPAL BOND MARKET RISK
Investing in the municipal bond market involves certain risks. The amount of
public information available about the municipal obligations in each Fund's
portfolio is generally less than for corporate equities or bonds, and the
investment performance of each Fund may therefore be more dependent on the
analytical abilities of Eaton Vance than if the Fund were a stock fund or
taxable bond fund.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, each Fund could experience delays in collecting principal and
interest to which it is entitled. To enforce its rights in the event of default
in the payment of interest or repayment of principal, or both, each Fund may
take possession of and manage the assets securing the issuer's obligations on
such securities, which may increase the Fund's operating expenses. Any income
derived from a Fund's ownership or operation of such assets may not be
tax-exempt.
MUNICIPAL BOND INSURANCE
In the event Moody's, S&P or Fitch (or all of them) should downgrade its
assessment of the claims-paying ability of a particular insurer, it (or they)
could also be expected to downgrade the ratings assigned to municipal
obligations insured by such insurer, and municipal obligations insured under
Portfolio Insurance issued by such insurer also would be of reduced quality in
the portfolio of a Fund. See "Investment objectives, policies and
risks--Municipal obligation insurance generally" above.
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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In addition, to the extent each Fund employs Portfolio Insurance, each Fund may
be subject to certain restrictions on investments imposed by guidelines of the
insurance companies issuing such Portfolio Insurance. Each Fund does not expect
these guidelines to prevent Eaton Vance from managing each Fund's portfolio in
accordance with the Fund's investment objective and policies.
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 APS and distributions thereon can
decline. In an inflationary period, however, it is expected that, through the
Auction process, APS dividend rates would increase, tending to offset the risk.
NON-DIVERSIFICATION
Each Fund has registered as a "non-diversified" investment company under the
1940 Act so that, subject to its investment restrictions and applicable federal
income tax diversification requirements, with respect to 50% of its total
assets, it will be able to invest more than 5% (but not more than 25%) of the
value of its total assets in the obligations of any single issuer. To the extent
a Fund invests a relatively high percentage of its assets in obligations of a
limited number of issuers, the Fund will be more susceptible than a more widely
diversified investment company to any single corporate, economic, political or
regulatory occurrence.
Management of the Funds
BOARDS OF TRUSTEES
The management of each Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of each Fund's Board of Trustees under the laws of The
Commonwealth of Massachusetts and the 1940 Act.
THE ADVISER
Eaton Vance acts as each Fund's investment adviser under an Investment Advisory
Agreement ("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 $56.6 billion as of December
31, 2002. 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.
Eaton Vance employs 25 personnel in its municipal bond department, including
five portfolio managers, three traders and nine credit analysts. Eaton Vance was
one of the first advisory firms to manage a registered municipal bond investment
company, and has done so continuously since 1978. Eaton Vance and certain of its
subsidiaries currently manage 6 national municipal investment companies, 49
single state municipal investment companies, 8 limited maturity municipal
investment companies and 1 money market municipal investment company, with
assets of about $10.1 billion as of December 31, 2002.
Under the general supervision of each Fund's Board of Trustees, the Adviser will
carry out the investment and reinvestment of the assets of each Fund, will
furnish continuously an investment program with respect to each Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to each Fund investment
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MANAGEMENT OF THE FUNDS
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advice and office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser will compensate all Trustees and officers
of each Fund who are members of the Adviser's organization and who render
investment services to each Fund, and will also compensate all other Adviser
personnel who provide research and investment services to each Fund. In return
for these services, facilities and payments, each Fund has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of
0.55% of the average weekly gross assets of each Fund. Gross assets of each Fund
shall be calculated by deducting accrued liabilities of each Fund not including
the amount of any preferred shares outstanding.
William H. Ahern is the portfolio manager of the Michigan Fund and is
responsible for day-to-day management of the Michigan Fund's investments. Mr.
Ahern also manages other Eaton Vance portfolios, has been an Eaton Vance
portfolio manager for more than 5 years and is Vice President of Eaton Vance.
Cynthia J. Clemson is the portfolio manager of the California Fund, the Florida
Fund and the Pennsylvania Fund and is responsible for day-to-day management of
the each Fund's investments. Ms. Clemson also manages other Eaton Vance
portfolios, has been an Eaton Vance portfolio manager for more than 5 years and
is Vice President of Eaton Vance.
Thomas J. Fetter is the portfolio manager of the National Fund, the New York
Fund and the Ohio Fund and is responsible for day-to-day management of each
Fund's investments. Mr. Fetter also manages other Eaton Vance portfolios, has
been an Eaton Vance portfolio manager for more than 5 years and is Vice
President of Eaton Vance.
Robert B. MacIntosh is the portfolio manager of the Massachusetts Fund and the
New Jersey Fund and is responsible for day-to-day management of each of the
Fund's investments. Mr. MacIntosh also manages other Eaton Vance portfolios, has
been an Eaton Vance portfolio manager for more than 5 years and is Vice
President of Eaton Vance.
Each Fund and the Adviser have adopted Codes of Ethics relating to personal
securities transactions. The Codes permit Adviser personnel to invest in
securities (including securities that may be purchased or held by a Fund) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
Eaton Vance serves as administrator of each Fund, but currently receives no
compensation for providing administrative services to the Funds. Under the
Administration Agreement with each Fund (each an "Administration Agreement"),
Eaton Vance is responsible for managing the business affairs of each Fund,
subject to the supervision of each Fund's Board of Trustees. Eaton Vance will
furnish to each Fund all office facilities, equipment and personnel for
administering the affairs of each Fund. 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 each
Fund'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 each
Fund's business.
Description of APS
The following is a brief description of the terms of the APS. This description
does not purport to be complete and is subject to and qualified in its entirety
by reference to each Fund's Declaration of Trust and Amended By-Laws, including
the provisions thereof establishing the APS. Each Fund's Declaration of Trust
and the form of Amended By-Laws establishing the terms of the APS have been
filed as exhibits to or incorporated by reference in the Registration Statement
of which this Prospectus is a
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35
DESCRIPTION OF APS
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part. The Amended By-Laws for each Fund may be found in Appendix E to each
Fund's Statement of Additional Information.
GENERAL
Each Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including preferred
shares, having a par value of $0.01 per share, in one or more series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the Shareholders. Each Fund's Amended By-Laws
currently authorize the number of shares of APS of each series set forth below
in "Description of Capital Structure." The APS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared). See "Description of
APS--Liquidation Rights."
The APS of each series will rank on parity with shares of any other series of
APS and with shares of other series of preferred shares of each Fund, as to the
payment of dividends and the distribution of assets upon liquidation. All shares
of APS carry one vote per share on all matters on which such shares are entitled
to be voted. APS, when issued, will be fully paid and, subject to matters
discussed in "Certain provisions of the Declaration of Trust," non-assessable
and have no preemptive, conversion or cumulative voting rights. The APS will not
be convertible into Common Shares or other capital stock of a Fund, and the
holders thereof will have no preemptive, or cumulative voting rights.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL
After the Initial Dividend Period, each Subsequent Dividend period for the APS
will generally consist of seven days (a "7-Day Dividend Period"); provided,
however, that prior to any Auction, a Fund may elect, subject to certain
limitations described herein, upon giving notice to holders thereof, a Special
Dividend Period as discussed below. Initially, the National Fund has elected an
Initial Dividend Period for Series B of 360 days. The National Fund will pay the
Series B accumulated dividends on the first Business Day of each month, with
final payment being made on January 12, 2004. The holders of the APS of a Fund
will be entitled to receive, when, as and if declared by that Fund's Board of
Trustees, out of funds legally available therefor, cumulative cash dividends on
their APS, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the dates set forth below.
Dividends on the APS of a Fund so declared and payable shall be paid (i) in
preference to and in priority over any dividends declared and payable on that
Fund's Common Shares and (ii) to the extent permitted under the Code and
available, out of the net tax-exempt income earned on that Fund's investments.
Dividends on the APS, to the extent that they are derived from municipal
obligations, generally will be exempt from federal income tax though some or all
of those dividends may be a tax preference item for purposes of the federal
alternative minimum tax ("Preference Item"), and relevant state taxes. See
"Taxes."
Dividends on the APS will accumulate from the date on which a Fund originally
issues the APS (the "Date of Original Issue") and will be payable on the APS on
the dates described below. Dividends on the APS with respect to the Initial
Dividend Period shall be payable on the Initial Dividend Payment Date. Following
the Initial Dividend Payment Date, dividends on the APS will be payable, at the
option of each Fund, either (i) with respect to any 7-Day Dividend Period and
any Short Term Dividend Period of 28 or fewer days, on the day next succeeding
the last day thereof or (ii) with respect to any Short Term Dividend Period of
more than 28 days and with respect to any Long Term Dividend Period, monthly on
the first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof (each such date referred to in clause (i) or (ii) being referred to
herein as a "Normal Dividend Payment Date"), except that if such Normal Dividend
Payment Date is not a Business Day, the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date.
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36
DESCRIPTION OF APS
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Although any particular Dividend Payment Date may not occur on the originally
scheduled date because of the exceptions discussed above, the next succeeding
Dividend Payment Date, subject to such exceptions, will occur on the next
following originally scheduled date. If for any reason a Dividend Payment Date
cannot be fixed as described above, then the Board of Trustees shall fix the
Dividend Payment Date. The Board of Trustees by resolution prior to
authorization of a dividend by the Board of Trustees may change a Dividend
Payment Date if such change does not adversely affect the contract rights of the
holders of APS set forth in the Amended By-Laws. The Initial Dividend Period,
7-Day Dividend Periods and Special Dividend Periods are hereinafter sometimes
referred to as "Dividend Periods." Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, each Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Funds
do not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the APS, which holder is
expected to be the nominee of the Securities Depository. See "The
Auctions--General--Securities Depository." The Securities Depository will credit
the accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in same-day
funds. The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the nominee
of the Securities Depository. Any dividend payment made on the APS first shall
be credited against the earliest declared but unpaid dividends accumulated with
respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends except as
described under "Additional Dividends" and "Non-Payment Period; Late Charge"
below. No interest will be payable in respect of any dividend payment or
payments on the APS which may be in arrears.
The amount of cash dividends per share of APS payable (if declared) on the
Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend
Payment Date of each Short Term Dividend Period shall be computed by multiplying
the Applicable Rate for such Dividend Period by a fraction, the numerator of
which will be the number of days in such Dividend Period or part thereof that
such share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
During any Long Term Dividend Period, the amount of cash dividends per share of
APS payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 360, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent.
NOTIFICATION OF DIVIDEND PERIOD
With respect to each Dividend Period that is a Special Dividend Period, each
Fund, at its sole option and to the extent permitted by law, by telephonic and
written notice (a "Request for Special Dividend Period") to the Auction Agent
and to each Broker-Dealer, may request that the next succeeding Dividend Period
for the APS will be a number of days (other than seven), evenly divisible by
seven, and not fewer than seven nor more than 364 in the case of a Short Term
Dividend Period or one whole year or more but not greater than five years in the
case of a Long Term Dividend Period,
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37
DESCRIPTION OF APS
--------------------------------------------------------------------------------
specified in such notice, provided that a Fund may not give a Request for
Special Dividend Period of greater than 28 days (and any such request shall be
null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for the APS and, in the case of a
Long Term Dividend Period, shall be given on or prior to the second Business Day
but not more than 28 days prior to an Auction Date for the APS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealers jointly shall
determine whether, given the factors set forth below, it is advisable that a
Fund issue a Notice of Special Dividend Period as contemplated by such Request
for Special Dividend Period and the Optional Redemption Price of the APS during
such Special Dividend Period and the Specific Redemption Provisions and shall
give each Fund and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination, the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the APS, (iv) industry and financial conditions which
may affect the APS, (v) the investment objective of a Fund and (vi) the Dividend
Periods and dividend rates at which current and potential beneficial holders of
the APS would remain or become beneficial holders.
If the Broker-Dealers shall not give a Fund and the Auction Agent a Response by
such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Fund give a Notice of Special Dividend
Period for the APS, the Fund may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that a Fund give a Notice of Special Dividend
Period for the APS, the Fund, by no later than the second Business Day prior to
such Auction Date, may give a notice (a "Notice of Special Dividend Period") to
the Auction Agent, the Securities Depository and each Broker-Dealer, which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
Each Fund also shall provide a copy of such Notice of Special Dividend Period to
S&P. A Fund shall not give a Notice of Special Dividend Period, and, if such
Notice of Special Dividend Period shall have been given already, shall give
telephonic and written notice of its revocation (a "Notice of Revocation") to
the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior
to the Business Day prior to the relevant Auction Date if (x) either the 1940
Act APS Asset Coverage is not satisfied or the Fund shall fail to maintain S&P
Eligible Assets with an aggregate Discounted Value at least equal to the APS
Basic Maintenance Amount, on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Auction Date on an actual basis
and on a pro forma basis giving effect to the proposed Special Dividend Period
(using as a pro forma dividend rate with respect to such Special Dividend Period
the dividend rate which the Broker-Dealers shall advise a Fund is an
approximately equal rate for securities similar to the APS with an equal
dividend period), (y) sufficient funds for the payment of dividends payable on
the immediately succeeding Dividend Payment Date have not been irrevocably
deposited with the Auction Agent by the close of business on the third Business
Day preceding the related Auction Date or (z) the Broker-Dealers jointly advise
a Fund that, after consideration of the factors listed above, they have
concluded that it is advisable to give a Notice of Revocation. Each Fund also
shall provide a copy of such Notice of Revocation to S&P. If a Fund is
prohibited from giving a Notice of Special Dividend Period as a result of the
factors enumerated in clause (x), (y) or (z) above or if the Fund gives a Notice
of Revocation with respect to a Notice of Special Dividend Period, the next
succeeding Dividend Period for that series will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids
--------------------------------------------------------------------------------
38
DESCRIPTION OF APS
--------------------------------------------------------------------------------
are not made in any Auction or an Auction is not held for any reason, the next
succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund may not
again give a Notice of Special Dividend Period (and any such attempted notice
shall be null and void) until Sufficient Clearing Bids have been made in an
Auction with respect to a 7-Day Dividend Period.
DETERMINATION OF DIVIDEND RATE
The dividend rate on the APS during the period from and including the Date of
Original Issue for the APS to but excluding the Initial Dividend Payment Date
for the APS (the "Initial Dividend Period") will be the rate per annum set forth
on the inside cover page hereof. Commencing on the Initial Dividend Payment Date
for the APS, the Applicable Rate on the APS for each Subsequent Dividend Period,
which Subsequent Dividend Period shall be a period commencing on and including a
Dividend Payment Date and ending on and including the calendar day prior to the
next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period
if there is more than one Dividend Payment Date), shall be equal to the rate per
annum that results from the Auction with respect to such Subsequent Dividend
Period. The Initial Dividend Period and Subsequent Dividend Period for the APS
is referred to herein as a "Dividend Period." Cash dividends shall be calculated
as set forth above under "Dividends--General."
NON-PAYMENT PERIOD; LATE CHARGE
A Non-Payment Period will commence if a Fund fails to (i) declare, prior to the
close of business on the second Business Day preceding any Dividend Payment
Date, for payment on or (to the extent permitted as described below) within
three Business Days after such Dividend Payment Date to the persons who held
such shares as of 12:00 noon, New York City time, on the Business Day preceding
such Dividend Payment Date, the full amount of any dividend on the APS payable
on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares (if
declared) payable on such Dividend Payment Date or (B) on any redemption date
for the APS called for redemption, the Mandatory Redemption Price per share of
such APS or, in the case of an optional redemption, the Optional Redemption
Price per share. Such Non-Payment Period will consist of the period commencing
on and including the aforementioned Dividend Payment Date or redemption date, as
the case may be, and ending on and including the Business Day on which, by 12:00
noon, New York City time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to the
applicable holders in same-day funds, provided that a Non-Payment Period for the
APS will not end unless a Fund shall have given at least five days' but no more
than 30 days' written notice of such deposit or availability to the Auction
Agent, the Securities Depository and all holders of the APS of such series.
Notwithstanding the foregoing, the failure by a Fund to deposit funds as
provided for by clauses (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated below, shall not constitute a "Non-Payment
Period." The Applicable Rate for each Dividend Period for the APS of any series,
commencing during a Non-Payment Period, will be equal to the Non-Payment Period
Rate; and each Dividend Period commencing after the first day of, and during, a
Non-Payment Period shall be a 3-Day Dividend Period. Any dividend on the APS due
on any Dividend Payment Date for such shares (if, prior to the close of business
on the second Business Day preceding such Dividend Payment Date, a Fund has
declared such dividend payable on such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may be paid to such persons in the same
form of funds by 12:00 noon, New York City time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that such amount is accompanied by a late charge calculated for such
period of non-payment
--------------------------------------------------------------------------------
39
DESCRIPTION OF APS
--------------------------------------------------------------------------------
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 365. In the case
of a willful failure of a Fund to pay a dividend on a Dividend Payment Date or
to redeem any APS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the
Non-Payment Period Rate. For the purposes of the foregoing, payment to a person
in same-day funds on any Business Day at any time will be considered equivalent
to payment to that person in New York Clearing House (next-day) funds at the
same time on the preceding Business Day, and any payment made after 12:00 noon,
New York City time, on any Business Day shall be considered to have been made
instead in the same form of funds and to the same person before 12:00 noon, New
York City time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable Reference
Rate (or 275% of such rate if a Fund has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
that net capital gains or other taxable income will be included in such dividend
on the APS), provided that the Board of Trustees of a Fund shall have the
authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Trustees of the Fund determines and S&P
(or any Substitute Rating Agency in lieu of S&P in the event such party shall
not rate the APS) advises the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect its then-current
rating on the APS.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS
Under the 1940 Act, a Fund may not declare dividends or make other distributions
on Common Shares or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto), asset
coverage (as defined in the 1940 Act) with respect to the outstanding APS would
be less than 200% (or such other percentage as in the future may be required by
law). Under the Code, each Fund must, among other things, distribute each year
at least 90% of the sum of its net tax-exempt income and investment company
taxable income in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends, other
distributions and purchases in certain circumstances may impair a Fund's ability
to maintain such qualification. See "Taxes."
Upon any failure to pay dividends on the APS for two years or more, the holders
of the APS will acquire certain additional voting rights. See "Voting rights"
below.
For so long as any APS are outstanding, a Fund will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other stock, if any, ranking junior to the APS as
to dividends or upon liquidation) in respect of Common Shares or any other stock
of the Fund ranking junior to or on a parity with the APS as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any Common Shares or shares of any other such junior stock
(except by conversion into or exchange for stock of the Fund ranking junior to
APS as to dividends and upon liquidation) or any such parity stock (except by
conversion into or exchange for stock of the Fund ranking junior to or on a
parity with APS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Fund would have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount, and the 1940 Act APS Asset Coverage (see "Rating Agency guidelines and
asset coverage" and "Redemption" below) would be satisfied, (B) full cumulative
dividends on the APS due on or prior to the date of the transaction have been
declared and paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent, (C) any Additional Dividend
required to be paid on or before the date of such declaration or payment has
been paid and (D) the Fund has
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40
DESCRIPTION OF APS
--------------------------------------------------------------------------------
redeemed the full number of APS required to be redeemed by any provision for
mandatory redemption contained in the Amended By-Laws.
ADDITIONAL DIVIDENDS
If a Fund retroactively allocates any net capital gains or other taxable income
to the APS without having given advance notice thereof to the Auction Agent as
described below under "The Auctions--Auction Procedures--Auction Date; Advance
notice of allocation of taxable income; Inclusion of taxable income in
Dividends" solely by reason of the fact that such an allocation results from (i)
the redemption of all or a portion of the outstanding APS, (ii) the liquidation
of the Fund or (iii) a debt obligation believed to be a Municipal Obligation
proving to be an obligation subject to federal income tax and/or a relevant
state tax (the amount of any of such allocations referred to herein as a
"Retroactive Taxable Allocation"), the Fund, within 90 days (and generally
within 60 days) after the end of the Fund's fiscal year for which such
Retroactive Taxable Allocation is made, will provide notice thereof to the
Auction Agent and to each holder of APS (initially Cede & Co. as nominee of the
Securities Depository) during such fiscal year at such holder's address as the
same appears or last appeared on the stock books of the Fund. Each such Fund,
within 30 days after such notice is given to the Auction Agent, will pay to the
Auction Agent (who then will distribute to such holders of the APS), out of
funds legally available therefor, an amount equal to the aggregate Additional
Dividend (as defined below) with respect to all Retroactive Taxable Allocations
made to such holders during the fiscal year in question. See "Taxes."
An "Additional Dividend" means a payment to a present or former holder of the
APS of an amount that would cause (i) the dollar amount of such holder's
dividends received on the APS with respect to the fiscal year in question
(including the Additional Dividend) less the federal income tax and applicable
state tax attributable to the aggregate of (x) the Retroactive Taxable
Allocations made to such holder with respect to the fiscal year in question and
(y) the Additional Dividend (to the extent taxable) to equal (ii) the dollar
amount of such holder's dividends received on the APS with respect to the fiscal
year in question (excluding the Additional Dividend) if there had been no
Retroactive Taxable Allocations. An Additional Dividend shall be calculated (i)
without consideration being given to the time value of money; (ii) assuming that
none of the dividends received from a Fund is a Preference Item; and (iii)
assuming that each Retroactive Taxable Allocation would be taxable in the hands
of each holder of shares of APS at the greater of: (x) the maximum marginal
combined regular Federal and state income tax rate applicable to ordinary income
or capital gains depending on the taxable character of the distribution
(including any surtax); or (y) the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (disregarding in both (x) and (y) the
effect of any state or local taxes and the phase out of, or provision limiting,
personal exemptions, itemized deductions, or the benefit of lower tax brackets).
Although each Fund generally intends to designate any Additional Dividend as an
"exempt-interest" dividend to the extent permitted by applicable law, it is
possible that all or a portion of any Additional Dividend will be taxable to the
recipient thereof. See "Taxes--Tax Treatment of additional dividends." A Fund
will not pay a further Additional Dividend with respect to any taxable portion
of an Additional Dividend.
If a Fund does not give advance notice of the amount of taxable income to be
included in a dividend on the APS in the related Auction, as described below
under "The Auctions--Auction procedures--Auction Date; Advance notice of
allocation of taxable income; Inclusion of taxable income in Dividends," the
Fund may include such taxable income in a dividend on the APS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date.
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41
DESCRIPTION OF APS
--------------------------------------------------------------------------------
REDEMPTION
MANDATORY REDEMPTION
Each Fund will be required to redeem, out of funds legally available therefor,
at the Mandatory Redemption Price per share, the APS to the extent permitted
under the 1940 Act and Massachusetts law, on a date fixed by the Board of
Trustees, if the Fund fails to maintain S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount or to
satisfy the 1940 Act APS Asset Coverage and such failure is not cured on or
before the APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" of APS means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption. In addition, holders of APS may be entitled to receive
Additional Dividends in the event of redemption of such APS to the extent
provided herein. See "Description of APS--Dividends and Dividend
Periods--Additional Dividends." Any such redemption will be limited to the
lesser number of APS necessary to restore the Discounted Value or the 1940 Act
APS Asset Coverage, as the case may be, or the maximum number that can be
redeemed with funds legally available under the Declaration of Trust and
applicable law.
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and under Massachusetts law, upon
giving a Notice of Redemption, as provided below, each Fund, at its option, may
redeem the APS, in whole or in part, out of funds legally available therefor, at
the Optional Redemption Price per share on any Dividend Payment Date; provided
that no APS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to the APS or (b) a Non-Call Period to which such
share is subject. "Optional Redemption Price" means $25,000 per share of APS
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed for redemption and excluding Additional Dividends
plus any applicable redemption premium, if any, attributable to the designation
of a Premium Call Period. In addition, holders of APS may be entitled to receive
Additional Dividends in the event of redemption of such APS to the extent
provided herein. See "Description of APS--Dividends and Dividend
Periods--Additional Dividends." Each Fund has the authority to redeem the APS
for any reason and may redeem all or part of the outstanding APS if it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return to holders of Common Shares for any significant period of time
than that obtainable if the Common Shares were unleveraged.
Notwithstanding the provisions for redemption described above, no APS shall be
subject to optional redemption (i) unless all dividends in arrears on all
remaining outstanding APS, and all capital shares of a Fund ranking on a parity
with the APS with respect to the payment of dividends or upon liquidation, have
been or are being contemporaneously paid or declared and set aside for payment
and (ii) if redemption thereof would result in a Fund's failure to maintain S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all outstanding APS of such series
pursuant to a successful completion of an otherwise lawful purchase or exchange
offer made on the same terms to, and accepted by, holders of all outstanding APS
of such series.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of a Fund, whether voluntary or
involuntary, the holders of APS will be entitled to receive, out of the assets
of the Fund available for distribution to shareholders, before any distribution
or payment is made upon any Common Shares or any other shares of beneficial
interest of the Fund ranking junior in right of payment upon liquidation of APS,
$25,000 per share together with the amount of any dividends accumulated but
unpaid (whether or not
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42
DESCRIPTION OF APS
--------------------------------------------------------------------------------
earned or declared) thereon to the date of distribution, and after such payment
the holders of APS will be entitled to no other payments except for any
Additional Dividends. If such assets of a Fund shall be insufficient to make the
full liquidation payment on outstanding APS and liquidation payments on any
other outstanding class or series of preferred shares of the Fund ranking on a
parity with the APS as to payment upon liquidation, then such assets will be
distributed among the holders of APS and the holders of shares of such other
class or series ratably in proportion to the respective preferential amounts to
which they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of APS will not be entitled
to any further participation in any distribution of assets by a Fund except for
any Additional Dividends. A consolidation, merger or share exchange of a Fund
with or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of the
assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
Each Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Amended By-Laws. These requirements are
summarized below.
1940 ACT APS ASSET COVERAGE
Each Fund will be required under the Amended By-Laws to maintain, with respect
to the APS, as of the last Business Day of each month in which any APS are
outstanding, asset coverage of at least 200% with respect to senior securities
which are beneficial interests in the Fund, including the APS (or such other
asset coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are beneficial interests of a
closed-end investment company as a condition of paying dividends on its common
stock) ("1940 Act APS Asset Coverage"). If a Fund fails to maintain 1940 Act APS
Asset Coverage and such failure is not cured as of the last Business Day of the
following month (the "1940 Act Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the APS. See "Redemption" below.
The 1940 Act APS Asset Coverage immediately following the issuance of APS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the APS) computed using each Fund's net assets as of
December 31, 2002 and assuming the Over-allotment Common Shares and the APS had
been issued as of such date will be as follows:
NATIONAL FUND
Value of Fund assets less liabilities not $231,458,795 = 265%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $87,500,000
liquidation value of APS
CALIFORNIA FUND
Value of Fund assets less liabilities not $89,436,638 = 265%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $33,750,000
liquidation value of APS
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43
DESCRIPTION OF APS
--------------------------------------------------------------------------------
FLORIDA FUND
Value of Fund assets less liabilities not $59,285,363 = 263%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $22,500,000
liquidation value of APS
MASSACHUSETTS FUND
Value of Fund assets less liabilities not $40,643,666 = 262%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $15,500,000
liquidation value of APS
MICHIGAN FUND
Value of Fund assets less liabilities not $35,202,543 = 261%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $13,500,000
liquidation value of APS
NEW JERSEY FUND
Value of Fund assets less liabilities not $59,676,663 = 265%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $22,500,000
liquidation value of APS
NEW YORK FUND
Value of Fund assets less liabilities not $59,524,118 = 265%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $22,500,000
liquidation value of APS
OHIO FUND
Value of Fund assets less liabilities not $58,090,251 = 266%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $21,875,000
liquidation value of APS
PENNSYLVANIA FUND
Value of Fund assets less liabilities not $68,397,885 = 263%
constituting senior securities
------------------------------------------------ ---------------
=
Senior securities representing indebtedness plus $26,000,000
liquidation value of APS
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44
DESCRIPTION OF APS
--------------------------------------------------------------------------------
APS BASIC MAINTENANCE AMOUNT
Each Fund intends that, so long as APS are outstanding, the composition of its
portfolio will reflect guidelines established by S&P in connection with the
Fund's receipt of a rating for such shares on or prior to their Date of Original
Issue of at least AAA from S&P. S&P, which is a rating agency, issues ratings
for various securities reflecting the perceived creditworthiness of such
securities. The guidelines described below have been developed by S&P in
connection with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred shares, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
shares will be varied sufficiently and will be of sufficient quality and amount
to justify investment grade ratings. The guidelines do not have the force of law
but have been adopted by each Fund in order to satisfy current requirements
necessary for S&P to issue the above-described ratings for APS, which ratings
generally are relied upon by institutional investors in purchasing such
securities. The guidelines provide 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.
Each Fund intends to maintain a Discounted Value for its portfolio at least
equal to the APS Basic Maintenance Amount. S&P has established guidelines for
determining Discounted Value. These guidelines define eligible portfolio assets
("S&P Eligible Assets"). To the extent any particular portfolio holding does not
satisfy these guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value of that Fund's portfolio assets.
The S&P guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of each Fund's portfolio. The amount of such
assets included in the portfolio of a Fund at any time may vary depending upon
the rating, diversification and other characteristics of eligible assets
included in the portfolio, although it is not anticipated in the normal course
of business the value of such assets will exceed 20% of a Fund's total assets.
The APS basic maintenance amount includes the sum of (a) the aggregate
liquidation preference of APS then outstanding and (b) certain accrued and
projected payment obligations of a Fund.
Upon any failure to maintain the required aggregate Discounted Value, each Fund
will seek to alter the composition of its portfolio to retain a Discounted Value
at least equal to the APS Basic Maintenance Amount on or prior to the APS Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the APS will be subject
to mandatory redemption. See "Description of APS--Redemption." The APS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
APS then outstanding and (ii) certain accrued and projected payment obligations
of a Fund.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the APS, at any time, may change or withdraw any such rating. As set
forth in the Amended By-Laws, each Fund's Board of Trustees, without shareholder
approval, may modify certain definitions or restrictions that have been adopted
by each Fund pursuant to the rating agency guidelines, provided the Board of
Trustees has obtained written confirmation from S&P that any such change would
not impair the ratings then assigned by S&P to the APS.
As recently described by S&P, a preferred shares rating is an assessment of the
capacity and willingness of an issuer to pay preferred shares obligations. The
ratings on the APS are not recommendations to purchase, hold or sell APS,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor, nor do the rating agency guidelines described above address
the likelihood that a holder of APS will be able to sell such shares in an
Auction. The ratings
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45
DESCRIPTION OF APS
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are based on current information furnished to S&P by each Fund and the Adviser
and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of, such
information. The Common Shares have not been rated by a rating agency.
A rating agency's guidelines will apply to a Fund's APS only so long as such
agency is rating such shares. Each Fund will pay certain fees to each rating
agency that rates the Fund's APS.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS of each Fund will be entitled to one
vote per share on each matter submitted to a vote of shareholders and will vote
together with holders of Common Shares and other preferred shares of that Fund
as a single class.
In connection with the election of each Fund's Trustees, holders of the APS and
any other preferred shares, voting as a separate class, shall be entitled at all
times to elect two of the Fund's Trustees, and the remaining Trustees will be
elected by holders of Common Shares and APS and any other preferred shares,
voting together as a single class. In addition, if at any time dividends on
outstanding APS shall be unpaid in an amount equal to at least two full years'
dividends thereon or if at any time holders of any shares of preferred shares
are entitled, together with the holders of APS, to elect a majority of the
Trustees of the Fund under the 1940 Act, then the number of Trustees
constituting the Board of Trustees automatically shall be increased by the
smallest number that, when added to the two Trustees elected exclusively by the
holders of APS and any other preferred shares as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number, and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which Trustees are to
be elected, the holders of the APS and any other preferred shares, voting as a
separate class, will be entitled to elect the smallest number of additional
Trustees that, together with the two Trustees which such holders in any event
will be entitled to elect, constitutes a majority of the total number of
Trustees of the Fund as so increased. The terms of office of the persons who are
Trustees at the time of that election will continue. If a Fund thereafter shall
pay, or declare and set apart for payment in full, all dividends payable on all
outstanding APS and any other preferred shares for all past Dividend Periods,
the additional voting rights of the holders of APS and any other preferred
shares as described above shall cease, and the terms of office of all of the
additional Trustees elected by the holders of APS and any other preferred shares
(but not of the Trustees with respect to whose election the holders of Common
Shares were entitled to vote or the two Trustees the holders of APS and any
other preferred shares have the right to elect in any event) will terminate
automatically.
The affirmative vote of a majority of the votes entitled to be cast by holders
of outstanding APS and any other preferred shares, voting as a separate class,
will be required to (i) authorize, create or issue any class or series of shares
ranking prior to the APS or any other series of preferred shares with respect to
the payment of dividends or the distribution of assets on liquidation; provided,
however, that no vote is required to authorize the issuance of another class of
preferred shares which are substantially identical in all respects to the APS or
(ii) amend, alter or repeal the provisions of the Declaration of Trust or the
Amended By-Laws, whether by merger, consolidation or otherwise, so as to
adversely affect any of the contract rights expressly set forth in the
Declaration of Trust or the Amended By-Laws of holders of APS or any other
preferred shares. To the extent permitted under the 1940 Act, in the event
shares of more than one series of APS are outstanding, a Fund shall not approve
any of the actions set forth in clause (i) or (ii) which adversely affects the
contract rights expressly set forth in the Declaration of Trust of a holder of
shares of a series of APS differently than those of a holder of shares of any
other series of APS without the affirmative vote of at least a
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DESCRIPTION OF APS
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majority of votes entitled to be cast by holders of APS of each series adversely
affected and outstanding at such time (each such adversely affected series
voting separately as a class). Each Board of Trustees, however, without
shareholder approval, may amend, alter or repeal any or all of the various
rating agency guidelines described herein in the event a Fund receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to the APS. Unless a higher
percentage is provided for under "Certain provisions in the Declaration of
Trust," the affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding APS and any other preferred shares, voting as a separate
class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in a Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
objectives and policies." The class vote of holders of APS and any other
preferred shares described above in each case will be in addition to a separate
vote of the requisite percentage of Common Shares and APS and any other
preferred shares, voting together as a single class, necessary to authorize the
action in question.
The foregoing voting provisions will not apply to the APS if, at or prior to the
time when the act with respect to which such vote otherwise would be required
shall be effected, such shares shall have been (i) redeemed or (ii) called for
redemption and sufficient funds shall have been deposited in trust to effect
such redemption.
The Auctions
GENERAL
Holders of the APS will be entitled to receive cumulative cash dividends on
their shares when, as and if declared by the Board of Trustees of each Fund, out
of the funds legally available therefor, on the Initial Dividend Payment Date
with respect to the Initial Dividend Period and, thereafter, on each Dividend
Payment Date with respect to a Subsequent Dividend Period (generally a period of
seven days subject to certain exceptions set forth under "Description of
APS--Dividends and Dividend Periods--General") at the rate per annum equal to
the Applicable Rate for each such Dividend Period.
The provisions of the Amended By-Laws establishing the terms of the APS offered
hereby will provide that the Applicable Rate for each Dividend Period after the
Initial Dividend Period therefor will be equal to the rate per annum that the
Auction Agent advises has resulted on the Business Day preceding the first day
of such Dividend Period due to implementation of the auction procedures set
forth in the Amended By-Laws (the "Auction Procedures") in which persons
determine to hold or offer to purchase or sell the APS. The Amended Bylaws,
which contain the Auction Procedures, are attached as Appendix E to each Fund's
Statement of Additional Information. Each periodic operation of such procedures
with respect to the APS is referred to hereinafter as an "Auction." If, however,
a Fund should fail to pay or duly provide for the full amount of any dividend on
or the redemption price of the APS called for redemption, the Applicable Rate
for the APS will be determined as set forth under "Description of APS--Dividends
and Dividend Periods--Determination of Dividend Rate."
AUCTION AGENT AGREEMENT
Each Fund will enter into an agreement (the "Auction Agent Agreement") with
Deutsche Bank Trust Company Americas ("Deutsche Bank" and together with any
successor bank or trust company or other entity entering into a similar
agreement with a Fund, the "Auction Agent"), which provides, among other things,
that the Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate for the APS. Each Fund will pay the Auction
Agent compensation for its services under the Auction Agent Agreement.
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The Auction Agent may terminate the Auction Agent Agreement upon notice to a
Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, a Fund will use its best efforts to
enter into an agreement with a successor Auction Agent containing substantially
the same terms and conditions as the Auction Agent Agreement. Each Fund may
terminate the Auction Agent Agreement, provided that prior to such termination
the Fund shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
In addition to serving as the Auction Agent, Deutsche Bank will be the transfer
agent, registrar, dividend disbursing agent and redemption agent for the APS.
The Auction Agent, however, will serve merely as the agent of each Fund, acting
in accordance with each Fund's instructions, and will not be responsible for any
evaluation or verification of any matters certified to it.
BROKER-DEALER AGREEMENTS
The Auctions require the participation of one or more broker-dealers. The
Auction Agent will enter into agreements with UBS Warburg LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc. and Prudential
Securities Incorporated with respect to each Fund and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more other
broker-dealers (collectively, the "Broker-Dealers") selected by each Fund, which
provide for the participation of such Broker-Dealers in Auctions. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the Broker-
Dealer Agreement with UBS Warburg LLC or Merrill Lynch, Pierce, Fenner & Smith
Incorporated may not be terminated without the prior written consent of a Fund,
which consent may not be unreasonably withheld.
The Auction Agent after each Auction will pay a service charge from funds
provided by each Fund to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of a
Fund and any such Broker-Dealer or Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the Dividend Period with
respect to such Auction. For the purposes of the preceding sentence, the APS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
shares as a result of the Auction, (B) a Submitted Bid of a Potential Beneficial
Owner that resulted in such Potential Beneficial Owner purchasing such shares as
a result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in
Auctions for its own account, unless a Fund notifies all Broker-Dealers that
they no longer may do so; provided that Broker-Dealers may continue to submit
Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own
account in any Auction of APS, it may have knowledge of Orders placed through it
in that Auction and therefore have an advantage over other Bidders, but such
Broker-Dealer would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
SECURITIES DEPOSITORY
The Depository Trust Company initially will act as the Securities Depository for
the Agent Members with respect to the APS. One or more registered certificates
for all of the shares of each series of APS initially will be registered in the
name of Cede & Co., as nominee of the Securities Depository. The
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certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of the APS contained in the
Amended By-Laws. Cede & Co. initially will be the holder of record of all APS,
and Beneficial Owners will not be entitled to receive certificates representing
their ownership interest in such shares. The Securities Depository will maintain
lists of its participants and will maintain the positions (ownership interests)
of the APS held by each Agent Member, whether as the Beneficial Owner thereof
for its own account or as nominee for the Beneficial Owner thereof. Payments
made by each Fund to holders of APS will be duly made by making payments to the
nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Amended By-Laws set
forth in Appendix E to each Fund's Statement of Additional Information.
AUCTION DATE; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF
TAXABLE INCOME IN DIVIDENDS
An Auction to determine the Applicable Rate for the APS offered hereby for each
Dividend Period for such shares (other than the Initial Dividend Period
therefor) will be held on the last Business Day preceding the first day of such
Dividend Period, which first day is also the Dividend Payment Date for the
preceding Dividend Period (the date of each Auction being referred to herein as
an "Auction Date").
The Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. See "Description
of APS--Dividends and Dividend Periods" for information concerning the
circumstances under which a Dividend Payment Date may fall on a date other than
the days specified above, which may affect the Auction Date.
Except as noted below, whenever a Fund intends to include any net capital gains
or other income subject to federal income tax or relevant state taxes ("taxable
income") in any dividend on the APS, the Fund will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from a Fund, in turn it will
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will notify its customers who are Beneficial
Owners and Potential Beneficial Owners believed to be interested in submitting
an Order in the Auction to be held on such Auction Date. Each Fund also may
include such income in a dividend on the APS without giving advance notice
thereof if it increases the dividend by an additional amount calculated as if
such income were a Retroactive Taxable Allocation and the additional amount were
an Additional Dividend; provided that each Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of
APS--Dividends and Dividend Periods--Additional Dividends."
ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS, EXISTING HOLDERS AND
POTENTIAL HOLDERS
On or prior to each Auction Date for a series of APS:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone
orders ("Orders") with respect to a series of APS as follows:
(i) Hold Order--indicating the number of outstanding APS, if any, that
such Beneficial Owner desires to continue to hold without regard to the
Applicable Rate for the next Dividend Period for such shares;
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(ii) Bid--indicating the number of outstanding APS, if any, that such
Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is not less
than the rate per annum then specified by such Beneficial Owner; and/or
(iii) Sell Order--indicating the number of outstanding APS, if any, that
such Beneficial Owner offers to sell without regard to the Applicable
Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of APS to determine whether such Potential Beneficial Owners desire
to submit Bids indicating the number of APS which they offer to purchase
provided that the Applicable Rate for the next Dividend Period for such
shares is not less than the rates per annum specified in such Bids.
A Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. For information concerning the priority given to different types
of Orders placed by Beneficial Owners, see "Submission of Orders by Broker-
Dealers to Auction Agent" below.
The Maximum Applicable Rate for the APS will be the Applicable Percentage of the
Reference Rate. The Auction Agent will round each applicable Maximum Applicable
Rate to the nearest one-thousandth (0.001) of one percent per annum, with any
such number ending in five ten-thousandths of one percent being rounded upwards
to the nearest one-thousandth (0.001) of one percent. The Auction Agent will not
round the applicable Reference Rate as part of its calculation of the Maximum
Applicable Rate.
The Maximum Applicable Rate for the APS will depend on the credit rating or
ratings assigned to such shares. The Applicable Percentage will be determined
based on (i) the credit ratings assigned on such date to such shares by S&P (or
if S&P shall not make such rating available, the equivalent of such rating by a
Substitute Rating Agency), and (ii) whether a Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in such
dividend on the APS as follows:
PERCENTAGE OF APPLICABLE PERCENTAGE OF
S&P CREDIT REFERENCE RATE-- REFERENCE RATE--
RATINGS NO NOTIFICATION NOTIFICATION
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AA- or higher................................. 110% 150%
A- to A+...................................... 125 160
BBB- to BBB+.................................. 150 250
Below BBB-.................................... 200 275
There is no minimum Applicable Rate in respect of any Dividend Period.
Each Fund will take all reasonable action necessary to enable S&P to provide a
rating for the APS. If S&P shall not make such a rating available, the
Underwriters or their affiliates and successors, after consultation with a Fund,
will select another rating agency (a "Substitute Rating Agency") to act as a
Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per
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annum higher than the Maximum Applicable Rate will not be considered. See
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and "Acceptance and rejection of Submitted Bids and Submitted Sell Orders
and allocation of Shares."
Neither a Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with the foregoing. A Broker-Dealer also may hold APS in its
own account as a Beneficial Owner. A Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. Any Order placed with the Auction Agent
by a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential
Beneficial Owner will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any APS held by it or its customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of APS held by it, as described in the next
paragraph. Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the priority
given to different types of Orders placed by Existing Holders, see "Submission
of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an
Auction will be settled on the Business Day next succeeding the Auction Date at
a price per share equal to $25,000. See "Notification of results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding APS held
by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period of 91 days or less) and a Sell
Order (in the case of an Auction relating to a Special Dividend Period of longer
than 91 days) to have been submitted on behalf of such Beneficial Owner covering
the number of outstanding the APS held by such Beneficial Owner and not subject
to Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the Dividend
Period next succeeding the Auction automatically shall be the same length as the
immediately preceding Dividend Period, and the Applicable Rate for the next
Dividend Period for all the APS will be 40% of the Reference Rate on the date of
the applicable Auction (or 60% of such rate if a Fund has provided notification
to the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gains or other taxable income will be included in
such dividend on the APS).
For the purposes of an Auction, the APS for which each Fund shall have given
notice of redemption and deposited moneys therefor with the Auction Agent in
trust or segregated in an account at a Fund's custodian bank for the benefit of
the Auction Agent, as set forth under "Description of APS--Redemption," will not
be considered as outstanding and will not be included in such Auction. Pursuant
to the Amended By-Laws of the Fund, each Fund will be prohibited from reissuing
and its affiliates (other than the Underwriter) will be prohibited from
transferring (other than to a Fund) any APS they may acquire. Neither a Fund nor
any affiliate of the Fund (other than the Underwriter) may submit an Order in
any Auction, except that an affiliate of the Fund that is a Broker-Dealer may
submit an Order.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., New York City time, on each Auction Date, or such other time
on the Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will
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submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date, designating itself (unless otherwise
permitted by a Fund) as the Existing Holder or Potential Holder in respect of
the APS subject to such Orders. Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
If the rate per annum specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate per annum
up to the next highest one-thousandth (0.001) of 1%. If one or more Orders of an
Existing Holder are submitted to the Auction Agent and such Orders cover in the
aggregate more than the number of outstanding APS held by such Existing Holder,
such Orders will be considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the number
of outstanding APS held by such Existing Holder, provided that if more than
one Hold Order is submitted by such Existing Holder and the number of APS
subject to such Hold Orders exceeds the number of outstanding APS held by
such Existing Holder, the number of APS subject to each of such Hold Orders
will be reduced pro rata so that such Hold Orders, in the aggregate, will
cover exactly the number of outstanding APS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of outstanding
APS held by such Existing Holder over the number of outstanding APS subject
to any Hold Order referred to in clause (i) above (and if more than one Bid
submitted by such Existing Holder specifies the same rate per annum and
together they cover more than the remaining number of shares that can be the
subject of valid Bids after application of clause (i) above and of the
foregoing portion of this clause (ii) to any Bid or Bids specifying a lower
rate or rates per annum, the number of shares subject to each of such Bids
will be reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of outstanding shares); and the number of outstanding
shares, if any, subject to Bids not valid under this clause (ii) shall be
treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over
the sum of the number of APS subject to Hold Orders referred to in clause
(i) above and the number of APS subject to valid Bids by such Existing
Holder referred to in clause (ii) above; provided that, if more than one
Sell Order is submitted by any Existing Holder and the number of APS subject
to such Sell Orders is greater than such excess, the number of APS subject
to each of such Sell Orders will be reduced pro rata so that such Sell
Orders, in the aggregate, will cover exactly the number of APS equal to such
excess.
If more than one Bid of any Potential Holder is submitted in any Auction, each
Bid submitted in such Auction will be considered a separate Bid with the rate
per annum and number of APS therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline for each Auction, the Auction Agent
will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS") and
whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of
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Potential Holders with rates per annum not higher than the Maximum Applicable
Rate equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids of
Existing Holders specifying rates per annum higher than the Maximum Applicable
Rate). If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being at
least equal to the Available APS. If Sufficient Clearing Bids have been made,
the Winning Bid Rate will be the Applicable Rate for the next Dividend Period
for the APS then outstanding. If Sufficient Clearing Bids have not been made
(other than because all outstanding APS are the subject of Submitted Hold
Orders), the Dividend Period next following the Auction automatically will be a
7-Day Dividend Period, and the Applicable Rate for such Dividend Period will be
equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, of the APS subject to such Submitted Sell Orders. See
"Acceptance and rejection of Submitted Bids and Submitted Sell Orders and
allocation of Shares." Thus, under some circumstances, Beneficial Owners may not
have liquidity of investment.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARE
Based on the determinations described under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and subject to the
discretion of the Auction Agent to round, the Auction Procedures include a pro
rata allocation of shares for purchase and sale, which may result in an Existing
Holder continuing to hold or selling or a Potential Holder purchasing, a number
of shares of a series of APS that is fewer than the number of shares of such
series specified in its Order. To the extent the allocation procedures have that
result, Broker-Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. See each
Fund's Amended By-Laws set forth in Appendix E to each Fund's Statement of
Additional Information.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell
Order in an Auction whether such Bid or Sell Order was accepted or rejected in
whole or in part and of the Applicable Rate for the next Dividend Period for the
related APS by telephone at approximately 3:00 p.m., New York City time, on the
Auction Date for such Auction. Each such Broker-Dealer that submitted an Order
for the account of a customer then will advise such customer whether such Bid or
Sell Order was accepted or rejected, will confirm purchases and sales with each
customer purchasing or selling APS as a result of the Auction and will advise
each customer purchasing or selling APS to give instructions to its Agent Member
of the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of APS as determined in such Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to APS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the APS are not
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53
THE AUCTIONS
--------------------------------------------------------------------------------
held by the Securities Depository or its nominee, payment will be made in
same-day funds to the Auction Agent against delivery of such certificates.
The following is a simplified example of how a typical Auction works. Assume
that a Fund has 1,000 outstanding APS and three current holders. The three
current holders and three potential holders submit orders through Broker-Dealers
at the Auction:
Current Holder A................ Owns 500 shares, wants to sell Bid order of 2.1% rate
all 500 shares if Applicable for all 500 shares
Rate is less than 2.1%
Current Holder B................ Owns 300 shares, wants to hold Hold Order--will take
the Applicable Rate
Current Holder C................ Owns 200 shares, wants to sell Bid order of 1.9% rate
all 200 shares if Applicable for all 200 shares
Rate is less than 1.9%
Potential Holder D.............. Wants to buy 200 shares Places order to buy at
or above 2.0%
Potential Holder E.............. Wants to buy 300 shares Places order to buy at
or above 1.9%
Potential Holder F.............. Wants to buy 200 shares Places order to buy at
or above 2.1%
The lowest dividend rate that will result in all 1,000 APS continuing to be held
is 2.0% (the offer by D). Therefore, the Applicable Rate will be 2.0%. Current
Holders B and C will continue to own their shares. Current Holder A will sell
its shares because A's dividend rate bid was higher than the Applicable Rate.
Potential Holder D will buy 200 shares and Potential Holder E will buy 300
shares because their bid rates were at or below the Applicable Rate. Potential
Holder F will not buy shares because its bid rate was above the Applicable Rate.
SECONDARY MARKET TRADING AND TRANSFER OF APS
The Broker-Dealers may maintain a secondary trading market in the APS outside of
Auctions; however, they have no obligation to do so and there can be no
assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long-Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
Taxes
GENERAL
Each Fund intends to elect and to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. As long as a Fund so
qualifies, in any taxable year in which it distributes at least 90% of the sum
of its investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain and net realized gains from
certain hedging transactions) and its net tax-exempt interest (the excess of its
gross tax-exempt interest over certain disallowed deductions), that Fund (but
not its shareholders) will not be subject to federal income tax
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54
TAXES
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to the extent that it distributes its investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss). Each Fund intends to distribute substantially all of such income
and gain each year.
The APS will constitute stock of each Fund, and distributions by a Fund with
respect to its APS (other than distributions in redemption of APS that are
treated as exchanges of stock under Section 302(b) of the Code) thus will
constitute dividends to the extent of that Fund's current and accumulated
earnings and profits as calculated for federal income tax purposes. It is
possible, however, that the Internal Revenue Service (the "IRS") might take a
contrary position, asserting, for example, that the APS constitute debt of each
Fund. If this position were upheld, the discussion of the treatment of
distributions below would not apply. Instead, distributions by each Fund to
holders of APS would constitute interest, whether or not they exceeded the
earnings and profits of each Fund, would be included in full in the income of
the recipient and would be taxed as ordinary income. Kirkpatrick & Lockhart LLP,
counsel to each Fund, believes that such a position, if asserted by the IRS,
would be unlikely to prevail if the issue were properly litigated.
Each dividend distribution ordinarily will constitute income exempt from federal
income tax (i.e., qualify as an "exempt-interest" dividend, which is excludable
from the shareholder's gross income). A portion of dividends attributable to
interest on certain municipal obligations, however, may be a Preference Item.
Furthermore, exempt-interest dividends are included in determining what portion,
if any, of a person's social security and railroad retirement benefits will be
includible in gross income subject to federal income tax. Distributions of any
taxable net investment income and net short-term capital gain will be taxable as
ordinary income. Finally, distributions of each Fund's net capital gain, if any,
will be taxable to shareholders as long-term capital gains, regardless of the
length of time they held their shares. Distributions, if any, in excess of a
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after that basis has been reduced to zero, will constitute
capital gains to the shareholder (assuming the shares are held as a capital
asset).
Dividends and other distributions declared by a Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
Each Fund 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 tax-exempt interest 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.
Thus, each Fund is required to allocate a portion of its net capital gain and
other taxable income to the APS. Each Fund generally will notify the Auction
Agent of the amount of any net capital gain and other taxable income to be
included in any dividend on the APS prior to the Auction establishing the
Applicable Rate for that dividend. Except for the portion of any dividend that
it informs the Auction Agent will be treated as net capital gain or other
taxable income, each Fund anticipates that the dividends paid on the APS will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to a Fund's APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Fund and the
total dividends paid by the Fund on its Common Shares and the APS during a
taxable year, but taxable distributions generally are not expected to be
significant. The tax treatment of Additional Dividends also may affect each
Fund's calculation of each class's allocable share of capital gains and other
taxable income. See "Tax treatment of Additional Dividends."
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55
TAXES
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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 each Fund, under current law the manner in which each Fund intends to
allocate items of tax-exempt income, net capital gain, and other taxable income,
if any, among each Fund's Common Shares and APS will be respected for federal
income tax purposes. It is possible that the IRS could disagree with counsel's
opinion and attempt to reallocate each Fund's net capital gain or other taxable
income. In the event of such a reallocation, some of the dividends identified by
a Fund as exempt-interest dividends to holders of APS may be recharacterized as
additional net capital gain or other taxable income. In the event of such
recharacterization, however, no Fund will be required to make payments to such
shareholders to offset the tax effect of such reallocation. Kirkpatrick &
Lockhart LLP has advised each Fund that, in its opinion, if the IRS were to
challenge in court the Fund's allocations of income and gain and the issue were
properly litigated, the IRS would be unlikely to prevail. A holder should be
aware, however, that the opinion of Kirkpatrick & Lockhart LLP represents only
its best legal judgment and is not binding on the IRS or the courts.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry APS is not deductible for federal income tax purposes to the extent that
interest relates to exempt-interest dividends received from the Fund.
If at any time when APS are outstanding a Fund does not meet the asset coverage
requirements of the 1940 Act, the Fund will be required to suspend distributions
to holders of Common Shares until the asset coverage is restored. See
"Description of APS--Dividends and Dividend Periods--Restrictions on Dividends
and other payments." Such a suspension may prevent a Fund from distributing at
least 90% of the sum of its investment company taxable income and net tax-exempt
interest and may, therefore, jeopardize the Fund's qualification for taxation as
a RIC. Upon any failure to meet the asset coverage requirements of the 1940 Act,
a Fund, in its sole discretion, may redeem APS in order to maintain or restore
the requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify for treatment as a RIC. See "Description
of APS--Redemption." There can be no assurance, however, that any such action
would achieve that objective.
The IRS has adopted Temporary Regulations, effective January 1, 2003,
instituting new reporting and recordkeeping requirements for a broad range of
tax-motivated investment vehicles and transactions. Among the transactions
subject to the Temporary Regulations are transactions in which an investor is
provided with contractual protection against the possibility that the intended
tax benefits of the transaction will not be sustained. Each Fund generally
intends to pay tax-exempt dividends on the APS. Under certain circumstances, if
a Fund allocates any net capital gains or other taxable income to the APS
without having given notice in advance of an auction, the Fund will pay an
Additional Dividend to the holders of the APS. The holders' right to receive
Additional Dividends might be considered a contractual protection of the type
covered by the Temporary Regulations. If the purchase of APS is a transaction
covered by the Temporary Regulations, an investor would be required to report
the transaction on its tax return, using Form 8886, for each year for which the
investor's tax liability is affected by its participation in the transaction. If
any investor is uncertain whether its investment in APS must be disclosed
pursuant to the Temporary Regulations, the investor may make protective
disclosure of the transaction using Form 8886. Failure to disclose a reportable
transaction could result in penalties. Also, each material adviser of a
transaction reportable under the Temporary Regulations must maintain a list that
identifies participants in the transaction.
Certain of each Fund's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require a Fund to recognize income or gain without receiving cash with which to
make distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and for avoiding income
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56
TAXES
--------------------------------------------------------------------------------
and excise taxes. Each Fund will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a RIC.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If a Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of APS who are subject to the Retroactive Taxable
Allocation. See "Description of APS--Dividends and Dividend Periods--Additional
Dividends." The federal income tax consequences of Additional Dividends under
existing law are uncertain. An Additional Dividend generally will be designated
by each Fund as an exempt-interest dividend except to the extent net capital
gain or other taxable income is allocated thereto as described above. A Fund
will not pay a further Additional Dividend with respect to any taxable portion
of an Additional Dividend.
SALES OF APS
The sale of APS (including transfers in connection with a redemption or
repurchase of APS) will be a taxable transaction for federal income tax
purposes. A selling shareholder generally will recognize gain or loss equal to
the difference between the amount received and the holder's adjusted tax basis
in the APS. If the APS are held as a capital asset, the gain or loss will be a
capital gain or loss and will be long-term if the APS have been held for more
than one year. Any loss realized on a disposition of APS held for six months or
less will be disallowed to the extent of any exempt-interest dividends received
with respect to those APS and any such loss that is not disallowed will be
treated as a long-term, rather than a short-term, capital loss to the extent of
any capital gain distributions received with respect to those APS. A
shareholder's holding period for APS is suspended for any periods during which
the 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, sales contracts or short sales. Any loss realized on a sale or exchange
of APS will be disallowed to the extent those APS are replaced by other APS
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the original APS. In that event, the basis of the
replacement APS will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
Each Fund is required to withhold a percentage of all taxable dividends, capital
gain distributions and repurchase proceeds payable to any individuals and
certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number. Such withholding from taxable dividends
and capital gain distributions is also required for such shareholders who fail
to provide certain certifications or otherwise are subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against the
shareholder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
STATE TAXES
CALIFORNIA TAXES
In the opinion of special California tax counsel, under California law,
dividends paid by the California Fund and designated by it as tax-exempt are
exempt from California state personal income tax on individuals who reside in
California to the extent such dividends are derived from interest payments on
Municipal Obligations exempt from California state personal income taxes,
provided that a least 50% of the assets of the California Fund at the close of
each quarter of its taxable year are invested in obligations the interest on
which is exempt under either federal or California law from taxation by the
state of California. Distributions of short-term capital gains are treated as
ordinary income, and distributions of long-term capital gain are treated as
long-term capital gains taxable at ordinary income rates under the California
state personal income tax.
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57
TAXES
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FLORIDA TAXES
In the opinion of special Florida tax counsel, the Florida Statutes provide that
shares of the Florida Fund owned by a Florida resident will be exempt from the
Florida intangible personal property tax as long as at least ninety percent
(90%) of the net asset value of the portfolio is invested in assets that are
exempt from the Florida intangible personal property tax. The Fund will normally
invest in tax-exempt obligations of Florida, the United States, the U.S.
Territories or political subdivisions of the United States or Florida so Shares
should, under normal circumstances, be exempt from the Florida intangible
personal property tax.
MASSACHUSETTS TAXES
In the opinion of special Massachusetts tax counsel, the Massachusetts Fund's
interest distributions attributable to Massachusetts obligations (debt
obligations issued by The Commonwealth of Massachusetts or its political
subdivisions, including agencies or instrumentalities thereof), U.S. possessions
obligations (debt obligations issued by the Governments of Puerto Rico, Guam, or
the United States Virgin Islands) and United States obligations can be excluded
from Massachusetts gross income for Massachusetts personal income tax purposes.
Distributions properly designated as capital gain dividends and attributable to
gains realized on the sale of certain Massachusetts tax-exempt obligations
issued pursuant to statutes that specifically exempt such gains from
Massachusetts taxation will also be exempt from Massachusetts personal income
tax. Other distributions from the Fund that are included in a Shareholder's
federal gross income, including distributions of net long-term capital gains not
described in the preceding sentence and net short-term capital gains, are
generally not exempt from Massachusetts personal income tax. Distributions from
the Fund and the value of the shares of the Fund may be subject to the
Massachusetts excise tax on corporations.
MICHIGAN TAXES
In the opinion of special Michigan tax counsel, Shareholders of the Michigan
Fund who are subject to the Michigan state and city income taxes or single
business tax will not be subject to such taxes on their Fund dividends to the
extent that such distributions are exempt-interest dividends for federal income
tax purposes and are attributable to interest on obligations which is exempt
from regular federal income tax and is exempt from Michigan state and city
income taxes and single business tax. Other distributions with respect to shares
of the Fund including, but not limited to, long or short-term capital gains,
will be subject to the Michigan state and city income tax or single business tax
and may be subject to the city income taxes imposed by certain Michigan cities.
NEW JERSEY TAXES
The New Jersey Fund intends to satisfy New Jersey's statutory requirements for
treatment as a "Qualified Investment Fund" under the provisions of the New
Jersey Gross Income Tax Act (N.J.S.A. Sections 54A: 5-1 et seq.), as amended and
any regulations promulgated thereunder. In the opinion of special New Jersey tax
counsel, Wilentz, Goldman & Spitzer, P.A., provided the Fund at all times has no
investments other than interest-bearing obligations, obligations issued at
discount, and cash and cash items including receivables; at all times has not
less than 80 percent of the aggregate principal amount of all its investments in
obligations which are issued by or on behalf of New Jersey or any county,
municipality, school or other district, agency, authority, commission,
instrumentality, public corporation, body corporate and politic or political
subdivision of New Jersey; or those obligations which are statutorily free from
state or local taxation under any act of New Jersey or under the laws of the
United States; complies with all applicable certification, disclosure and
reporting requirements; at all times is an investment company registered with
the Securities and Exchange Commission; and otherwise satisfies such statutory
requirements, shareholders of the Fund which are individuals, estates or trusts
will not be required to include in their New Jersey gross income distributions
from the Fund that are attributable to interest or gain realized by the Fund
from obligations the interest on which is
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58
TAXES
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exempt from regular federal income tax and is exempt from New Jersey personal
income tax or other obligations statutorily free from New Jersey taxation.
However, with regard to corporate shareholders, such counsel is also of the
opinion that distributions from the Fund will not be excluded from net income
and shares of the Fund will not be excluded from investment capital in
determining New Jersey corporation business (franchise) and corporation income
taxes for corporate shareholders. For additional information, see the Statement
of Additional Information--Taxes and Appendix C.
NEW YORK TAXES
In the opinion of special New York tax counsel, under New York law, dividends
paid by the New York Fund are exempt from New York State and New York City
personal income tax applicable to individuals who reside in New York State and
New York City to the extent such dividends are excluded from gross income for
federal income tax purposes and are derived from interest payments on tax-exempt
obligations issued by or on behalf of New York State and its political
subdivisions and agencies and the governments of Puerto Rico, the U.S. Virgin
Islands and Guam and other territories. Other distributions from the New York
Fund, including distributions derived from taxable ordinary income and net
short-term and long-term capital gains, are generally not exempt from New York
State and City personal income tax. Distributions to a corporate holder of APS
will be subject to New York State corporate franchise tax and New York City
general corporation tax.
OHIO TAXES
In the opinion of special Ohio tax counsel, under current Ohio law individuals
who are otherwise subject to the Ohio personal income tax will not be subject to
such tax on dividends paid by the Ohio Fund to the extent such dividends are
properly attributable to interest on obligations issued by or on behalf of the
State of Ohio or its political subdivisions, or the agencies or
instrumentalities thereof ("Ohio obligations"). Dividends paid by the Fund also
will be excluded from the net income base of the Ohio corporation franchise tax
to the extent such dividends are excluded from gross income for federal income
tax purposes or are properly attributable to interest on Ohio obligations.
However, the Fund's shares will be included in the tax base for purposes of
computing the Ohio corporation franchise tax on the net worth basis. These
conclusions regarding Ohio taxation are based on the assumption that the Ohio
Fund will continue to qualify as a regulated investment company under the
Internal Revenue Code and that at all times at least 50% of the value of the
total assets of the Fund will consist of Ohio obligations or similar obligations
of other states.
PENNSYLVANIA TAXES
In the opinion of special Pennsylvania tax counsel, interest derived by the
Pennsylvania Fund from obligations which are statutorily free from state
taxation in Pennsylvania ("Exempt Obligations") are not taxable on pass through
to individual shareholders for purposes of the Pennsylvania personal income tax.
The term "Exempt Obligations" includes (i) those obligations issued by the
Commonwealth of Pennsylvania and its political subdivisions, agencies and
instrumentalities, the interest from which is statutorily free from state
taxation in the Commonwealth of Pennsylvania, and (ii) certain qualifying
obligations of U.S. territories and possessions, or direct U.S. Government
obligations. Distributions attributable to most other sources, including capital
gains, will not be exempt from Pennsylvania personal income tax.
Corporate shareholders that are subject to the Pennsylvania corporate net income
tax will not be subject to corporate net income tax on distributions made by the
Fund, provided such distributions are derived from interest on Exempt
Obligations. Distributions of capital gain attributable to Exempt Obligations
are subject to the Pennsylvania corporate net income tax.
Shares of the Fund which are held by individual shareholders who are
Pennsylvania residents and subject to the Pennsylvania county personal property
tax will be exempt from such tax to the extent
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59
TAXES
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that the obligations held by the Fund consist of Exempt Obligations on the
annual assessment date. Corporations are not subject to Pennsylvania personal
property taxes.
For individual shareholders who are residents of the City of Philadelphia,
distributions of interest derived from Exempt Obligations will not be taxable
for purposes of the Philadelphia School District Investment Net Income Tax
("Philadelphia School District Tax"), provided that the Fund reports to its
investors the percentage of Exempt Obligations held by the Fund for the year.
The Fund will report such percentage to its investors.
The foregoing briefly summarizes some of the important federal income tax and
state tax consequences of investing in the APS and reflects the federal and
applicable state and local tax laws, 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. Other federal, state or local tax
considerations may apply to a particular investor, including state alternative
minimum tax. Investors should consult their tax advisers.
Description of capital structure
Each Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
October 3, 2002 (each a "Declaration of Trust"). Each Declaration of Trust
provides that the Trustees of each Fund may authorize separate classes of shares
of beneficial interest. The Trustees of each Fund have authorized an unlimited
number of shares of beneficial interest stock, par value $0.01 per share, all of
which shares were initially classified as Common Shares. The Declaration of
Trust also authorizes the issuance of an unlimited number of shares of
beneficial interest with preference rights, including preferred shares, having a
par value of $0.01 per share, in one or more series, with rights as determined
by the Board of Trustees, by action of the Board of Trustees without the
approval of the Shareholders. For a description of the APS, see "Description of
APS." The following table shows the amount of (i) shares authorized, (ii) shares
held by a Fund for its own account and (iii) shares outstanding, for each class
of authorized securities of each Fund as of January 13, 2003.
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
-------------------------------------------------------------------------------------------
NATIONAL FUND
Common Shares..................... Unlimited -0- 9,904,558
Auction Preferred Shares..........
Series A........................ 1,750 -0- -0-
Series B........................ 1,750 -0- -0-
CALIFORNIA FUND
Common Shares..................... Unlimited -0- 3,851,232
Auction Preferred Shares.......... 1,350 -0- -0-
FLORIDA FUND
Common Shares..................... Unlimited -0- 2,542,190
Auction Preferred Shares.......... 900 -0- -0-
MASSACHUSETTS FUND
Common Shares..................... Unlimited -0- 1,743,435
Auction Preferred Shares.......... 620 -0- -0-
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60
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
-------------------------------------------------------------------------------------------
MICHIGAN FUND
Common Shares..................... Unlimited -0- 1,507,374
Auction Preferred Shares.......... 540 -0- -0-
NEW JERSEY FUND
Common Shares..................... Unlimited -0- 2,553,301
Auction Preferred Shares.......... 900 -0- -0-
NEW YORK FUND
Common Shares..................... Unlimited -0- 2,553,314
Auction Preferred Shares.......... 900 -0- -0-
OHIO FUND
Common Shares..................... Unlimited -0- 2,503,113
Auction Preferred Shares.......... 875 -0- -0-
PENNSYLVANIA FUND
Common Shares..................... Unlimited -0- 2,937,198
Auction Preferred Shares.......... 1,040 -0- -0-
Holders of Common Shares are entitled to share equally in dividends declared by
a Board of Trustees payable to holders of Common Shares and in the net assets of
each Fund available for distribution to holders of Common Shares after payment
of the preferential amounts payable to holders of any outstanding preferred
shares. Neither holders of Common Shares nor holders of preferred shares have
pre-emptive or conversion rights and Common Shares are not redeemable. Upon
liquidation of a Fund, after paying or adequately providing for the payment of
all liabilities of the Fund 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 Fund among the holders of the Common
Shares. Each Declaration of Trust provides that Shareholders are not liable for
any liabilities of a Fund, requires inclusion of a clause to that effect in
every agreement entered into by the Fund and 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 a Fund as though they were general
partners, the provisions of each Declaration of Trust described in the foregoing
sentence make the likelihood of such personal liability remote.
Holders of Common Shares are entitled to one vote for each share held and will
vote with the holders of any outstanding APS or other preferred shares on each
matter submitted to a vote of holders of Common Shares, except as described
under "Description of APS--Voting rights."
Shareholders are entitled to one vote for each share held. The Common Shares,
APS and any other preferred shares do not have cumulative voting rights, which
means that the holders of more than 50% of the Common Shares, APS and any other
preferred shares voting for the election of Trustees can elect all of the
Trustees standing for election by such holders, and, in such event, the holders
of the remaining Common Shares, APS and any other preferred shares will not be
able to elect any of such Trustees.
So long as any APS or any other preferred shares are outstanding, holders of
Common Shares will not be entitled to receive any dividends of or other
distributions from each Fund, unless at the time of
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61
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
such declaration, (1) all accrued dividends on preferred shares or accrued
interest on borrowings has been paid and (2) the value of a Fund's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Fund 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, each Fund is required to comply with other asset coverage requirements as a
condition of the Fund obtaining a rating of the preferred shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act. See "Description of APS--Dividends and Dividend
Periods--Restrictions on Dividends and other payments."
Each Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Common Shares of each Fund commenced trading on the AMEX on November 26,
2002. At January 3, 2003, the net asset value per share of Common Shares and the
closing price per share of Common Shares on the AMEX were as follows: National
Fund--$14.52, $15.00; California Fund--$14.52, $15.00; Florida Fund--$14.49,
$15.01; Massachusetts Fund--$14.46, $15.30; Michigan Fund--$14.44, $15.11; New
Jersey Fund--$14.60, $15.00; New York Fund--$14.50, $15.00; Ohio Fund--$14.47,
$15.25; and Pennsylvania Fund--$14.47, $15.01.
PREFERRED SHARES
Under the 1940 Act, each Fund is permitted to have outstanding more than one
series of Preferred Shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of Common Shares nor holders of Preferred Shares have
pre-emptive rights to purchase any APS or any other preferred shares that might
be issued. It is anticipated that the net asset value per share of the APS will
equal its original purchase price per share plus accumulated dividends per
share.
Certain provisions of the Declarations of Trust
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
Each Declaration of Trust includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of a Fund
or to change the composition of its Board, and could have the effect of
depriving holders of Common Shares of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund. These provisions may have the effect of
discouraging attempts to acquire control of a Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund. Each Board is divided into three classes, with the
term of one class expiring at each annual meeting of holders of Common Shares
and preferred shares. 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 of Trustees. 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 each Fund that elected such Trustee and is entitled to vote on the
matter.
In addition, each Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of a Fund,
voting as a class, then entitled to vote to approve, adopt or
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CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
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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 each Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of a Fund or any subsidiary of a Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of a Fund to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of a Fund 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 a Fund or any subsidiary thereof, in
exchange for securities of the Fund, 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).
Each 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 holders of Common Shares and preferred shares 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
Each Fund may be converted to an open-end investment company at any time if
approved by the lesser of (i) two-thirds or more of the Fund'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 each Fund 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 composition of each Fund's portfolio
likely would prohibit it from complying with regulations of the SEC applicable
to open-end investment companies. Accordingly, conversion likely would require
significant changes in each Fund's investment policies and liquidation of a
substantial portion of its relatively illiquid portfolio. Conversion of each
Fund to an open-end investment company also would require the redemption of any
outstanding preferred shares and could require the repayment of borrowings. Each
Board believes, however, that the closed-end structure is desirable, given the
Fund's investment objective and policies. Investors should assume, therefore,
that it is unlikely that a Board would vote to convert a Fund to an open-end
investment company.
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Underwriting
The underwriters named below (the "Underwriters"), acting through UBS Warburg
LLC, 299 Park Avenue, New York, New York, and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, 4 World Financial Center, New York, New York as lead
managers and A.G. Edwards & Sons, Inc. and Prudential Securities Incorporated as
their representatives (together with the lead managers, the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement with each Fund and the Adviser, to purchase from each Fund the number
of APS set forth below their respective names. The Underwriters are committed to
purchase and pay for all of a Fund's APS if any are purchased.
UNDERWRITER
------------------------------------------------------------------------------
MERRILL LYNCH, PRUDENTIAL TOTAL
PIERCE, FENNER & A.G. EDWARDS SECURITIES PREFERRED
FUND UBS WARBURG LLC SMITH INCORPORATED & SONS, INC. INCORPORATED SHARES
---------------------------------------------------------------------------------------------------------------
National Fund.................. 1,400 1,400 350 350 3,500
California Fund................ 540 540 135 135 1,350
Florida Fund................... 360 360 90 90 900
Massachusetts Fund............. 248 248 62 62 620
Michigan Fund.................. 216 216 54 54 540
New Jersey Fund................ 360 360 90 90 900
New York Fund.................. 360 360 90 90 900
Ohio Fund...................... 350 350 87 88 875
Pennsylvania Fund.............. 416 416 104 104 1,040
The Underwriters have advised each Fund that they propose initially to offer the
APS of such Fund to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $137.50 per share. The Underwriters may allow, and
such dealers may reallow, a discount not in excess of $87.50 per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. Investors must pay for any APS purchased
on or before January 17, 2003.
The Underwriters will act in Auctions as Broker-Dealers as set forth under "The
Auctions--General--Broker-Dealer Agreements" and will be entitled to fees for
services as Broker-Dealers as set forth therein. The Underwriters also may
provide information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Representatives and certain other Underwriters may
from time to time act as brokers and dealers in connection with the execution of
a Fund's portfolio transactions after they have ceased to be principal
underwriters of the Fund under the 1940 Act and, subject to certain conditions,
may act as such brokers while they are principal underwriters.
In connection with this offering, certain of the Underwriters or selected
dealers may distribute prospectuses electronically.
Each Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.
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64
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Shareholder Servicing Agent, custodian and transfer agent
Pursuant to a Shareholder Servicing Agreement between UBS Warburg LLC (the
"Shareholder Servicing Agent") and Eaton Vance, the Shareholder Servicing Agent
will (i) undertake to make 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 periodic seminars or conference calls,
responses to questions from current or prospective shareholders and specific
shareholder contact where appropriate); (ii) make available to investors and
prospective investors market price, net asset value, yield and other information
regarding the Fund's common shares, if reasonably obtainable, for the purpose of
maintaining the visibility of the Fund in the investor community; (iii) at the
request of Eaton Vance, provide certain economic research and statistical
information and reports, if reasonably obtainable, on behalf of the Fund, and
consult with representatives and Trustees of the Fund in connection therewith,
which information and reports shall include: (a) statistical and financial
market information with respect to the Fund's market performance and (b)
comparative information regarding the Fund 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 Fund and such other
companies and (3) other relevant performance indicators; and (iv) at the request
of Eaton Vance, provide information to and consult with the Board of Trustees
with respect to applicable 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; 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
weekly and payable quarterly equal on an annual basis to 0.10% of the Fund's
average weekly gross assets. Under the terms of the Shareholder Servicing
Agreement, the Shareholder Servicing Agent is relieved from liability to Eaton
Vance for any act or omission in the course of its performances under the
Shareholder Servicing Agreement in the absence of gross negligence or willful
misconduct by the Shareholder Servicing Agent. The Shareholder Servicing
Agreement will continue so long as the Advisory Agreement remains in effect
between the Fund 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, MA 02116
is the custodian of the Fund and will maintain custody of the securities and
cash of the Fund. IBT maintains the Fund'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 Fund'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, RI 02940-3027 is the transfer agent and
dividend disbursing agent of the Fund.
Legal opinions
Certain legal matters in connection with the APS will be passed upon for each
Fund by Kirkpatrick & Lockhart LLP, Boston, Massachusetts, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois and its affiliated entities. Skadden, Arps, Slate, Meagher & Flom
(Illinois) and its affiliated entities may rely as to certain matters of
Massachusetts law on the opinion of Kirkpatrick & Lockhart LLP.
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65
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Independent auditors
Deloitte & Touche LLP, Boston, Massachusetts, are the independent auditors for
each Fund and will audit each Fund's financial statements.
Additional information
The Prospectus and the Statements of Additional Information do not contain all
of the information set forth in the Registration Statement that each Fund 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
Statements 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 document 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.
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66
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National Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 17
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 24
Independent auditors........................................ 24
Independent auditors' report................................ 25
Financial statements........................................ 26
Appendix A: Ratings of municipal bonds...................... 54
Appendix B: Tax equivalent yield table...................... 60
Appendix C: U.S. territory information...................... 61
Appendix D: Description of insurers......................... 63
Appendix E: Amended By-Laws................................. 66
California Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 17
Determination of net asset value............................ 18
Portfolio trading........................................... 19
Taxes....................................................... 21
Other information........................................... 26
Independent auditors........................................ 26
Independent auditors' report................................ 27
Financial statements........................................ 28
Appendix A: Ratings of municipal bonds...................... 56
Appendix B: Tax equivalent yield table...................... 62
Appendix C: California and U.S. territory information....... 63
Appendix D: Description of insurers......................... 76
Appendix E: Amended By-Laws................................. 79
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67
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Florida Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 18
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 24
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
Appendix A: Ratings of municipal bonds...................... 55
Appendix B: Tax equivalent yield table...................... 61
Appendix C: Florida and U.S. territory information.......... 63
Appendix D: Description of insurers......................... 68
Appendix E: Amended By-Laws................................. 71
Massachusetts Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 17
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 24
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
Appendix A: Ratings of municipal bonds...................... 55
Appendix B: Tax equivalent yield table...................... 61
Appendix C: Massachusetts and U.S. territory information.... 62
Appendix D: Description of insurers......................... 80
Appendix E: Amended By-Laws................................. 83
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68
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Michigan Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 17
Determination of net asset value............................ 18
Portfolio trading........................................... 19
Taxes....................................................... 21
Other information........................................... 25
Independent auditors........................................ 26
Independent auditors' report................................ 27
Financial statements........................................ 28
Appendix A: Ratings of municipal bonds...................... 56
Appendix B: Tax equivalent yield table...................... 62
Appendix C: Michigan and U.S. territory information......... 64
Appendix D: Description of insurers......................... 70
Appendix E: Amended By-Laws................................. 73
New Jersey Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 17
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 25
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
Appendix A: Ratings of municipal bonds...................... 55
Appendix B: Tax equivalent yield table...................... 61
Appendix C: New Jersey and U.S. territory information....... 62
Appendix D: Description of insurers......................... 67
Appendix E: Amended By-Laws................................. 70
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69
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New York Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 17
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 25
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
Appendix A: Ratings of municipal bonds...................... 55
Appendix B: Tax equivalent yield table...................... 61
Appendix C: New York and U.S. territory information......... 63
Appendix D: Description of insurers......................... 72
Appendix E: Amended By-Laws................................. 75
Ohio Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 16
Determination of net asset value............................ 17
Portfolio trading........................................... 18
Taxes....................................................... 20
Other information........................................... 25
Independent auditors........................................ 26
Independent auditors' report................................ 27
Financial statements........................................ 28
Appendix A: Ratings of municipal bonds...................... 56
Appendix B: Tax equivalent yield table...................... 62
Appendix C: Ohio and U.S. territory information............. 64
Appendix D: Description of insurers......................... 74
Appendix E: Amended By-Laws................................. 77
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70
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Pennsylvania Fund
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 17
Determination of net asset value............................ 18
Portfolio trading........................................... 19
Taxes....................................................... 21
Other information........................................... 25
Independent auditors........................................ 26
Independent auditors' report................................ 27
Financial statements........................................ 28
Appendix A: Ratings of municipal bonds...................... 56
Appendix B: Tax equivalent yield table...................... 62
Appendix C: Pennsylvania and U.S. territory information..... 63
Appendix D: Description of insurers......................... 72
Appendix E: Amended By-Laws................................. 75
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71
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Glossary
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act APS Asset Coverage" has the meaning set forth on page 43 of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page 43 of this Prospectus.
"Additional Dividends" has the meaning set forth on page 41 of this Prospectus.
"Adviser" means Eaton Vance Management.
"Agent Member" means the member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more APS or on behalf of a Potential
Beneficial Owner.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"Amended By-Laws" means the By-laws of each Fund, as amended December 17, 2002,
specifying the powers, preferences and rights of the APS. Each Fund's Amended
By-Laws are contained in Appendix E to the Fund's Statement of Additional
Information.
"Anticipation Notes" means the following municipal obligations: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page 50 of this Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on APS for any Dividend Period.
"APS" means the Auction Preferred Shares with a par value of $0.01 per share and
a liquidation preference of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared), of
a Fund.
"APS Basic Maintenance Amount" has the meaning set forth on page 45 of this
Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page 42 of this
Prospectus.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company, unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Trustees of each Fund or a duly authorized committee
thereof enters into an agreement with each to follow the Auction Procedures for
the purpose of determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the APS.
"Auction Agent Agreement" means the agreement entered into between each Fund and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" has the meaning set forth on page 49 of this Prospectus.
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72
GLOSSARY
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"Auction Procedures" means the procedures for conducting Auctions set forth in
Section 10 of each Fund's Amended By-Laws contained in Appendix E to each Fund's
Statement of Additional Information.
"Available APS" has the meaning specified in Paragraph 10(d)(i) of the Auction
Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of APS or a Broker-Dealer that holds APS for its own account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of each Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by each Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the Auction
Agent and a Broker-Dealer, including UBS Warburg LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc. and Prudential Securities
Incorporated pursuant to which such Broker-Dealer agrees to follow the Auction
Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.
"Cede & Co." means the nominee of DTC, and in whose name the shares of APS
initially will be registered.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the Common Shares, par value $0.01 per share, of each
Fund.
"Date of Original Issue" means, with respect to each APS, the date on which such
share first is issued by each Fund.
"Declaration of Trust" means the Agreement and Declaration of Trust of each
Fund.
"Discounted Value" of any asset of each means with respect to an S&P Eligible
Asset, the quotient of the market value thereof divided by the applicable S&P
Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 37 of this Prospectus.
"Dividend Periods" has the meaning set forth on page 37 of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means S&P Eligible Assets.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by each Fund that is listed as the holder of record of APS in the
records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Fund" means each Eaton Vance insured municipal bond fund listed on the cover
page of this Prospectus, each a Massachusetts business trust that is the issuer
of APS.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
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73
GLOSSARY
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"IBT" means Investors Bank & Trust Company, the custodian of each Fund's assets.
"Initial Dividend Payment Date" has the meaning set forth on the inside cover
page of this Prospectus.
"Initial Dividend Period" means, with respect to the APS, the period from and
including the Date of Original Issue to but excluding the Initial Dividend
Payment Date of the APS.
"IRS" means the Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page 37 of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 42 of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal federal income tax rate
applicable to an individual's or a corporation's ordinary income, whichever is
greater.
"Maximum Applicable Rate" has the meaning specified under "The Auction--Orders
by Beneficial Owners, Potential Beneficial Owners, Existing Holders and
Potential Holders" in this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 39 of this Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page 40 of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page 38 of this Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 38 of this
Prospectus.
"Optional Redemption Price" has the meaning set forth on page 42 of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
APS.
"Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by each Fund, including any Existing Holder, who may be interested in
acquiring APS (or, in the case of an Existing Holder, additional APS).
"Preference Item" has the meaning set forth on page 36 of this Prospectus.
"Preferred Shares" means preferred shares of beneficial interest, par value
$0.01 per share, of each Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S.
Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page 37 of
this Prospectus.
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74
GLOSSARY
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"Response" has the meaning set forth on page 38 of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 41 of this
Prospectus.
"S&P" means Standard & Poor's, or its successors.
"S&P Eligible Assets" has the meaning set forth on page 45 of this Prospectus.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by each Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Short Term Dividend Period" has the meaning set forth on page 37 of this
Prospectus.
"Special Dividend Period" has the meaning set forth on page 31 of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of each Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the APS subject to such
Dividend Period shall not be subject to redemption at the option of a Fund and
(ii) a period (a "Premium Call Period"), consisting of a number of whole years
and determined by the Board of Trustees of each Fund, after consultation with
the Auction Agent and the Broker-Dealers, during each year of which the APS
subject to such Dividend Period shall be redeemable at a Fund's option at a
price per share equal to $25,000 plus accumulated but unpaid dividends plus a
premium expressed as a percentage of $25,000, as determined by the Board of
Trustees of each Fund after consultation with the Auction Agent and the
Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of the
Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the Auction
Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by UBS
Warburg LLC, or its respective affiliates and successors, after consultation
with each Fund, to act as a substitute rating agency or substitute rating
agencies, as the case may be, to determine the credit ratings of the APS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day immediately
preceding such date but in any event not later than 8:30 a.m., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for federal income tax purposes under the Code of "high grade"
component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes a
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75
GLOSSARY
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Preference Item, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal); provided, however, that if the Kenny Index is not made so available by
8:30 a.m., New York City time, on such date by Kenny Information Systems Inc. or
any successor, the Taxable Equivalent of the Short-Term Municipal Obligations
Rate shall mean the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the most recent Kenny Index so made available for any
preceding Business Day, divided by (B) 1.00 minus the marginal tax rate noted
above (expressed as a decimal). A Fund may not utilize a successor index to the
Kenny Index unless S&P provides the Fund with written confirmation that the use
of such successor index will not adversely affect the then-current S&P rating of
the APS.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the
rate on the actively traded Treasury Bill with a maturity most nearly comparable
to the length of the related Dividend Period, as such rate is made available on
a discount basis or otherwise by the Federal Reserve Bank of New York in its
Composite 3:30 p.m. Quotations for U.S. Government Securities report for such
Business Day, or (ii) if such yield as so calculated is not available, the
Alternate Treasury Bill Rate on such date.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether a Fund is
maintaining the APS Basic Maintenance Amount, each Business Day commencing with
January 17, 2003.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
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STATEMENT OF ADDITIONAL INFORMATION
JANUARY 15, 2003
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND II
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265
TABLE OF CONTENTS
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PAGE
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Additional investment information and restrictions.......... 2
Trustees and officers....................................... 11
Investment advisory and other services...................... 17
Determination of net asset value............................ 18
Portfolio trading........................................... 19
Taxes....................................................... 21
Other information........................................... 26
Independent auditors........................................ 26
Independent auditors' report................................ 27
Financial statements........................................ 28
Appendix A: Ratings of municipal bonds...................... 56
Appendix B: Tax equivalent yield table...................... 62
Appendix C: California and U.S. territory information....... 63
Appendix D: Description of insurers......................... 76
Appendix E: Amended By-Laws................................. 79
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 INSURED CALIFORNIA MUNICIPAL BOND
FUND II (THE "FUND") DATED JANUARY 15, 2003, 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 FUND AT 1-800-225-6265.
Capitalized terms used in this SAI and not otherwise defined have the meanings
given them in the Fund's Prospectus.
Additional investment information and restrictions
MUNICIPAL OBLIGATIONS
Municipal obligations are issued to obtain funds for various public and private
purposes. Municipal obligations include long-term obligations, which are often
called municipal bonds, as well as tax-exempt commercial paper, project notes
and municipal notes such as tax, revenue and bond anticipation notes of short
maturity, generally less than three years. Market rates of interest available
with respect to municipal obligations may be lower than those available with
respect to taxable securities, although such differences may be partially or
wholly offset by the effects of federal income tax on income derived from such
taxable securities. While most municipal bonds pay a fixed rate of interest
semi-annually in cash, some bonds pay no periodic cash interest but instead make
a single payment at maturity representing both principal and interest. Municipal
obligations may be issued or subsequently offered with interest coupons
materially greater or less than those then prevailing, with price adjustments
reflecting such deviation.
In general, there are three categories of municipal obligations the interest on
which is exempt from federal income tax and is not a tax preference item for
purposes of the federal alternative minimum tax ("AMT"): (i) certain "public
purpose" obligations (whenever issued), which include obligations issued
directly by state and local governments or their agencies to fulfill essential
governmental functions; (ii) certain obligations issued before August 8, 1986
for the benefit of non-governmental persons or entities; and (iii) certain
"private activity bonds" issued after August 7, 1986, which include "qualified
Section 501(c)(3) bonds" or refundings of certain obligations included in the
second category.
Interest on certain "private activity bonds" issued after August 7, 1986 is
exempt from regular federal income tax, but is treated as a tax preference item
that could subject the recipient to or increase the recipient's liability for
the AMT. For corporate shareholders, the Fund's distributions derived from
interest on all municipal obligations (whenever issued) is included in "adjusted
current earnings" for purposes of the AMT as applied to corporations (to the
extent not already included in federal alternative minimum taxable income as
income attributable to private activity bonds). In assessing the federal income
tax treatment of interest on any such obligation, the Fund will rely on an
opinion of the issuer's counsel (when available) obtained by the issuer or other
reliable authority and will not undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security
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including partially or fully insured, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. In
addition to a debt service reserve fund, some authorities provide further
security in the form of a state's ability (without legal obligation) to make up
deficiencies in the debt service reserve fund. Lease rental revenue bonds issued
by a state or local authority for capital projects are normally secured by
annual lease rental payments from the state or locality to the authority
sufficient to cover debt service on the authority's obligations. Such payments
are usually subject to annual appropriations by the state or locality.
Industrial development and pollution control bonds, although nominally issued by
municipal authorities, are in most cases revenue bonds and are generally not
secured by the taxing power of the municipality, but are usually secured by the
revenues derived by the authority from payments of the industrial user or users.
The Fund may on occasion acquire revenue bonds which carry warrants or similar
rights covering equity securities. Such warrants or rights may be held
indefinitely, but if exercised, the Fund anticipates that it would, under normal
circumstances, dispose of any equity securities so acquired within a reasonable
period of time.
The obligations of any person or entity to pay the principal of and interest on
a municipal obligation are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations. There
is also the possibility that as a result of litigation or other conditions the
power or ability of any person or entity to pay when due principal of and
interest on a municipal obligation may be materially affected. There have been
recent instances of defaults and bankruptcies involving municipal obligations
which were not foreseen by the financial and investment communities. The Fund
will take whatever action it considers appropriate in the event of anticipated
financial difficulties, default or bankruptcy of either the issuer of any
municipal obligation or of the underlying source of funds for debt service. Such
action may include retaining the services of various persons or firms (including
affiliates of the Adviser) to evaluate or protect any real estate, facilities or
other assets securing any such obligation or acquired by the Fund as a result of
any such event, and the Fund may also manage (or engage other persons to manage)
or otherwise deal with any real estate, facilities or other assets so acquired.
The Fund anticipates that real estate consulting and management services may be
required with respect to properties securing various municipal obligations in
its portfolio or subsequently acquired by the Fund. The Fund will incur
additional expenditures in taking protective action with respect to portfolio
obligations in default and assets securing such obligations. To enforce its
rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets or
have a receiver appointed to collect and disburse pledged revenues securing the
issuer's obligations on such securities, which may increase the operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the ownership or operation of such assets may not be tax-exempt. In
addition, the Fund's intention to qualify as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code") may
limit the extent to which the Fund may exercise its rights by taking possession
of such assets, because as a regulated investment company, the Fund is subject
to certain limitations on its investments and on the nature of its income.
The yields on municipal obligations are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of municipal
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obligations will normally fluctuate with changes in interest rates, and
therefore the net asset value of the Fund will be affected by such changes.
The Fund also may invest up to 20% of the net assets in uninsured municipal
bonds that are entitled to the benefit of an escrow or trust account that
contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies, backed by the full faith and credit of the United States,
and sufficient in the amount to ensure the payment of interest and principal on
the original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will include,
but are not limited to, municipal bonds that have been advance refunded where
the proceeds of the refunding have been used to buy U.S. Government or U.S.
Government agency securities that are placed in escrow and whose interest or
maturing principal payments, or both, are sufficient to cover the remaining
scheduled debt service on that municipal bond.
STATE CONCENTRATION
The Fund may invest 25% or more of its total assets in municipal obligations of
issuers located in California or the U.S. territories. When the Fund does so, it
will be sensitive to factors affecting California or the U.S. Territory, such as
changes in the economy, decreases in tax collection or the tax base, legislation
which limits taxes and changes in issuer credit ratings. Factors pertaining to
California and U.S. territories are set forth in Appendix C.
CREDIT QUALITY
While municipal obligations rated investment grade or below and comparable
unrated municipal obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions. Lower
rated and comparable unrated municipal obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
(credit risk) and may also be subject to greater price volatility due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity (market risk). Lower rated or unrated
municipal obligations are also more likely to react to real or perceived
developments affecting market and credit risk than are more highly rated
obligations, which react primarily to movements in the general level of interest
rates.
MUNICIPAL LEASES
The Fund may invest in municipal leases and participations therein, which
arrangements frequently involve special risks. Municipal leases are obligations
in the form of a lease or installment purchase arrangement which is issued by
state or local governments to acquire equipment and facilities. Interest income
from such obligations is generally exempt from local and state taxes in the
state of issuance. "Participations" in such leases are undivided interests in a
portion of the total obligation. Participations entitle their holders to receive
a pro rata share of all payments under the lease. The obligation of the issuer
to meet its obligations under such leases is often subject to the appropriation
by the appropriate legislative body, on an annual or other basis, of funds for
the payment of the obligations. Investments in municipal leases are thus subject
to the risk that the legislative body will not make the necessary appropriation
and the issuer will not otherwise be willing or able to meet its obligation.
Certain municipal lease obligations are illiquid.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations which do not require the periodic payment
of interest and are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. The Fund is required to
accrue income from zero coupon bonds on a current basis, even though it does not
receive that income currently in cash and the
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Fund is required to distribute its income for each taxable year. Thus, the Fund
may have to sell other investments to obtain cash needed to make income
distributions.
WHEN-ISSUED SECURITIES
New issues of municipal obligations are sometimes offered on a "when-issued"
basis, that is, delivery and payment for the securities normally take place
within a specified number of days after the date of the Fund's commitment and
are subject to certain conditions such as the issuance of satisfactory legal
opinions. The Fund may also purchase securities on a when-issued basis pursuant
to refunding contracts in connection with the refinancing of an issuer's
outstanding indebtedness. Refunding contracts generally require the issuer to
sell and the Fund to buy such securities on a settlement date that could be
several months or several years in the future. The Fund may also purchase
instruments that give the Fund the option to purchase a municipal obligation
when and if issued.
The Fund will make commitments to purchase when-issued securities only with the
intention of actually acquiring the securities, but may sell such securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. The payment obligation and the interest rate that will be received on
the securities are fixed at the time the Fund enters into the purchase
commitment. When the Fund commits to purchase a security on a when-issued basis
it records the transaction and reflects the value of the security in determining
its net asset value. Securities purchased on a when-issued basis and the
securities held by the Fund are subject to changes in value based upon the
perception of the creditworthiness of the issuer and changes in the level of
interest rates (i.e. appreciation when interest rates decline and depreciation
when interest rates rise). Therefore, to the extent that the Fund remains
substantially fully invested at the same time that it has purchased securities
on a when-issued basis, there will be greater fluctuations in the Fund's net
asset value than if it set aside cash to pay for when-issued securities.
REDEMPTION, DEMAND AND PUT FEATURES AND PUT OPTIONS
Issuers of municipal obligations reserve the right to call (redeem) the bond. If
an issuer redeems securities held by the Fund during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed. Also, some
bonds may have "put" or "demand" features that allow early redemption by the
bondholder. Longer term fixed-rate bonds may give the holder a right to request
redemption at certain times (often annually after the lapse of an intermediate
term). These bonds are more defensive than conventional long term bonds because
they may protect to some degree against a rise in interest rates.
VARIABLE RATE OBLIGATIONS
The Fund may purchase variable rate obligations. Variable rate instruments
provide for adjustments in the interest rate at specified intervals (weekly,
monthly, semi-annually, etc.). The revised rates are usually set at the issuer's
discretion in which case the investor normally enjoys the right to "put" the
security back to the issuer or his agent. Rate revisions may alternatively be
determined by formula or in some other contractual fashion. Variable rate
obligations normally provide that the holder can demand payment of the
obligation on short notice at par with accrued interest and which are frequently
secured by letters of credit or other support arrangements provide by banks. To
the extent that such letters of credit or other arrangements constitute an
unconditional guarantee of the issuer's obligations, a bank may be treated as
the issuer of a security for the purposes of complying with the diversification
requirements set forth in Section 5(b) of the 1940 Act and Rule 5b-2 thereunder.
The Fund would anticipate using these bonds as cash equivalents pending longer
term investment of its funds.
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INVERSE FLOATERS
The Fund may invest in municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index
("inverse floaters"). Inverse floaters typically are created by underwriting
firms depositing on behalf of municipal issuers a municipal bond(s) with a
custodian or in a trust arrangement and issuing two derivative securities
against the municipal bond(s) held in custody/trust. The first tranche typically
is referred to as a floater, with a variable rate adjusted at regular intervals
to market rates. This periodic rate adjustment permits floaters to trade like
short-term bonds. The second tranche consists of inverse floaters as described
below. Inverse floaters bear all of the interest rate risk of the deposited
municipal bond(s) and trade like bonds with a duration that is a multiple of the
underlying long-term bonds. Inverse floaters are structured to pass through to
investors the tax-exempt character of the underlying municipal bond(s) that they
are issued against.
An investment in inverse floaters may involve greater risk than an investment in
a fixed rate bond. Because changes in the interest rate on the other security or
index inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a fixed rate
bond. Inverse floaters have interest rate adjustment formulas which generally
reduce or, in the extreme, eliminate the interest paid to a portfolio when
short-term interest rates rise, and increase the interest paid to the Fund when
short-term interest rates fall. Inverse floaters have varying degrees of
liquidity, and the market for these securities is relatively volatile. These
securities tend to underperform the market for fixed rate bonds in a rising
interest rate environment, but tend to outperform the market for fixed rate
bonds when interest rates decline. Shifts in long-term interest rates may,
however, alter this tendency. Although volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These securities usually
permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising rates if exercised at an opportune time. Inverse floaters
are leveraged because they provide two or more dollars of bond market exposure
for every dollar invested.
INTEREST RATE SWAPS AND FORWARD RATE CONTRACTS
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. The Fund will only enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The Fund may also enter forward rate contracts. Under these contracts,
the buyer locks in an interest rate at a future settlement date. If the interest
rate on the settlement date exceeds the lock rate, the buyer pays the seller the
difference between the two rates. If the lock rate exceeds the interest rate on
the settlement date, the seller pays the buyer the difference between the two
rates. Any such gain received by the Fund would be taxable.
If the other party to an interest rate swap or forward rate contract defaults,
the Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. The net amount of the excess, if any, of the
Fund's obligations over its entitlements will be maintained in a segregated
account by the Fund's custodian. The Fund will not enter into any interest rate
swap or forward rate contract unless the claims-paying ability of the other
party thereto is considered to be investment grade by the investment adviser. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market.
LIQUIDITY AND PROTECTIVE PUT OPTIONS
The Fund may also enter into a separate agreement with the seller of a security
or some other person granting the Fund the right to put the security to the
seller thereof or the other person at an agreed
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upon price. Such agreements are subject to the risk of default by the other
party, although the Fund intends to limit this type of transaction to
institutions (such as banks or securities dealers) which the Adviser believes
present minimal credit risks. The Fund would engage in this type of transaction
to facilitate portfolio liquidity or (if the seller so agrees) to hedge against
rising interest rates. There is no assurance that this kind of put option will
be available to the Fund or that selling institutions will be willing to permit
the Fund to exercise a put to hedge against rising interest rates. The Fund does
not expect to assign any value to any separate put option which may be acquired
to facilitate portfolio liquidity, inasmuch as the value (if any) of the put
will be reflected in the value assigned to the associated security; any put
acquired for hedging purposes would be valued in good faith under methods or
procedures established by the Trustees of the Fund after consideration of all
relevant factors, including its expiration date, the price volatility of the
associated security, the difference between the market price of the associated
security and the exercise price of the put, the creditworthiness of the issuer
of the put and the market prices of comparable put options. Interest income
generated by certain bonds having put or demand features may be taxable.
ILLIQUID OBLIGATIONS
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other accounts
managed by the Adviser and its affiliates, holds a major portion or all of such
securities. Under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, the Fund could find it
more difficult to sell such securities when the Adviser believes it advisable to
do so or may be able to sell such securities only at prices lower than if such
securities were more widely held. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing the Fund's net asset value.
The secondary market for some municipal obligations issued within a state
(including issues which are privately placed with the Fund) is less liquid than
that for taxable debt obligations or other more widely traded municipal
obligations. No established resale market exists for certain of the municipal
obligations in which the Fund may invest. The market for obligations rated below
investment grade is also likely to be less liquid than the market for higher
rated obligations. As a result, the Fund may be unable to dispose of these
municipal obligations at times when it would otherwise wish to do so at the
prices at which they are valued.
SECURITIES LENDING
The Fund may seek to increase its income by lending portfolio securities to
broker-dealers or other institutional borrowers. Distributions by the Fund of
any income realized by the Fund from securities loans will be taxable. If the
management of the Fund decides to make securities loans, it is intended that the
value of the securities loaned would not exceed 30% of the Fund's total assets.
Securities lending involves risks of delay in recovery or even loss of rights on
the securities loaned if the borrower fails financially. The Fund has no present
intention of engaging in securities lending.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A change in the level of interest rates may affect the value of the securities
held by the Fund (or of securities that the Fund expects to purchase). To hedge
against changes in rates or as a substitute for the purchase of securities, the
Fund may enter into (i) futures contracts for the purchase or sale of debt
securities and (ii) futures contracts on securities indices. All futures
contracts entered into by the Fund are traded on exchanges or boards of trade
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant exchange. The Fund may purchase and write
call and put options on futures contracts which are traded on a United States or
foreign exchange or board of trade. The Fund will be required, in connection
with transactions in futures contracts and the
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writing of options on futures, to make margin deposits, which will be held by
the Fund's custodian for the benefit of the futures commission merchant through
whom the Fund engages in such futures and options transactions.
Some futures contracts and options thereon may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit transactions in an exchange-traded instrument,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or futures option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
The Fund will engage in futures and related options transactions for bona fide
hedging purposes or non-hedging purposes as defined in or permitted by CFTC
regulations. The Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase. The Fund will engage in transactions in futures and related options
contracts only to the extent such transactions are consistent with the
requirements of the Code for maintaining its qualification as a RIC for federal
income tax purposes.
ASSET COVERAGE REQUIREMENTS
Transactions involving when-issued securities, futures contracts and options
(other than options that the Fund has purchased), interest rate swaps or forward
rate contracts may expose the Fund to an obligation to another party. The Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts, or (2) cash or liquid securities (such as readily marketable
obligations and money market instruments) with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. The
Fund will comply with SEC guidelines regarding cover for these instruments and,
if the guidelines so require, set aside cash or liquid securities in a
segregated account with its custodian in the prescribed amount. The securities
in the segregated account will be marked to market daily.
Assets used as cover or held in a segregated account maintained by the custodian
cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Fund's assets to segregated accounts or
to cover could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
TEMPORARY INVESTMENTS
Under unusual market conditions, the Fund may invest temporarily in cash or cash
equivalents. Cash equivalents are highly liquid, short-term securities such as
commercial paper, certificates of deposit, short-term notes and short-term U.S.
Government obligations. These securities may be subject to federal income, state
income and/or other taxes.
PORTFOLIO TURNOVER
The Fund may sell (and later purchase) securities in anticipation of a market
decline (a rise in interest rates) or purchase (and later sell) securities in
anticipation of a market rise (a decline in interest rates). In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the Fund believes to be a temporary disparity in the
normal yield relationship between the two securities. Yield disparities may
occur for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the overall
demand for or supply of various types of municipal obligations or changes in the
investment objectives of investors. Such trading may be expected to increase the
portfolio turnover rate, which
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may increase capital gains and the expenses incurred in connection with such
trading. The Fund cannot accurately predict its portfolio turnover rate, but it
is anticipated that the annual portfolio turnover rate will generally not exceed
100% (excluding turnover of securities having a maturity of one year or less). A
100% annual turnover rate could occur, for example, if all the securities held
by the Fund were replaced once in a period of one year. A high turnover rate
(100% or more) necessarily involves greater expenses to the Fund.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as fundamental
policies and as such cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, which as used in this SAI
means the lesser of (a) 67% of the shares of the Fund present or represented by
proxy at a meeting if the holders of more than 50% of the outstanding shares are
present or represented at the meeting or (b) more than 50% of outstanding shares
of the Fund. As a matter of fundamental policy the Fund may not:
(1) Borrow money, except as permitted by the 1940 Act;
(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;
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The 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
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 Fund is
authorized to invest in accordance with its investment objective and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase or sell real estate, although it may purchase and sell securities
which are secured by interests in real estate and securities of issuers
which invest or deal in real estate. The Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities;
(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) Invest 25% or more of its total assets in issuers in any one industry.
In addition, as a fundamental policy, the Fund will, during normal market
conditions, invest at least 80% of its net assets in municipal obligations, the
interest on which is exempt from federal income tax, including alternative
minimum tax, and California personal income tax, and that are insured as to
principal and interest payments.
For purposes of the Fund's investment restrictions, the determination of the
"issuer" of a municipal obligation which is not a general obligation bond will
be made by the Adviser on the basis of the
--------------------------------------------------------------------------------
9
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
characteristics of the obligation and other relevant factors, the most
significant of which is the source of funds committed to meeting interest and
principal payments of such obligation.
The Fund 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 Fund
securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.
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. However, municipal obligations backed only
by the assets and revenues of non-governmental users may for this purpose be
deemed to be issued by such non-governmental users. The foregoing 25% limitation
would apply to these issuers.
The Fund has adopted the following nonfundamental investment policy which may be
changed by the Trustees without approval of the Fund's shareholders. As a matter
of nonfundamental policy, the Fund 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 issue as, and equal in amount to, the securities sold
short.
Upon Board of Trustee approval, the Fund 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 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 Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances will not compel the Fund to dispose of
such security or other asset. Notwithstanding the foregoing, the Fund must
always be in compliance with the borrowing policies set forth above.
--------------------------------------------------------------------------------
10
--------------------------------------------------------------------------------
Trustees and officers
The Trustees of the Fund are responsible for the overall management and
supervision of the affairs of the Fund. The Trustees and officers of the Fund
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 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 is the
corporate parent of Eaton Vance. EV is the corporate trustee of Eaton Vance.
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 FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee(2) Since 10/16/02 President and Chief 185 None
11/28/59 3 Years Executive Officer of
National Financial
Partners (financial
services company)
(since April 1999).
President and Chief
Operating Officer of
John A. Levin & Co.
(registered investment
adviser) (July 1997 to
April 1999) and a
Director of Baker,
Fentress & Company
which owns John A.
Levin & Co. (July 1997
to April 1999). Ms.
Bibliowicz is an
interested person
because of her
affiliation with a
brokerage firm.
James B. Hawkes Vice President Since 10/3/02 Chairman, President and 190 Director of EVC,
11/9/41 and Trustee(3) 3 Years Chief Executive Officer EV and EVD
of BMR, Eaton Vance and
their corporate parent
and trustee (EVC and
EV, respectively); Vice
President of EVD.
Trustee and/or officer
of 190 investment
companies in the Eaton
Vance Fund Complex. Mr.
Hawkes is an interested
person because of his
positions with BMR,
Eaton Vance and EVC,
who are affiliates of
the Fund.
--------------------------------------------------------------------------------
11
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 FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
NONINTERESTED
TRUSTEES
Donald R. Dwight Trustee(2) Since 10/16/02 President of Dwight 190 Trustee/Director
3/26/31 3 Years Partners, Inc. (a of the Royce Funds
corporate relations and mutual funds
communications (consisting of 17
company). portfolios)
Samuel L. Hayes, III Trustee(3) Since 10/16/02 Jacob H. Schiff 190 Director of
2/23/35 3 Years Professor of Investment Tiffany & Co.
Banking Emeritus, (specialty
Harvard University retailer) and
Graduate School of Telect, Inc.
Business (telecommunication
Administration. services company)
Norton H. Reamer Trustee(4) Since 10/16/02 President, Unicorn 190 None
9/21/35 3 Years Corporation (an
investment and
financial advisory
services company)
(since September 2000).
Chairman, Hellman,
Jordan Management Co.,
Inc. (an investment
management company)
(since November 2000).
Advisory Director of
Berkshire Capital
Corporation (investment
banking firm) (since
June 2002). 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).
Lynn A. Stout 9/14/57 Trustee(4) Since 10/16/02 Professor of Law, 185 None
3 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 Trustee whose term expires in 2003.
(3) Class II Trustee whose term expires in 2004.
(4) Class III Trustee whose term expires in 2005.
--------------------------------------------------------------------------------
12
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
TERM OF OFFICE
NAME AND POSITION(S) AND LENGTH
DATE OF BIRTH WITH FUND OF SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
------------------------------------------------------------------------------------------------------
Cynthia Clemson Vice President Since 10/3/02 Vice President of Eaton Vance and BMR.
3/2/63 Officer of 20 investment companies managed
by Eaton Vance or BMR.
Thomas J. Fetter President Since 10/3/02 Vice President of Eaton Vance and BMR.
8/20/43 Officer of 126 investment companies managed
by Eaton Vance or BMR.
Robert B. MacIntosh Vice President Since 10/3/02 Vice President of Eaton Vance and BMR.
1/22/57 Officer of 125 investment companies managed
by Eaton Vance or BMR.
Alan R. Dynner Secretary Since 10/3/02 Vice President, Secretary and Chief Legal
10/10/40 Officer of BMR, Eaton Vance, EVD and EVC.
Officer of 190 investment companies managed
by Eaton Vance or BMR.
James L. O'Connor Treasurer Since 10/3/02 Vice President of BMR, Eaton Vance and EVD.
4/1/45 Officer of 112 investment companies managed
by Eaton Vance or BMR.
The Nominating Committee of the Board of Trustees of the Fund is comprised of
the Trustees who are not "interested persons" of the Fund as that term is
defined under the 1940 Act ("noninterested Trustees"). The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is comprised of noninterested Trustees of the Fund. The Trustees will,
when a vacancy exists or is anticipated, consider any nominee for Trustee
recommended by a shareholder if such recommendation is submitted to the Trustees
in writing and contains sufficient background information concerning the
individual to enable a proper judgment to be made as to such individual's
qualifications.
Messrs. Dwight (Chairman), Hayes and Reamer are members of the Audit Committee
of the Board of Trustees of the Fund. The Audit Committee's functions include
making recommendations to the Trustees regarding the selection and performance
of the independent accountants, and reviewing matters relative to accounting and
auditing practices and procedures, accounting records, and the internal
accounting controls, of the Fund, and certain service providers.
Messrs. Dwight, Hayes and Reamer and Ms. Stout are members of the Special
Committee of the Board of Trustees of the Fund. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Fund, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Fund.
As of the date of this SAI, the Committees had not held any meetings.
When considering approval of the investment advisory agreement between the Fund
and the investment adviser, the noninterested Trustees considered, among other
things, the following:
+ A report comparing the fees and expenses of the Fund to a peer group of
funds;
+ Information on the relevant peer group(s) of funds and appropriate indices;
+ The economic outlook and the general investment outlook in the relevant
investment markets;
--------------------------------------------------------------------------------
13
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
+ Eaton Vance's results and financial condition and the overall organization of
the investment adviser;
+ Arrangements regarding the distribution of Fund shares;
+ The procedures used to determine the fair value of the Fund'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;
+ Operating expenses (including transfer agency expenses) to be paid to third
parties; and
+ Information to be provided to investors, including Fund's shareholders.
In addition to the factors mentioned above, the noninterested Trustees also
reviewed the level of the investment adviser's profits in respect of the
management of the Eaton Vance funds, including the Fund. The noninterested
Trustees considered the profits realized by Eaton Vance and its affiliates in
connection with the operation of the Fund. The noninterested Trustees also
considered Eaton Vance's profit margins in comparison with available industry
data.
The noninterested Trustees did not consider any single factor as controlling in
determining whether or not to approve the investment advisory agreement. Nor are
the items described herein all encompassing of the matters considered by the
noninterested Trustees. In assessing the information provided by Eaton Vance and
its affiliates, the noninterested Trustees also took into consideration the
benefits to shareholders of investing in a fund that is part of large family of
funds which provides a large variety of shareholder services.
Based on their consideration of all factors that it deemed material and assisted
by the advice of its independent counsel, the noninterested Trustees concluded
that the approval of the investment advisory agreement, including the fee
structure (described herein) is in the interests of shareholders.
--------------------------------------------------------------------------------
14
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
SHARE OWNERSHIP
The following table shows the dollar range of equity securities beneficially
owned by each Trustee in the Fund and all Eaton Vance Funds overseen by the
Trustee as of December 31, 2002.
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES OWNED IN ALL REGISTERED
EQUITY SECURITIES FUNDS OVERSEEN BY TRUSTEE IN THE
NAME OF TRUSTEE OWNED IN THE FUND EATON VANCE FUND COMPLEX
-----------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz...................... None $10,001--$50,000
James B. Hawkes............................ None over $100,000
NONINTERESTED TRUSTEES
Donald R. Dwight........................... None over $100,000
Samuel L. Hayes, III....................... None over $100,000
Norton H. Reamer........................... None over $100,000
Lynn A. Stout.............................. None $10,001--$50,000
As of December 31, 2002, 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, 2001 and December 31, 2002, no
noninterested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any person
controlling, controlled by or under common control with EVC or EVD;
2. Any direct or indirect material interest in any transaction or series of
similar transactions with (i) the Trust or any Fund; (ii) another fund
managed by EVC, distributed by EVD or a person controlling, controlled by or
under common control with EVC or EVD; (iii) EVC or EVD; (iv) a person
controlling, controlled by or under common control with EVC or EVD; or (v)
an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Trust or any Fund; (ii)
another fund managed by EVC, distributed by EVD or a person controlling,
controlled by or under common control with EVC or EVD; (iii) EVC or EVD;
(iv) a person controlling, controlled by or under common control with EVC or
EVD; or (v) an officer of any of the above.
During the calendar years ended December 31, 2001 and December 31, 2002, 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 Fund or any of their immediate family members
served as an officer.
Trustees of the Fund 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 Fund in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Fund's assets, liabilities, and net income per share, and will not obligate the
Fund to retain the services of any Trustee or obligate the Fund to pay any
particular level of compensation to the Trustee. The Fund does not have a
retirement plan for its Trustees.
--------------------------------------------------------------------------------
15
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
The fees and expenses of the noninterested Trustees of the Fund are paid by the
Fund. (The Trustees of the Fund who are members of the Eaton Vance organization
receive no compensation from the Fund.) During the Fund's fiscal year ending
March 31, 2003, it is anticipated that the noninterested Trustees of the Fund
will earn the following compensation in their capacities as Trustee. For the
year ended December 31, 2002, the noninterested Trustees earned the following
compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex (1).
JESSICA M. DONALD R. SAMUEL L. NORTON H. LYNN A.
SOURCE OF COMPENSATION BIBLIOWICZ DWIGHT HAYES, III REAMER STOUT
------------------------------------------------------------------------------------------------
Fund*............................ $ 0 $ 0 $ 0 $ 0 $ 0
-------- -------- -------- -------- --------
Fund Complex..................... $160,000 $162,500(2) $180,000 $160,000 $160,000(3)
-------- -------- -------- -------- --------
------------
* Estimated
(1) As of December 31, 2002, the Eaton Vance fund complex consisted of 191
registered investment companies or series thereof.
(2) Includes $60,000 of deferred compensation.
(3) Includes $16,000 of deferred compensation.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
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 and equity
investment professionals to service the needs of their clients. The fixed-income
division focuses on all kinds of taxable investment-grade and high-yield
securities, tax-exempt investment-grade and high-yield securities, and U.S.
Government securities. The equity division covers stocks ranging from blue chip
to emerging growth companies. Eaton Vance and its affiliates act as adviser to a
family of mutual funds, and individual and various institutional accounts,
including corporations, hospitals, retirement plans, universities, foundations
and trusts.
The Fund 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 Fund
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 Fund shares; and
investment advisory and administration fees. The Fund will also bear expenses
incurred in connection with any litigation in which the Fund is a party and any
legal obligation to indemnify its officers and Trustees with respect thereto, to
the extent not covered by insurance.
The Investment Advisory Agreement continues in effect to March 31, 2004 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 Fund 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 Fund or by vote
of a majority of the outstanding interests of the Fund. The Fund'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
Fund's Trustees. Each agreement may be terminated at any time without penalty on
sixty (60) days' written notice by the Trustees of the Fund or Eaton Vance, as
applicable, or by vote of the majority of the outstanding shares of the Fund.
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 Fund under
such agreements on the part of Eaton Vance, Eaton Vance shall not be liable to
the Fund for any loss incurred, to the extent not covered by insurance.
Eaton Vance is a business trust organized under Massachusetts law. Eaton Vance,
Inc. ("EV") serves as trustee of Eaton Vance. EV is a subsidiary of Eaton Vance
Corporation ("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, Thomas E. Faust, Jr.,
Jeffrey P. Beale, Alan R. Dynner, Thomas J. Fetter, Scott H. Page, Duncan W.
Richardson, William M. Steul, Payson F. Swaffield, Michael W. Weilheimer and
Wharton P. Whitaker (all of whom are officers of Eaton Vance). The Voting
Trustees have unrestricted voting rights for the
--------------------------------------------------------------------------------
17
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------
election of Directors of EVC. All of the outstanding voting trust receipts
issued under said Voting Trust are owned by certain of the officers of BMR and
Eaton Vance who are also officers, or officers and Directors of EVC and EV. As
indicated under "Trustees and Officers", all of the officers of the Fund (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 Fund, IBT. It is
Eaton Vance's opinion that the terms and conditions of such transactions were
not and will not be influenced by existing or potential custodial or other
relationships between the Fund and such banks.
CODE OF ETHICS
The Adviser and the Fund have adopted a Code of Ethics governing personal
securities transactions. Under the Code, Eaton Vance employees may purchase and
sell securities (including securities held by the Fund) subject to certain
pre-clearance and reporting requirements and other procedures.
INVESTMENT ADVISORY SERVICES
Under the general supervision of the Fund's Board of Trustees, Eaton Vance will
carry out the investment and reinvestment of the assets of the Fund, will
furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. Eaton Vance will furnish to the Fund investment
advice and provide related office facilities and personnel for servicing the
investments of the Fund. Eaton Vance will compensate all Trustees and officers
of the Fund who are members of the Eaton Vance organization and who render
investment services to the Fund, and will also compensate all other Eaton Vance
personnel who provide research and investment services to the Fund.
ADMINISTRATIVE SERVICES
Under the Administration Agreement, Eaton Vance is responsible for managing the
business affairs of the Fund, subject to the supervision of the Fund's Board of
Trustees. Eaton Vance will furnish to the Fund all office facilities, equipment
and personnel for administering the affairs of the Fund. Eaton Vance will
compensate all Trustees and officers of the Fund who are members of the Eaton
Vance organization and who render executive and administrative services to the
Fund, and will also compensate all other Eaton Vance personnel who perform
management and administrative services for the Fund. 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 Fund's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing services
in connection with quarterly repurchase offers and other administrative services
necessary to conduct the Fund's business.
Determination of net asset value
The net asset value per Share of the Fund is determined no less frequently than
weekly, generally on the last 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 Fund's net asset value per
Share is determined by Investors Bank & Trust Company ("IBT"), in the manner
authorized by the Trustees of the Fund. Net asset value is computed by dividing
the value of the Fund's total assets, less its liabilities by the number of
shares outstanding.
Inasmuch as the market for municipal obligations is a dealer market with no
central trading location or continuous quotation system, it is not feasible to
obtain last transaction prices for most municipal obligations held by the Fund,
and such obligations, including those purchased on a when-issued basis, will
normally be valued on the basis of valuations furnished by a pricing service.
The pricing service
--------------------------------------------------------------------------------
18
DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------------------------------
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities, various relationships
between securities, and yield to maturity in determining value. Taxable
obligations for which price quotations are readily available normally will be
valued at the mean between the latest available bid and asked prices. Open
futures positions on debt securities are valued at the most recent settlement
prices, unless such price does not reflect the fair value of the contract, in
which case the positions will be valued by or at the direction of the Trustees.
Other assets are valued at fair value using methods determined in good faith by
the Trustees.
Portfolio trading
Decisions concerning the execution of portfolio 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 Fund 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 which are advantageous to the Fund 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.
Municipal obligations, including state obligations, purchased and sold by the
Fund are generally traded in the over-the-counter market on a net basis (i.e.,
without commission) through broker-dealers and banks acting for their own
account rather than as brokers, or otherwise involve transactions directly with
the issuer of such obligations. Such firms attempt to profit from such
transactions by buying at the bid price and selling at the higher asked price of
the market for such obligations, and the difference between the bid and asked
price is customarily referred to as the spread. The Fund may also purchase
municipal obligations from underwriters, and dealers in fixed price offerings,
the cost of which may include undisclosed fees and concessions to the
underwriters. On occasion it may be necessary or appropriate to purchase or sell
a security through a broker on an agency basis, in which case the Fund will
incur a brokerage commission. Although spreads or commissions on portfolio
security transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, spreads or commissions exceeding
those which another firm might charge may be paid to firms who were selected to
execute transactions on behalf of the Fund and the Adviser's other clients for
providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a broker
or dealer who executes a portfolio transaction on behalf of the Fund may receive
a commission which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if 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
--------------------------------------------------------------------------------
19
PORTFOLIO TRADING
--------------------------------------------------------------------------------
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 which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, the Adviser receives Research Services from many
broker-dealer firms with which the Adviser places the Fund'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, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by the Adviser in
connection with client accounts other than those accounts which pay commissions
to such broker-dealer. Any such Research Service may be broadly useful and of
value to the 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 Fund 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 which the Adviser believes are useful or of value
to it in rendering investment advisory services to its clients.
The Fund 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 companies and other mutual funds, which information is
used by the Trustees of such companies to fulfill their responsibility to
oversee the quality of the services provided by various entities, including the
Adviser, to such companies. Such 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 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 Fund 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
--------------------------------------------------------------------------------
20
PORTFOLIO TRADING
--------------------------------------------------------------------------------
investment company or group of investment companies on the basis of brokerage
commissions received or expected by such firm from any source.
Municipal obligations considered as investments for the Fund 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 Fund
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 Fund will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
the Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
Taxes
The following discussion of federal income tax matters is based on the advice of
Kirkpatrick & Lockhart LLP, counsel to the Fund. The Fund intends to elect to be
treated and to qualify each year as a RIC under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute substantially all of its net
income (including tax-exempt interest income) and net short-term and long-term
capital gains (after reduction by any available capital loss carryforwards) in
accordance with the timing requirements imposed by the Code, so as to maintain
its RIC status and to avoid paying any federal income or excise tax. To the
extent it qualifies for treatment as a RIC and satisfies the above-mentioned
distribution requirements, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends or capital gain
distributions.
In order to avoid incurring a federal excise tax obligation, the Code requires
that the Fund distribute (or be deemed to have distributed) by December 31 of
each calendar year an amount at least equal to the sum of (i) 98% of its
ordinary income (not including tax-exempt 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 Fund paid no federal
income tax. Under current law, provided that the Fund qualifies as a RIC for
federal income tax purposes, the Fund should not be liable for any income,
corporate excise or franchise tax in the Commonwealth of Massachusetts.
If the Fund does not qualify as a RIC for any taxable year, the Fund's taxable
income will be subject to corporate income taxes, and all distributions from
earnings and profits, including distributions of net capital gain (if any), will
be taxable to the shareholder as ordinary income. In addition, in order to
requalify for taxation as a RIC, the Fund may be required to recognize
unrealized gains, pay substantial taxes, and make certain distributions (which
could be subject to interest charges).
--------------------------------------------------------------------------------
21
TAXES
--------------------------------------------------------------------------------
The Fund's investment in zero coupon and certain other securities will cause it
to realize income prior to the receipt of cash payments with respect to these
securities. Such income will be accrued daily by the Fund and, in order to avoid
a tax payable by the Fund, the Fund may be required to liquidate securities that
it might otherwise have continued to hold in order to generate cash so that the
Fund may make required distributions to its shareholders.
Investments in lower-rated or unrated securities may present special tax issues
for the Fund to the extent that the issuers of these securities default on their
obligations pertaining thereto. The Code is not entirely clear regarding the
federal income tax consequences of the Fund's taking certain positions in
connection with ownership of such distressed securities.
Insurance proceeds received by the Fund under any insurance policies in respect
of scheduled interest payments on defaulted municipal obligations, as described
herein, will generally be excludable from gross income under Section 103(a) of
the Code.
Distributions by the Fund of net tax-exempt interest income that are properly
designated as "exempt-interest dividends" may be treated by shareholders as
interest excludable from gross income under Section 103(a) of the Code. In order
for the Fund to be entitled to pay exempt-interest dividends to its
shareholders, the Fund must and intends to satisfy certain requirements,
including the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from regular federal income tax under Code Section
103(a). Interest on certain municipal obligations is treated as a tax preference
item for purposes of the AMT. In addition, corporate shareholders must include
the full amount of exempt-interest dividends in computing the AMT. Shareholders
of the Fund are required to report tax-exempt interest on their federal income
tax returns.
Tax-exempt distributions received from the Fund are taken into account in
determining, and may increase, the portion of social security and certain
railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible to the extent it is deemed related to
the Fund's distributions of exempt-interest dividends. Further, entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by industrial development or private activity bonds
should consult their tax advisers before purchasing shares of the Fund.
"Substantial user" is defined in applicable Treasury regulations to include a
"non-exempt person" who regularly uses in its trade or business a part of a
facility financed from the proceeds of industrial development bonds, and the
same definition should apply in the case of private activity bonds.
Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 (except to the extent of a portion of the
discount attributable to original issue discount), is taxable as ordinary
income. A long-term debt obligation is generally treated as acquired at a market
discount if purchased after its original issue at a price less than (i) the
stated principal amount payable at maturity, in the case of an obligation that
does not have original issue discount or (ii) in the case of an obligation that
does have original issue discount, the sum of the issue price and any original
issue discount that accrued before the obligation was purchased, subject to a de
minimis exclusion.
From time to time proposals have been introduced before Congress for the purpose
of restricting or eliminating the federal income tax exemption for interest on
certain types of municipal obligations, and it can be expected that similar
proposals may be introduced in the future. Under federal tax legislation enacted
in 1986, the federal income tax exemption for interest on certain municipal
--------------------------------------------------------------------------------
22
TAXES
--------------------------------------------------------------------------------
obligations was eliminated or restricted. As a result of such legislation, the
availability of municipal obligations for investment by the Fund and the value
of the securities held by it may be affected.
In the course of managing its investments, the Fund may realize some short-term
and long-term capital gains (and/or losses) as well as other taxable income. Any
distributions by the Fund of such capital gains (after reduction by any capital
loss carryforwards) or other taxable income would be taxable to shareholders of
the Fund. However, it is expected that such amounts, if any, would normally be
insubstantial in relation to the tax-exempt interest earned by the Fund.
The Fund's investments in options, futures contracts, hedging transactions,
forward contracts (to the extent permitted) and certain other transactions will
be subject to special tax rules (including mark-to-market, constructive sale,
straddle, wash sale, short sale and other rules), the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of securities held by the Fund, 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 Fund 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 Fund shares with a holding period
of 6 months or less will be disallowed to the extent of any exempt interest
dividends received with respect to such shares, and if the loss exceeds the
disallowed amount, will be treated as a long-term capital loss to the extent of
any 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 Fund shares may be disallowed under "wash sale" rules to the
extent the shareholder acquires other shares of the same Fund (whether through
the reinvestment of distributions or otherwise) within the 61 day period
beginning 30 days before the redemption of the loss shares and ending 30 days
after such date. Any disallowed loss will result in an adjustment to the
shareholder's tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares 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 Fund (or of another fund) pursuant to
the reinvestment or exchange privilege. Any disregarded amounts will result in
an adjustment to the shareholder's tax basis in some or all of any other shares
acquired.
Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Certain distributions declared in October, November or December and paid
in the following January will be taxed to shareholders as if received on
December 31 of the year in which they were declared. In addition, certain other
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid by the Fund (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.
Amounts paid by the Fund to individuals and certain other shareholders who have
not provided the Fund with their correct taxpayer identification number ("TIN")
and certain certifications required by the Internal Revenue Service (the "IRS")
as well as shareholders with respect to whom the Fund has received certain
information from the IRS or a broker, may be subject to "backup" withholding of
federal income tax arising from the Fund's taxable dividends and other
distributions as well as the gross proceeds of sales of Shares, at a rate of up
to 30% for amounts paid during 2003. An
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23
TAXES
--------------------------------------------------------------------------------
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 foregoing discussion does not address the special tax rules applicable to
certain classes of investors, such as tax-exempt entities, foreign investors,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local, and, where applicable,
foreign tax consequences of investing in the Fund.
The Fund 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 tax-exempt interest 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.
Thus, the Fund is required to allocate a portion of its net capital gain and
other taxable income to the APS. The Fund generally will notify the Auction
Agent of the amount of any net capital gain and other taxable income to be
included in any dividend on the APS prior to the Auction establishing the
Applicable Rate for that dividend. Except for the portion of any dividend that
it informs the Auction Agent will be treated as net capital gain or other
taxable income, the Fund anticipates that the dividends paid on the APS will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to the Fund's APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Fund and the
total dividends paid by the Fund on its Common Shares and the APS during a
taxable year, but taxable distributions generally are not expected to be
significant. The tax treatment of Additional Dividends also may affect the
Fund's calculation of each class's allocable share of capital gains and other
taxable income. See "Taxes--Tax Treatment of Additional Dividends" in the
Prospectus.
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 Fund, under current law the manner in which the Fund intends to
allocate items of tax-exempt income, net capital gain, and other taxable income,
if any, among the Fund's Common Shares and APS 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 Fund's net capital gain or other taxable
income. In the event of such a reallocation, some of the dividends identified by
the Fund as exempt-interest dividends to holders of APS may be recharacterized
as additional net capital gain or other taxable income. In the event of such
recharacterization, however, the Fund will not be required to make payments to
such Shareholders to offset the tax effect of such reallocation. Kirkpatrick &
Lockhart LLP has advised the Fund that, in its opinion, if the IRS were to
challenge in court the Fund's allocations of income and gain and the issue were
properly litigated, the IRS would be unlikely to prevail. A holder should be
aware, however, that the opinion of Kirkpatrick & Lockhart LLP represents only
its best legal judgment and is not binding on the IRS or the courts.
The Fund is not appropriate for non-U.S. investors or as a retirement plan
investment.
STATE AND LOCAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of the Fund may be exempt from state and
local taxes on distributions of net tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but
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24
TAXES
--------------------------------------------------------------------------------
taxable generally on income derived from obligations of other jurisdictions. The
Fund will report annually to shareholders the percentages representing the
proportionate ratio of its net tax-exempt interest income earned in each state.
In the opinion of special California tax counsel, Sidley, Austin, Brown & Wood
LLP, under California law, dividends paid by the Fund are exempt from California
personal income tax applicable to individuals who reside in California to the
extent such dividends are derived from interest payment on California municipal
obligations and municipal obligations issued by certain U.S. Territories and
provided that at least 50% of the assets of the Fund at the close of each
quarter of its taxable year are invested in obligations the interest on which is
exempt under either federal or California law from taxation by the state of
California. This opinion assumes and relies upon the Fund's qualification as a
regulated investment company under federal income tax law.
Under the California personal income tax, distributions of short-term capital
gains are treated as ordinary income, and distributions of long-term capital
gains are treated as long-term capital gains taxable at ordinary income rates.
Exempt-interest dividends paid to a corporate shareholder subject to California
state corporate franchise tax will be taxable as ordinary income.
The foregoing briefly summarizes some of the important federal income tax and
California personal income tax consequences to Shareholders of investing in
Shares, reflects the federal and California income tax laws 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,
including state alternative minimum tax as well as any proposed tax law changes.
The foregoing discussion does not address the special tax rules applicable to
certain classes of investors, such as insurance companies and financial
institutions.
Shareholders should consult their own tax advisers with respect to special tax
rules that may apply in their particular situations, as well as the state or
local tax consequences of investing in the Fund.
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25
--------------------------------------------------------------------------------
Other information
The Fund 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 Fund property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund property of any shareholder held personally
liable for the claims and 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 Fund itself is unable to meet its obligations. The
Fund has been advised by its counsel that the risk of any shareholder incurring
any liability for the obligations of the Fund 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 Fund or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. 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 2/3 of the outstanding shares have removed him from that
office either by a written declaration filed with the Fund's custodian or by
votes cast at a meeting called for that purpose. The Declaration of Trust
further provides that the Trustees of the Fund 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 Fund's Prospectus and this SAI do not contain all of the information set
forth in the Registration Statement that the Fund 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 auditors
Deloitte & Touche LLP, Boston, Massachusetts, are the independent auditors for
the Fund, providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
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26
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INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Insured California Municipal Bond Fund II:
We have audited the accompanying statement of assets and liabilities of Eaton
Vance Insured California Municipal Bond Fund II (the "Fund") as of November 14,
2002 and the related statement of operations for the period from October 3, 2002
(date of organization) through November 14, 2002. These financial statements are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 Insured California
Municipal Bond Fund II as of November 14, 2002, and the result of its operations
for the period from October 3, 2002 (date of organization) through November 14,
2002 in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 15, 2002
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27
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Eaton Vance Insured California Municipal Bond Fund II
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 14, 2002
ASSETS:
Cash...................................................... $100,000
Offering costs............................................ 400,000
Receivable from Adviser................................... 7,500
--------
Total assets.............................................. $507,500
========
LIABILITIES:
Accrued offering costs.................................... $400,000
Accrued organizational costs.............................. 7,500
--------
Total liabilities......................................... $407,500
========
Net assets applicable to 6,666.67 common shares of
beneficial interest issued and outstanding................ $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 15.00
========
STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 3, 2002 (DATE OF ORGANIZATION) THROUGH NOVEMBER 14, 2002
Investment Income........................................... $ --
-------
Expenses:
Organization costs........................................ $ 7,500
Expense reimbursement..................................... (7,500)
-------
Net expenses.............................................. $ --
-------
Net investment income....................................... $ --
=======
See notes to financial statements.
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28
--------------------------------------------------------------------------------
Notes to financial statements
NOTE 1: ORGANIZATION
The Fund was organized as a Massachusetts business trust on October 3, 2002, and
has been inactive since that date except for matters relating to its
organization and registration as a non-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 6,666.67 common shares to
Eaton Vance Management, the Fund'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 $0.03 per common share.
The Fund's investment objective is to provide current income exempt from federal
income tax, including alternative minimum tax, and California personal income
tax.
NOTE 2: ACCOUNTING POLICIES
The Fund'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 Fund'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 Fund operations. The offering costs reflected above assume the sale of
13,333,333 common shares.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment advisory agreement between the Adviser and the Fund,
the Fund has agreed to pay an investment advisory fee, payable on a monthly
basis, at an annual rate of 0.55% of the average weekly gross assets of the
Fund. Gross assets of the Fund shall be calculated by deducting accrued
liabilities of the Fund 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 Fund for fees
and other expenses in the amount of 0.15% of the average weekly gross assets for
the first 5 full years of the Fund's operations, 0.10% of average weekly gross
assets in year 6, and 0.05% in year 7.
Eaton Vance serves as the administrator of the Fund, but currently receives no
compensation for providing administrative services to the Fund.
NOTE 4: FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income, if any, and tax-exempt income, including any net realized gain
on investments.
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29
CALIFORNIA FUND
PORTFOLIO OF INVESTMENTS (UNAUDITED)
AS OF DECEMBER 31, 2002
PRINCIPAL
AMOUNT
(000'S
OMITTED) SECURITY VALUE
--------- -------- ------------
TAX-EXEMPT INVESTMENTS -- 100.7%
INSURED-EDUCATION -- 7.5%
$ 4,000 California University, (AMBAC), 5.00%, 11/1/33(1) $ 4,057,160
------------
$ 4,057,160
============
INSURED-ELECTRIC UTILITIES -- 0.9%
$ 455 Sacramento Municipal Utility District, (FSA), Variable Rate,
8/15/28(2)(3) $ 479,461
------------
$ 479,461
============
INSURED-GENERAL OBLIGATIONS -- 31.9%
$ 2,000 Butte-Glenn Community College District, (MBIA), 5.00%,
8/1/26 $ 2,041,960
1,250 California, (AMBAC), 5.00%, 4/1/27 1,266,537
415 California, (XLCA), Variable Rate, 10/1/28(2)(3) 430,729
2,000 Laguna Salada Unified School District, (FGIC), 0.00%, 8/1/22 731,160
1,255 Lawndale Elementary School District, (FSA), 5.00%, 8/1/32 1,272,984
2,350 Long Beach Unified School District, (FSA), 5.00%, 8/1/31 2,381,819
1,945 Los Osos, (MBIA), 5.00%, 9/2/33 1,973,533
1,000 Mount Diablo Unified School District, (FSA), 5.00%, 8/1/25 1,021,730
1,195 Portersville Unified School District, (MBIA), 5.00%, 8/1/22 1,237,183
1,000 Portersville Unified School District, (MBIA), 5.00%, 8/1/23 1,030,220
1,750 Santa Ana Unified School District, (MBIA), 5.00%, 8/1/32 1,775,077
3,200 Union Elementary School District, (FGIC), 0.00%, 9/1/22 1,167,072
2,600 Union Elementary School District, (FGIC), 0.00%, 9/1/23 891,826
------------
$ 17,221,830
============
INSURED-LEASE REVENUE/CERTIFICATES OF PARTICIPATION -- 6.7%
$ 2,500 California Public Works Board, (AMBAC), 5.00%, 12/1/27 $ 2,542,350
1,075 San Jose, Lease Revenue, (AMBAC), 5.00%, 6/1/32 1,090,362
------------
$ 3,632,712
============
INSURED-SPECIAL ASSESSMENT -- 4.7%
$ 2,500 Cathedral City Public Financing Authority, (MBIA), 5.00%,
8/1/33 $ 2,540,600
------------
$ 2,540,600
============
INSURED-SPECIAL TAX REVENUE -- 7.3%
$ 2,500 San Francisco, (Bay Area Rapid Transportation District),
(AMBAC), 5.125%, 7/1/36 $ 2,545,675
1,335 San Jose, Tax Allocation, (MBIA), Variable Rate,
8/1/32(2)(3) 1,381,939
------------
$ 3,927,614
============
--------------------------------------------------------------------------------
30
PRINCIPAL
AMOUNT
(000'S
OMITTED) SECURITY VALUE
--------- -------- ------------
INSURED-TAX INCREMENT -- 7.5%
$ 2,000 Murrieta Redevelopment Agency, (MBIA), 5.00%, 8/1/32 $ 2,029,640
2,000 Palm Desert, Tax Allocation, (MBIA), 5.00%, 4/1/25 2,045,660
------------
$ 4,075,300
============
INSURED-TRANSPORTATION -- 13.5%
$ 2,250 Los Angeles County, Metropolitan Transportation Authority,
(FGIC), 5.25%, 7/1/30 $ 2,335,095
2,500 Sacramento Airport Systems, (FSA), 5.00%, 7/1/27 2,542,550
500 San Francisco, City and County Airport Commission, (FGIC),
5.00%, 5/1/29 505,625
6,670 San Joaquin Hills, Transportation Corridor Agency, Toll Road
Bonds, (MBIA), 0.00%, 1/15/27 1,898,549
------------
$ 7,281,819
============
INSURED-WATER AND SEWER -- 16.0%
$ 835 Contra Costa County, Water District, (FSA), Variable Rate,
10/1/32(2)(3) $ 871,122
1,700 East Bay Municipal Utilities Water System, (MBIA), 5.00%,
6/1/38 1,715,130
2,000 Los Angeles, Water and Power, (FGIC), 5.125%, 7/1/41 2,033,060
1,500 Los Angeles, Water and Power, (FGIC), 5.00%, 7/1/43(4) 1,510,725
2,500 Los Angeles, Wastewater, (FGIC), 5.00%, 6/1/28 2,544,050
------------
$ 8,674,087
============
WATER AND SEWER -- 4.7%
$ 2,500 California Water Resource, (Central Valley), 5.00%, 12/1/29 $ 2,525,375
------------
$ 2,525,375
============
TOTAL TAX-EXEMPT INVESTMENTS -- 100.7%
(identified cost $53,589,295) $ 54,415,958
============
OTHER ASSETS, LESS LIABILITIES -- (0.7)% $ (372,472)
------------
NET ASSETS -- 100.0% $ 54,043,486
============
---------------
The Fund invests primarily in debt securities issued by California
municipalities. The ability of the issuers of the debt securities to meet their
obligations may be affected by economic developments in a specific industry or
municipality. In order to reduce the risk associated with such economic
developments, at December 31, 2002, 95.4% of the securities in the portfolio of
investments are backed by bond insurance of various financial institutions and
financial guaranty assurance agencies. The aggregate percentage insured by
financial institutions ranged from 0.8% to 36.1% of total investments.
(1) Security (or a portion thereof) has been segregated to cover when-issued
securities.
(2) Security has been issued as a leveraged inverse floater bond.
(3)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(4) When-issued security.
See notes to financial statements
--------------------------------------------------------------------------------
31
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
NATIONAL FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.044
Net realized and unrealized gain............................ 0.321
--------
Total income from operations................................ $ 0.365
--------
Common share offering costs................................. $ (0.030)
--------
Net asset value -- End of period............................ $ 14.660
--------
Market value -- End of period............................... $ 15.010
--------
Total Investment Return on Net Asset Value(4)............... 2.34%
--------
Total Investment Return on Market Value(4).................. 4.78%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $139,340
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.65%(5)
Net investment income..................................... 3.40%(5)
Portfolio Turnover.......................................... 26%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such action
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 0.85%(5)
Net investment income........................... 3.20%(5)
Net investment income per share................... $ 0.041
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
32
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
CALIFORNIA FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.040
Net realized and unrealized gain............................ 0.245
--------
Total income from operations................................ $ 0.285
--------
Common share offering costs................................. $ (0.030)
--------
Net asset value -- End of period............................ $ 14.580
--------
Market value -- End of period............................... $ 15.000
--------
Total Investment Return on Net Asset Value(4)............... 1.78%
--------
Total Investment Return on Market Value(4).................. 4.71%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 54,043
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.72%(5)
Net investment income..................................... 3.15%(5)
Portfolio Turnover.......................................... 24%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.03%(5)
Net investment income........................... 2.84%(5)
Net investment income per share................... $ 0.036
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
33
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
FLORIDA FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.032
Net realized and unrealized gain............................ 0.273
--------
Total income from operations................................ $ 0.305
--------
Common share offering costs................................. $ (0.030)
--------
Net asset value -- End of period............................ $ 14.600
--------
Market value -- End of period............................... $ 15.030
--------
Total Investment Return on Net Asset Value(4)............... 1.92%
--------
Total Investment Return on Market Value(4).................. 4.92%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 35,136
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.77%(5)
Net investment income..................................... 2.55%(5)
Portfolio Turnover.......................................... 9%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.17%(5)
Net investment income........................... 2.15%(5)
Net investment income per share................... $ 0.027
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
34
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
MASSACHUSETTS FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.035
Net realized and unrealized gain............................ 0.230
--------
Total income from operations................................ 0.265
--------
Common share offering costs................................. $ (0.030)
--------
Net asset value -- End of period............................ $ 14.560
--------
Market value -- End of period............................... $ 15.280
--------
Total Investment Return on Net Asset Value(4)............... 1.64%
--------
Total Investment Return on Market Value(4).................. 6.67%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 23,750
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.76%(5)
Net investment income..................................... 2.78%(5)
Portfolio Turnover.......................................... 28%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.29%(5)
Net investment income........................... 2.25%(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
35
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
MICHIGAN FUND -----------------------
Net asset value -- Beginning of period(3)................... $14.325
-------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.035
Net realized and unrealized gain............................ 0.200
-------
Total income from operations................................ $ 0.235
-------
Common share offering costs................................. $(0.030)
-------
Net asset value -- End of period............................ $14.530
-------
Market value -- End of period............................... $15.170
-------
Total Investment Return on Net Asset Value(4)............... 1.43%
-------
Total Investment Return on Market Value(4).................. 5.90%
-------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $20,800
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.66%(5)
Net investment income..................................... 2.73%(5)
Portfolio Turnover.......................................... 17%
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.22%(5)
Net investment income........................... 2.17%(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
36
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
NEW JERSEY FUND -----------------------
Net asset value -- Beginning of period(3)................... $14.325
-------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.038
Net realized and unrealized gain............................ 0.367
-------
Total income from operations................................ $ 0.405
-------
Common share offering costs................................. $(0.030)
-------
Net asset value -- End of period............................ $14.700
-------
Market value -- End of period............................... $15.010
-------
Total Investment Return on Net Asset Value(4)............... 2.62%
-------
Total Investment Return on Market Value(4).................. 4.78%
-------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $35,369
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.65%(5)
Net investment income..................................... 2.94%(5)
Portfolio Turnover.......................................... 23%
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.04%(5)
Net investment income........................... 2.55%(5)
Net investment income per share................... $0.033
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
37
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
NEW YORK FUND -----------------------
Net asset value -- Beginning of period(3)................... $14.325
-------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.036
Net realized and unrealized gain............................ 0.289
-------
Total income from operations................................ $ 0.325
-------
Common Share offering costs................................. $(0.030)
-------
Net asset value -- End of period............................ $14.620
-------
Market value -- End of period............................... $15.000
-------
Total Investment Return on Net Asset Value(4)............... 2.06%
-------
Total Investment Return on Market Value(4).................. 4.71%
-------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $36,646
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.70%(5)
Net investment income..................................... 2.79%(5)
Portfolio Turnover.......................................... 18%
--------------------------------------------------------------------------------
+The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have been
as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.09%(5)
Net investment income........................... 2.40%(5)
Net investment income per share................... $0.031
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
38
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
OHIO FUND -----------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.033
Net realized and unrealized gain............................ 0.272
--------
Total income from operations................................ $ 0.305
--------
Common share offering costs................................. $ (0.030)
--------
Net asset value -- End of period............................ $ 14.600
--------
Market value -- End of period............................... $ 15.350
--------
Total Investment Return on Net Asset Value(4)............... 1.92%
--------
Total Investment Return on Market Value(4).................. 7.16%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $ 34,403
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.76%(5)
Net investment income..................................... 2.60%(5)
Portfolio Turnover.......................................... 5%
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.17%(5)
Net investment income........................... 2.19%(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
39
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF DECEMBER 31, 2002
PERIOD ENDED
DECEMBER 31, 2002(1)(2)
PENNSYLVANIA FUND -----------------------
Net asset value -- Beginning of period(3)................... $14.325
-------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.033
Net realized and unrealized gain............................ 0.242
-------
Total income from operations................................ $ 0.275
-------
Common share offering costs................................. $(0.030)
-------
Net asset value -- End of period............................ $14.570
-------
Market value -- End of period............................... $15.060
-------
Total Investment Return on Net Asset Value(4)............... 1.71%
-------
Total Investment Return on Market Value(4).................. 5.13%
-------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $39,433
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.68%(5)
Net investment income..................................... 2.54%(5)
Portfolio Turnover.......................................... 29%
--------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such actions
not been taken, the ratios and net investment income per share would have
been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.04%(5)
Net investment income........................... 2.18%(5)
Net investment income per share................... $0.028
--------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Computed using average common shares outstanding.
(3)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4)Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
(5)Annualized.
--------------------------------------------------------------------------------
40
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2002
NATIONAL FUND CALIFORNIA FUND FLORIDA FUND
------------- --------------- ------------
ASSETS
Investments --
Identified cost.................................. $139,492,532 $53,589,295 $32,681,014
Unrealized appreciation.......................... 2,834,999 826,663 634,025
---------------------------------------------------------------------------------------------------
Investments, at value.............................. $142,327,531 $54,415,958 $33,315,039
---------------------------------------------------------------------------------------------------
Cash............................................... $ 4,863,784 $ 506,107 $ 2,955,820
Interest receivable................................ 1,679,149 739,512 460,802
Receivable from Adviser............................ 7,500 7,500 7,500
---------------------------------------------------------------------------------------------------
Total assets....................................... $148,877,964 $55,669,077 $36,739,161
---------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased.................. $ 3,240,214 $ -- $ --
Payable for when-issued securities................. 5,973,920 1,493,480 1,512,498
Payable to affiliate for Trustees' fees............ 1,020 347 347
Accrued offering costs............................. 285,000 111,000 72,000
Accrued organization costs......................... 7,500 7,500 7,500
Accrued expenses................................... 30,317 13,264 10,484
---------------------------------------------------------------------------------------------------
Total liabilities.................................. $ 9,537,971 $ 1,625,591 $ 1,602,829
---------------------------------------------------------------------------------------------------
Net Assets......................................... $139,339,993 $54,043,486 $35,136,332
---------------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Paid-in capital.................................... $135,902,500 $52,991,500 $34,408,000
Accumulated net realized gain (computed on the
basis of identified cost)........................ 191,815 81,919 18,998
Accumulated undistributed net investment income.... 410,679 143,404 75,309
Net unrealized appreciation (computed on the basis
of identified cost).............................. 2,834,999 826,663 634,025
---------------------------------------------------------------------------------------------------
Total.............................................. $139,339,993 $54,043,486 $35,136,332
---------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING.......................... 9,506,667 3,706,667 2,406,667
---------------------------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE
Net assets applicable to common shares / common
shares issued and outstanding.................... $ 14.66 $ 14.58 $ 14.60
---------------------------------------------------------------------------------------------------
See notes to financial statements
--------------------------------------------------------------------------------
41
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2002
MASSACHUSETTS FUND MICHIGAN FUND NEW JERSEY FUND
------------------ ------------- ---------------
ASSETS
Investments --
Identified cost............................... $23,187,341 $17,851,959 $32,425,312
Unrealized appreciation....................... 344,039 263,213 835,178
------------------------------------------------------------------------------------------------------
Investments, at value........................... $23,531,380 $18,115,172 $33,260,490
------------------------------------------------------------------------------------------------------
Cash............................................ $ -- $ 2,540,238 $ 1,778,929
Interest receivable............................. 288,715 192,478 409,486
Receivable for investments sold................. 1,047,693 -- --
Receivable from Adviser......................... 7,500 7,500 7,500
------------------------------------------------------------------------------------------------------
Total assets.................................... $24,875,288 20,855,388 $35,456,405
------------------------------------------------------------------------------------------------------
LIABILITIES
Due to bank..................................... $ 1,061,759 $ -- $ --
Payable to affiliate for Trustees' fees......... 139 91 231
Accrued offering costs.......................... 48,750 42,750 72,000
Accrued organizational costs.................... 7,500 7,500 7,500
Accrued expenses................................ 7,012 4,573 7,874
------------------------------------------------------------------------------------------------------
Total liabilities............................... $ 1,125,160 $ 54,914 $ 87,605
------------------------------------------------------------------------------------------------------
Net Assets...................................... $23,750,128 $20,800,474 $35,368,800
------------------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Paid-in capital................................. $23,329,375 $20,470,375 $34,408,000
Accumulated net realized gain (computed on the
basis of identified cost)..................... 21,305 17,940 35,768
Accumulated undistributed net investment
income........................................ 55,409 48,946 89,854
Net unrealized appreciation (computed on the
basis of identified cost)..................... 344,039 263,213 835,178
------------------------------------------------------------------------------------------------------
Total........................................... $23,750,128 $20,800,474 $35,368,800
------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING....................... 1,631,667 1,431,667 2,406,667
------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE
Net assets applicable to common shares / common
shares issued and outstanding................. $ 14.56 $ 14.53 $ 14.70
------------------------------------------------------------------------------------------------------
See notes to financial statements
--------------------------------------------------------------------------------
42
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2002
NEW YORK FUND OHIO FUND PENNSYLVANIA FUND
------------- ----------- -----------------
ASSETS
Investments --
Identified cost................................. $34,393,772 $30,228,317 $32,039,358
Unrealized appreciation......................... 697,216 631,099 625,099
---------------------------------------------------------------------------------------------------
Investments, at value............................. $35,090,988 $30,859,416 $32,664,457
---------------------------------------------------------------------------------------------------
Cash.............................................. $ 1,119,416 $ 4,741,702 $ 6,442,900
Interest receivable............................... 518,794 360,921 416,856
Receivable from Adviser........................... 7,500 7,500 7,500
---------------------------------------------------------------------------------------------------
Total assets...................................... $36,736,698 $35,969,539 $39,531,713
---------------------------------------------------------------------------------------------------
LIABILITIES
Payable for when-issued securities................ $ -- $ 1,477,631 $ --
Payable to affiliate for Trustees' fees........... 200 347 238
Accrued offering costs............................ 75,000 70,500 81,000
Accrued organizational costs...................... 7,500 7,500 7,500
Accrued expenses.................................. 8,429 10,993 10,220
---------------------------------------------------------------------------------------------------
Total liabilities................................. $ 91,129 $ 1,566,971 $ 98,958
---------------------------------------------------------------------------------------------------
Net Assets........................................ $36,645,569 $34,402,568 $39,432,755
---------------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Paid-in capital................................... $35,837,500 $33,693,250 $38,696,499
Accumulated net realized gain (computed on the
basis of identified cost)....................... 22,040 2,880 23,936
Accumulated undistributed net investment income... 88,813 75,339 87,221
Net unrealized appreciation (computed on the basis
of identified cost)............................. 697,216 631,099 625,099
---------------------------------------------------------------------------------------------------
Total............................................. $36,645,569 $34,402,568 $39,432,755
---------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING......................... 2,506,667 2,356,667 2,706,667
---------------------------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE
Net assets applicable to common shares / common
shares issued and outstanding................... $ 14.62 $ 14.60 $ 14.57
---------------------------------------------------------------------------------------------------
See notes to financial statements
--------------------------------------------------------------------------------
43
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
NATIONAL FUND CALIFORNIA FUND FLORIDA FUND
------------- --------------- ------------
INVESTMENT INCOME
Interest............................................... $ 488,722 $ 176,227 $ 97,946
-------------------------------------------------------------------------------------------------------
Total investment income................................ $ 488,722 $ 176,227 $ 97,946
-------------------------------------------------------------------------------------------------------
EXPENSES
Investment adviser fee................................. $ 64,284 $ 25,050 $ 16,248
Trustees fees and expenses............................. 1,020 347 347
Legal and accounting services.......................... 9,010 5,273 3,884
Printing and postage................................... 3,672 1,249 1,110
Custodian fee.......................................... 4,675 1,823 1,046
Transfer and dividend disbursing agent................. 8,766 3,415 2,216
Organization costs..................................... 7,500 7,500 7,500
Miscellaneous.......................................... 4,148 2,497 2,081
-------------------------------------------------------------------------------------------------------
Total expenses......................................... $ 103,075 $ 47,154 $ 34,432
-------------------------------------------------------------------------------------------------------
Deduct --
Reduction of investment adviser fee.................. $ 17,532 $ 6,831 $ 4,295
Expense reimbursement.................................. 7,500 7,500 7,500
-------------------------------------------------------------------------------------------------------
Total expense reductions............................... $ 25,032 $ 14,331 $ 11,795
-------------------------------------------------------------------------------------------------------
Net expenses........................................... $ 78,043 $ 32,823 $ 22,637
-------------------------------------------------------------------------------------------------------
Net investment income.................................. $ 410,679 $ 143,404 $ 75,309
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions (identified cost basis)...... $ 191,815 $ 81,919 $ 18,998
-------------------------------------------------------------------------------------------------------
Net realized gain...................................... $ 191,815 $ 81,919 $ 18,998
-------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis).................. $2,834,999 $ 826,663 $634,025
-------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)... $2,834,999 $ 826,663 $634,025
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain....................... $3,026,814 $ 908,582 $653,023
-------------------------------------------------------------------------------------------------------
Net increase in net assets from operations............. $3,437,493 $1,051,986 $728,332
-------------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
See notes to financial statements
--------------------------------------------------------------------------------
44
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
MASSACHUSETTS FUND MICHIGAN FUND NEW JERSEY FUND
------------------ ------------- ---------------
INVESTMENT INCOME
Interest......................................... $ 70,540 $ 60,808 $109,806
-------------------------------------------------------------------------------------------------------
Total investment income.......................... $ 70,540 $ 60,808 $109,806
-------------------------------------------------------------------------------------------------------
EXPENSES
Investment adviser fee........................... $ 10,972 $ 9,563 $ 16,290
Trustees fees and expenses....................... 139 91 231
Legal and accounting services.................... 2,775 1,815 2,525
Printing and postage............................. 555 231 675
Custodian fee.................................... 798 695 1,185
Transfer and dividend disbursing agent........... 1,496 1,304 2,224
Organization costs............................... 7,500 7,500 7,500
Miscellaneous.................................... 1,388 771 1,265
-------------------------------------------------------------------------------------------------------
Total expenses................................... $ 25,623 $ 21,970 $ 31,895
-------------------------------------------------------------------------------------------------------
Deduct --
Reduction of investment adviser fee............ $ 2,992 $ 2,608 $ 4,443
Expense reimbursement.......................... 7,500 7,500 7,500
-------------------------------------------------------------------------------------------------------
Total expense reductions......................... $ 10,492 $ 10,108 $ 11,943
-------------------------------------------------------------------------------------------------------
Net expenses..................................... $ 15,131 $ 11,862 $ 19,952
-------------------------------------------------------------------------------------------------------
Net investment income............................ $ 55,409 $ 48,946 $ 89,854
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions (identified cost
basis)...................................... $ 21,305 $ 17,940 $ 35,768
-------------------------------------------------------------------------------------------------------
Net realized gain................................ $ 21,305 $ 17,940 $ 35,768
-------------------------------------------------------------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis)............ $344,039 $263,213 $835,178
-------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation)................................. $344,039 $263,213 $835,178
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain................. $365,344 $281,153 $870,946
-------------------------------------------------------------------------------------------------------
Net increase in net assets from operations....... $420,753 $330,099 $960,800
-------------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
See notes to financial statements
--------------------------------------------------------------------------------
45
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
NEW YORK FUND OHIO FUND PENNSYLVANIA FUND
------------- --------- -----------------
INVESTMENT INCOME
Interest............................................. $111,249 $ 97,379 $110,591
----------------------------------------------------------------------------------------------------
Total investment income.............................. $111,249 $ 97,379 $110,591
----------------------------------------------------------------------------------------------------
EXPENSES
Investment adviser fee............................... $ 17,265 $ 15,908 $ 18,315
Trustees fees and expenses........................... 200 347 238
Legal and accounting services........................ 3,364 3,884 2,897
Printing and postage................................. 957 1,110 1,496
Custodian fee........................................ 1,256 1,157 1,332
Transfer and dividend disbursing agent............... 2,354 2,169 2,498
Organization cost.................................... 7,500 7,500 7,500
Miscellaneous........................................ 1,749 1,804 1,589
----------------------------------------------------------------------------------------------------
Total expenses....................................... $ 34,645 $ 33,879 $ 35,865
----------------------------------------------------------------------------------------------------
Deduct --
Reduction of investment adviser fee................ $ 4,709 $ 4,339 $ 4,995
Expense reimbursement.............................. 7,500 7,500 7,500
----------------------------------------------------------------------------------------------------
Total expense reductions............................. $ 12,209 $ 11,839 $ 12,495
----------------------------------------------------------------------------------------------------
Net expenses......................................... $ 22,436 $ 22,040 $ 23,370
----------------------------------------------------------------------------------------------------
Net investment income................................ $ 88,813 $ 75,339 $ 87,221
----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions (identified cost basis).... $ 22,040 $ 2,880 $ 23,936
----------------------------------------------------------------------------------------------------
Net realized gain.................................... $ 22,040 $ 2,880 $ 23,936
----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis)................ $697,216 $631,099 $625,099
----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation)..................................... $697,216 $631,099 $625,099
----------------------------------------------------------------------------------------------------
Net realized and unrealized gain..................... $719,256 $633,979 $649,035
----------------------------------------------------------------------------------------------------
Net increase in net assets from operations........... $808,069 $709,318 $736,256
----------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
See notes to financial statements
--------------------------------------------------------------------------------
46
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
NATIONAL FUND CALIFORNIA FUND FLORIDA FUND
------------- --------------- ------------
INCREASE (DECREASE) IN NET ASSETS
From operations --
Net investment income............................ $ 410,679 $ 143,404 $ 75,309
Net realized gain................................ 191,815 81,919 18,998
Net change in unrealized appreciation
(depreciation)................................ 2,834,999 826,663 634,025
---------------------------------------------------------------------------------------------------
Net increase in net assets from operations......... $ 3,437,493 $ 1,051,986 $ 728,332
---------------------------------------------------------------------------------------------------
Transactions in shares of beneficial interest --
Proceeds from sale of shares(2).................. $136,087,500 $53,002,500 $34,380,000
Offering costs................................... (285,000) (111,000) (72,000)
---------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share
transactions..................................... $135,802,500 $52,891,500 $34,308,000
---------------------------------------------------------------------------------------------------
Net increase in net assets......................... $139,239,993 $53,943,486 $35,036,332
---------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of period............................. $ 100,000 $ 100,000 $ 100,000
---------------------------------------------------------------------------------------------------
At end of period................................... $139,339,993 $54,043,486 $35,136,332
---------------------------------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN NET ASSETS
At end of period................................... $ 410,679 $ 143,404 $ 75,309
---------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Proceeds from sale of shares net of sales load paid of $6,412,500, $2,497,500
and $1,620,000 for National Fund, California Fund and Florida Fund,
respectively.
See notes to financial statements
--------------------------------------------------------------------------------
47
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
MASSACHUSETTS FUND MICHIGAN FUND NEW JERSEY FUND
------------------ ------------- ---------------
INCREASE (DECREASE) IN NET ASSETS
From operations --
Net investment income......................... $ 55,409 $ 48,946 $ 89,854
Net realized gain............................. 21,305 17,940 35,768
Net change in unrealized appreciation
(depreciation)............................. 344,039 263,213 835,178
------------------------------------------------------------------------------------------------------
Net increase in net assets from operations...... $ 420,753 $ 330,099 $ 960,800
------------------------------------------------------------------------------------------------------
Transactions in shares of beneficial interest --
Proceeds from sale of shares(2)............... $23,278,125 $20,413,125 $34,380,000
Offering costs................................ (48,750) (42,750) (72,000)
------------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share
transactions.................................. $23,229,375 $20,370,375 $34,308,000
------------------------------------------------------------------------------------------------------
Net increase in net assets...................... $23,650,128 $20,700,474 $35,268,800
------------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of period.......................... $ 100,000 $ 100,000 $ 100,000
------------------------------------------------------------------------------------------------------
At end of period................................ $23,750,128 $20,800,474 $35,368,800
------------------------------------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN NET ASSETS
At end of period................................ $ 55,409 $ 48,946 $ 85,854
------------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Proceeds from sale of shares net of sales load paid of $1,096,875, $961,875
and $1,620,000 for Massachusetts Fund, Michigan Fund and New Jersey Fund,
respectively.
See notes to financial statements
--------------------------------------------------------------------------------
48
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2002(1)
NEW YORK FUND OHIO FUND PENNSYLVANIA FUND
------------- ----------- -----------------
INCREASE (DECREASE) IN NET ASSETS
From operations --
Net investment income........................... $ 88,813 $ 75,339 $ 87,221
Net realized gain............................... 22,040 2,880 23,936
Net change in unrealized appreciation
(depreciation)............................... 697,216 631,099 625,099
---------------------------------------------------------------------------------------------------
Net increase in net assets from operations........ $ 808,069 $ 709,318 $ 736,256
---------------------------------------------------------------------------------------------------
Transactions in shares of beneficial
interest --.....................................
Proceeds from sale of shares(2)................. $35,812,500 $33,663,750 $38,677,500
Offering costs.................................. (75,000) (70,500) (81,000)
---------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share
transactions.................................... $35,737,500 $33,593,250 $38,596,500
---------------------------------------------------------------------------------------------------
Net increase in net assets........................ $36,545,569 $34,302,568 $39,332,756
---------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of period............................ $ 100,000 $ 100,000 $ 100,000
---------------------------------------------------------------------------------------------------
At end of period.................................. $36,645,569 $34,402,568 $39,432,756
---------------------------------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN NET ASSETS
At end of period.................................. $ 88,813 $ 75,339 $ 87,221
---------------------------------------------------------------------------------------------------
(1)For the period from the start of business, November 29, 2002, to December 31,
2002.
(2)Proceeds from sale of shares net of sales load paid of $1,687,500, $1,586,250
and $1,822,500 for New York Fund, Ohio Fund and Pennsylvania Fund,
respectively.
See notes to financial statements
--------------------------------------------------------------------------------
49
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF DECEMBER 31, 2002
1 SIGNIFICANT ACCOUNTING POLICIES
Eaton Vance Insured Municipal Bond Fund II (National Fund), Eaton Vance Insured
California Municipal Bond Fund II (California Fund), and Eaton Vance Insured
Florida Municipal Bond Fund (Florida Fund), Eaton Vance Insured Massachusetts
Municipal Bond Fund (Massachusetts Fund), Eaton Vance Insured Michigan Municipal
Bond Fund (Michigan Fund), Eaton Vance Insured New Jersey Municipal Bond Fund
(New Jersey Fund), Eaton Vance Insured New York Municipal Bond Fund II (New York
Fund), Eaton Vance Insured Ohio Municipal Bond Fund (Ohio Fund) and Eaton Vance
Insured Pennsylvania Municipal Bond Fund (Pennsylvania Fund) (individually
referred to as the Fund or collectively the Funds) are registered under the
Investment Company Act of 1940, as amended, as non-diversified, closed-end
management investment companies. The Funds were organized under the laws of the
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
October 3, 2002. Each Fund's investment objective is to achieve current income
exempt from regular federal income tax, including alternative minimum tax, and
taxes in its specified state. Each Fund seeks to achieve its objective by
investing primarily in high grade municipal obligations that are insured as to
the timely payment of principal and interest.
The following is a summary of significant accounting policies consistently
followed by each Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America.
A Investment Valuation -- Municipal bonds are normally valued on the basis of
valuations furnished by a pricing service. Futures contracts listed on the
commodity exchanges are valued at closing settlement prices. Interest rate swaps
are normally valued on the basis of valuations furnished by a broker. Short-term
obligations, maturing in sixty days or less, are valued at amortized cost, which
approximates fair value. Investments for which valuations or market quotations
are unavailable are valued at fair value using methods determined in good faith
by or at the direction of the Trustees.
B Investment Transactions -- Investment transactions are recorded on a trade
date basis. Realized gains and losses from such transactions are determined
using the specific identification method. Securities purchased or sold on a
when-issued or delayed delivery basis may be settled a month or more after the
transaction date. The securities so purchased are subject to market fluctuations
during this period. To the extent that when-issued or delayed delivery purchases
are outstanding, the Fund instructs the custodian to segregate assets in a
separate account, with a current value at least equal to the amount of its
purchase commitments.
C Income -- Interest income is determined on the basis of interest accrued,
adjusted for amortization of premium or discount.
D Federal Taxes -- Each Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable, if any, and tax-exempt
income, including any net realized gain on investments. Therefore, no provision
for federal income or excise tax is necessary.
In addition, each Fund intends to satisfy conditions which will enable it to
designate distributions from the interest income generated by its investments in
municipal obligations, which are exempt from regular federal income taxes when
received by each Fund, as exempt-interest dividends.
E Offering Costs -- Costs incurred by the Fund in connection with the offerings
of the common shares were recorded as a reduction of capital paid in excess of
par applicable to common shares.
--------------------------------------------------------------------------------
50
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F Financial Futures Contracts -- Upon the entering of a financial futures
contract, a Fund is required to deposit (initial margin) either in cash or
securities an amount equal to a certain percentage of the purchase price
indicated in the financial futures contract. Subsequent payments are made or
received by a Fund (margin maintenance) each day, dependent on the daily
fluctuations in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by a Fund. A Fund's investment in
financial futures contracts is designed for both hedging against anticipated
future changes in interest rates and investment purposes. Should interest rates
move unexpectedly, a Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss.
G Interest Rate Swaps -- The Funds may enter into interest rate swap agreements
to enhance return, to hedge against fluctuations in securities prices or
interest rates or as substitution for the purchase and sale of securities.
Pursuant to these agreements, the Funds make bi-annual payments at a fixed
interest rate. In exchange, the Funds receive payments based on the interest
rate of a benchmark industry index. During the term of the outstanding swap
agreement, changes in the underlying value of the swap are recorded as
unrealized gains and losses. The value of the swap is determined by changes in
the relationship between two rates of interest. The Funds are exposed to credit
loss in the event of non-performance by the swap counterparty. However, the
Funds do not anticipate non-performance by the counterparty. Risk may also arise
from the unanticipated movements in value of interest rates.
H Use of Estimates -- The preparation of 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.
I Expense Reduction -- Investors Bank & Trust Company (IBT) serves as custodian
of the Funds. Pursuant to the respective custodian agreements, IBT receives a
fee reduced by credits which are determined based on the average daily cash
balances each Fund maintains with IBT. All significant credit balances used to
reduce the Funds' custodian fees are reported as a reduction of total expenses
in the Statement of Operations.
J Unaudited Financial Statements -- The Financial Statements relating to
December 31, 2002 and for the period then ended have not been audited by
independent certified public accounts but in the opinion of the Fund's
management reflect all adjustments consisting of only normal recurring
adjustments, necessary for the fair presentation of the Financial Statements.
2 DISTRIBUTIONS TO SHAREHOLDERS
Each Fund intends to make monthly distributions of net investment income.
Distributions are recorded on the ex-dividend date. In addition, at least
annually, the Funds intend to distribute net capital gain and taxable ordinary
income, if any.
3 INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee, computed at an annual rate of 0.55% of each Fund's
average weekly gross assets, was earned by Eaton Vance Management (EVM) as
compensation for investment advisory services rendered to each Fund. Except for
Trustees of each Fund who are not members of EVM's organization, officers and
Trustees receive remuneration for their services to each Fund out of such
investment adviser fee. For the period from the start of business November 29,
2002 to December 31, 2002 the fee was equivalent to 0.55% (annualized) of each
Fund's average weekly gross assets. EVM also serves as the administrator of the
Funds, but currently received no compensation.
--------------------------------------------------------------------------------
51
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Adviser has contractually agreed to reimburse the Fund for fees
and other expenses in the amount of 0.15% of average weekly total assets of each
Fund during the first five full years of each Fund's operations, 0.10% of
average weekly total assets of each Fund in year six, and 0.05% in year seven.
For the period from the start of business November 29, 2002 to December 31, 2002
the Investment Adviser waived $17,532, $6,831, $4,295, $2,992, $2,608, $4,443,
$4,709, $4,339 and $4,995 of its advisory fee for National Fund, California
Fund, Florida Fund, Massachusetts Fund, Michigan Fund, New Jersey Fund, New York
Fund, Ohio Fund and Pennsylvania Fund, respectively.
Trustees of the Funds that are not affiliated with the Investment Adviser may
elect to defer receipt of all or a percentage of their annual fees in accordance
with the terms of the Trustees Deferred Compensation Plan. For the period from
the start of business November 29, 2002 to December 31, 2002, no significant
amounts have been deferred.
Eaton Vance has agreed to pay offering costs (other than sales load) that exceed
$0.03 per share. Eaton Vance has agreed to reimburse all Fund organization
costs.
Certain officers and one Trustee of each Fund are officers of the above
organization.
4 INVESTMENTS
Purchases and sales of investments, other than U.S. Government securities and
short-term obligations for the period from the start of business November 29,
2002 to December 31, 2002 were as follows:
NATIONAL FUND
Purchases................................................. $161,324,454
Sales..................................................... 28,697,161
CALIFORNIA FUND
Purchases................................................. $ 62,666,076
Sales..................................................... 9,097,925
FLORIDA FUND
Purchases................................................. $ 34,324,125
Sales..................................................... 1,666,779
MASSACHUSETTS FUND
Purchases................................................. $ 24,850,137
Sales..................................................... 3,686,216
MICHIGAN FUND
Purchases................................................. $ 19,843,008
Sales..................................................... 2,013,818
NEW JERSEY FUND
Purchases................................................. $ 37,463,154
Sales..................................................... 5,043,700
NEW YORK FUND
Purchases................................................. $ 38,925,264
Sales..................................................... 4,558,035
--------------------------------------------------------------------------------
52
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OHIO FUND
Purchases................................................. $ 31,216,137
Sales..................................................... 1,005,030
PENNSYLVANIA FUND
Purchases................................................. $ 37,740,607
Sales..................................................... 5,734,655
5 FEDERAL INCOME TAX BASIS OF UNREALIZED APPRECIATION (DEPRECIATION)
The cost and unrealized appreciation (depreciation) in value of the investments
owned by each Fund at December 31, 2002, as computed for Federal income tax
purposes, were as follows:
NATIONAL FUND
Aggregate cost.............................................. $139,489,239
============
Gross unrealized appreciation............................... $ 2,838,292
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 2,838,292
============
CALIFORNIA FUND
Aggregate cost.............................................. $ 53,587,820
============
Gross unrealized appreciation............................... $ 828,138
Gross unrealized depreciation............................... --
------------
NET UNREALIZED APPRECIATION................................. $ 828,138
============
FLORIDA FUND
Aggregate cost.............................................. $ 32,680,700
============
Gross unrealized appreciation............................... $ 634,339
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 634,339
============
MASSACHUSETTS FUND
Aggregate cost.............................................. $ 21,187,121
============
Gross unrealized appreciation............................... $ 344,259
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 344,259
============
MICHIGAN FUND
Aggregate cost.............................................. $ 17,851,818
============
Gross unrealized appreciation............................... $ 264,243
Gross unrealized depreciation............................... $ (890)
------------
Net unrealized appreciation................................. $ 263,354
============
--------------------------------------------------------------------------------
53
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW JERSEY FUND
Aggregate cost.............................................. $ 32,424,934
============
Gross unrealized appreciation............................... $ 835,556
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 835,556
============
NEW YORK FUND
Aggregate cost.............................................. $ 34,393,462
============
Gross unrealized appreciation............................... $ 697,526
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 697,526
============
OHIO FUND
Aggregate cost.............................................. $ 30,227,590
============
Gross unrealized appreciation............................... $ 640,826
Gross unrealized depreciation............................... (9,000)
------------
Net unrealized appreciation................................. $ 631,826
============
PENNSYLVANIA FUND
Aggregate cost.............................................. $ 32,039,159
============
Gross unrealized appreciation............................... $ 625,303
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 625,303
============
6 SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Funds to issue an unlimited number of full
and fractional $0.01 par value common shares. Transactions in Fund shares were
as follows:
PERIOD ENDED
DECEMBER 31, 2002(1)
--------------------
NATIONAL FUND
Sales....................................................... 9,500,000
---------
Net increase................................................ 9,500,000
=========
CALIFORNIA FUND
Sales....................................................... 3,700,000
---------
Net increase................................................ 3,700,000
=========
FLORIDA FUND
Sales....................................................... 2,400,000
---------
Net increase................................................ 2,400,000
=========
--------------------------------------------------------------------------------
54
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PERIOD ENDED
DECEMBER 31, 2002(1)
--------------------
MASSACHUSETTS FUND
Sales....................................................... 1,625,000
---------
Net increase................................................ 1,625,000
=========
MICHIGAN FUND
Sales....................................................... 1,425,000
---------
Net increase................................................ 1,425,000
=========
NEW JERSEY FUND
Sales....................................................... 2,400,000
---------
Net increase................................................ 2,400,000
=========
NEW YORK FUND
Sales....................................................... 2,500,000
---------
Net increase................................................ 2,500,000
=========
OHIO FUND
Sales....................................................... 2,350,000
---------
Net increase................................................ 2,350,000
=========
PENNSYLVANIA FUND
Sales....................................................... 2,700,000
---------
Net increase................................................ 2,700,000
=========
---------------
(1)For the period from the start of business, November 29, 2002 to December 31,
2002.
7 FINANCIAL INSTRUMENTS
Each Fund may trade in financial instruments with off-balance sheet risk in the
normal course of its investing activities to assist in managing exposure to
various market risks. These financial instruments include futures contracts and
may involve, to a varying degree, elements of risk in excess of the amounts
recognized for financial statement purposes. The notional or contractual amounts
of these instruments represent the investment each Fund has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
At December 31, 2002 there were no outstanding obligations under these financial
instruments.
--------------------------------------------------------------------------------
55
APPENDIX A
--------------------------------------------------------------------------------
Description of securities ratings+
Moody's Investors Service, Inc.
MUNICIPAL BONDS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
---------------
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of the Fund's
fiscal year end.
--------------------------------------------------------------------------------
56
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 municipal bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
MUNICIPAL SHORT-TERM OBLIGATIONS
MIG/VMIG RATINGS U.S. SHORT-TERM RATINGS: In municipal debt issuance, there are
three rating categories for short-term obligations that are considered
investment grade. These ratings are designated as Moody's Investment Grade (MIG)
and are divided into three levels--MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component rating
is assigned. The first element represents Moody's evaluation of the degree of
risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated as
VMIG. When either the long- or short-term aspect of a VRDO is not rated, that
piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations will
be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt instruments
in this category in this category may lack sufficient margins of protection.
--------------------------------------------------------------------------------
57
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.
--------------------------------------------------------------------------------
58
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.
MUNICIPAL NOTES
S&P note ratings reflect the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment:
+ Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
+ Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined to
possess very strong characteristics will be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH RATINGS
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
--------------------------------------------------------------------------------
59
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified that could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D' represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the 'F-1+' and 'F-1' categories.
--------------------------------------------------------------------------------
60
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
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 Fund is dependent on the Investment Adviser's
judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
DESCRIPTION OF THE INSURANCE CLAIMS-PAYING ABILITY RATINGS OF STANDARD & POOR'S
RATINGS GROUP
An S&P insurance claims-paying ability rating is an assessment of an operating
insurance company's financial capacity to meet obligations under an insurance
policy in accordance with the terms. An insurer with an insurance claims-paying
ability of AAA has the highest rating assigned by S&P. Capacity to honor
insurance contracts is adjudged by S&P to be extremely strong and highly likely
to remain so over a long period of time.
An insurance claims-paying ability rating by S&P does not constitute an opinion
on an specific contract in that such an opinion can only be rendered upon the
review of the specific insurance contract. Furthermore, an insurance
claims-paying ability rating does not take in account deductibles, surrender or
cancellation penalties or the timeliness of payment; nor does it address the
ability of a company to meet nonpolicy obligations (i.e., debt contracts).
The assignment of ratings by S&P to debt issues that are fully or partially
supported by insurance policies, contracts, or guarantees is a separate process
from the determination of claims-paying ability ratings. The likelihood of a
timely flow of funds from the insurer to the trustee for the bondholders is a
key element in the rating determination of such debt issues.
--------------------------------------------------------------------------------
61
APPENDIX B
--------------------------------------------------------------------------------
Tax equivalent yield table
The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 7% under the 2003 regular federal income
tax and 2002 California personal income tax rates applicable to individuals.
COMBINED FEDERAL AND
CALIFORNIA STATE TAX RATES
---------------------------- A TAX-EXEMPT YIELD OF
SINGLE RETURN JOINT RETURN FEDERAL STATE BLENDED 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
----------------------------------------------------------------------------------------------------------------------
(TAXABLE INCOME)* IS EQUIVALENT TO A FULLY TAXABLE YIELD OF
$21,827-$28,400 $43,653-$47,450 15.0% 6.00% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$28,401-$30,298 $47,451-$60,596 27.0% 6.00% 31.38% 5.83% 6.56% 7.29% 8.02% 8.74% 9.47% 10.20%
$30,299-$38,291 $60,597-$76,582 27.0% 8.00% 32.84% 5.96% 6.70% 7.44% 8.19% 8.93% 9.68% 10.42%
$38,292-$68,800 $76,583-$114,650 27.0% 9.30% 33.79% 6.04% 6.80% 7.55% 8.31% 9.06% 9.82% 10.57%
$68,801-$143,500 $114,651-$174,700 30.0% 9.30% 36.51% 6.30% 7.09% 7.88% 8.66% 9.45% 10.24% 11.03%
$143,501-$311,950 $174,701-$311,950 35.0% 9.30% 41.05% 6.78% 7.63% 8.48% 9.33% 10.18% 11.03% 11.87%
Over $311,950 Over $311,950 38.6% 9.30% 44.31% 7.18% 8.08% 8.98% 9.88% 10.77% 11.67% 12.57%
------------
* Net amount subject to federal personal income tax after deductions and
exemptions.
The above indicated federal income tax brackets do not take into account the
effect of a reduction in the deductibility of itemized deductions generally for
individual taxpayers with adjusted gross income in excess of $139,500. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $139,500 and joint filers
with adjusted gross income in excess of $209,250. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
The combined federal and California tax brackets are calculated using the
highest California tax rate applicable within each bracket. Taxpayers may have
lower combined tax brackets and taxable equivalent yields than indicated above.
The combined tax brackets assume that California taxes are itemized deductions
for federal income tax purposes. Investors who do not itemize deductions on
their federal income tax return will have a higher combined bracket and higher
taxable equivalent yield than those indicated above. The applicable federal tax
rates within the brackets are 10%, 15%, 27%, 30%, 35.0% and 38.6%, over the same
ranges of income.
Yields shown are for illustration purposes only and are not meant to represent
the Fund's actual yield. No assurance can be given that the Fund will achieve
any specific tax-exempt yield. While it is expected that the Fund will invest
principally in obligations the interest from which is exempt from the regular
federal income tax and California State personal income taxes, other income
received by the Fund may be taxable. The table does not take into account state
or local taxes, if any, payable on Fund distributions. It should also be noted
that the interest earned on certain "private activity bonds", while exempt from
the regular federal income tax, is treated as a tax preference item which could
subject the recipient to the AMT. The illustrations assume that the AMT is not
applicable and do not take into account any tax credits that may be available.
The information set forth above is as of the date of this SAI. Subsequent tax
law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above. Investors should
consult their tax adviser for additional information.
--------------------------------------------------------------------------------
62
APPENDIX C
--------------------------------------------------------------------------------
California and U.S. territory information
The following is a summary of certain selected information relating to the
economy and finances of California (hereinafter the "State" or "California") and
the U.S. territories listed below. It is not a discussion of any specific
factors that may affect any particular issuer of municipal securities. The
information is not intended to be comprehensive and does not include all of the
economic and financial information, such as certain information pertaining to
budgets, receipts and disbursements, about California or such U.S. territories
that would ordinarily be included in various public documents issued thereby,
such as an official statement prepared in accordance with issuance of general
obligation bonds of California or such U.S. territories; however such summary
has not been updated nor will it be updated during the year. Such an official
statement, together with any updates or supplements thereto, generally may be
obtained upon request to the budget or equivalent office of California or such
U.S. territories. Such an official statement pertaining to the State of
California may be also found at the website of the California State Treasurer's
Office, www.treasurer.ca.gov under the heading "Bond Information." The
information below is derived from selected public documents of the type
described above and has not been independently verified by the Fund.
CALIFORNIA
GENERAL ECONOMIC CONDITIONS
The economy of the State of California (referred to herein as the "State" or
"California") is the largest among the 50 states and is one of the largest in
the world, having major components in high technology, trade, entertainment,
agriculture, manufacturing, tourism, construction and services. California's
economy slipped into a moderate recession in early 2001, losing approximately
250,000 jobs in calendar year 2001. The recession is concentrated in the state's
high-tech sector and tourism industry. Unemployment in the State has risen from
4.7 percent in February 2001 to 6.4 percent in November 2002. (See "Current
State Budget" below.) Current unemployment figures for the State are available
at the website of the Department of Finance, WWW.DOF.CA.GOV, under the heading
"Monthly Finance Bulletins."
The State projects growth in nonfarm employment in calendar year 2003 to be an
average of 2.1 percent. The State forecasted that the unemployment rate--a
lagging indicator--would edge up to a 6.4 percent average in 2002 from a 6.0
percent average in 2001, and then decline to 5.7 percent in 2003.
California's July 1, 2001 population of nearly 35 million represented over 12
percent of the total United States population. California's population is
concentrated in metropolitan areas. As of the April 1, 2000 census 97 percent of
the State's population resided in the 25 Metropolitan Statistical Areas in the
State. As of July 1, 2000, the five-county Los Angeles area accounted for 48
percent of the State's population with over 16.0 million residents and the
10-county San Francisco Bay Area represented 21 percent of the State's
population with a population of over 7.0 million.
Construction trends are expected by the State to be mixed. Low interest rates
and a large backlog of unmet demand continued to encourage further gains in new
residential construction in 2002. The State forecasted 153,000 new units to be
authorized by building permits in 2002, up from 149,000 in 2001. However, in
2003, the State expects homebuilding to decline to 148,000 units.
The State expected that slower job growth, coupled with new supply already under
construction, would result in rising commercial and retail vacancy rates, which
in turn would discourage new construction starts. After several years of strong
double-digit growth, the State expected nonresidential permit values (not
adjusted for inflation) to slow in 2002, but edge back up in 2003.
--------------------------------------------------------------------------------
63
CALIFORNIA AND U.S. TERRITORY INFORMATION
--------------------------------------------------------------------------------
The State attributes the weakness in personal income growth in 2002 to a drop in
capital gains as well as due to lower reduced stock option income. Capital gains
for the 2001 tax year are estimated to have decreased by 60 percent to $47
billion, and the State projects further decreases in Fiscal Year 2002-2003.
Stock options are estimated to have dropped by almost 45 percent, to $44 billion
in 2001 and are forecast by the State to have declined further in 2002.
PRIOR FISCAL YEARS' FINANCIAL RESULTS
The combination of resurging exports, a strong stock market, and a sharp-growing
economy in 1999 and early 2000 resulted in strong growth in General Fund
revenues during fiscal year 1999-2000. Since early 2001 the State has faced
severe financial challenges, which may continue for several years.
2001-2002 Fiscal Year Budget. The Fiscal Year 2001-2002 Budget Act (the "2001
Budget Act") was signed by the Governor on July 26, 2001, almost four weeks
after the start of the fiscal year. The spending plan for 2001-2002 included
General Fund expenditures of $78.8 billion, a reduction of $1.3 billion from the
prior year. The State could accomplish such spending reductions without serious
program cuts because such a large part of the 2000 Budget Act was comprised of
one-time expenditures. The spending plan utilized more than half of the budget
surplus as of June 30, 2001, but still left a projected balance in the Special
Fund for Economic Uncertainties at June 30, 2002 of $2.6 billion, the largest
appropriated reserve in State history. The 2001 Budget Act also included special
fund expenditures of $21.3 billion and bond fund expenditures of $3.2 billion.
The State issued $5.7 billion of revenue anticipation notes on October 4, 2001
as part of its cash management program.
CURRENT STATE BUDGET
Fiscal Year 2002-2003 Budget Act. The Fiscal Year 2002-2003 Budget Act (the
"2002 Budget Act") was signed by the Governor on September 5, 2002, almost nine
weeks after the start of the fiscal year--the latest budget signing in the
State's recorded history. The 2002 Budget Act closed the $23.6 billion budget
gap between expenditures and revenues resulting from the slowdown in economic
growth in the State and the steep drop in stock market levels (the "2002 Budget
Gap") through a combination of program reductions, loans, fund shifts,
accelerations and transfers and modest tax changes. Program reductions and the
receipt of funds from the tobacco securitization settlement account for
approximately 50 percent of the approach to close the 2002 Budget Gap. The
Governor vetoed almost $235 million in General Fund expenditures in addition to
the $9 billion in reductions contained in the budget passed by the Legislature.
The 2002 Budget Act projects General Fund revenues in Fiscal Year 2002-2003 will
be about $79.1 billion. The 2002 Budget Act contains a reserve of $1.035
billion.
The $98.9 billion spending plan for Fiscal Year 2002-2003 includes General Fund
expenditures of $76.7 billion, a reduction from Fiscal Year 2001-2002. The 2002
Budget Act also includes special fund expenditures of $19.4 billion and bond
fund expenditures of $2.8 billion. The State issued $12.5 billion of revenue
anticipation notes as part of its cash management plan.
The State Legislative Analyst (the "Legislative Analyst"), fiscal experts and
political leaders in the State acknowledged that the 2002 Budget Act left a
large gap between the expected level of tax and other continuing revenues and
projected expenditures under current programs for future years, referred to as a
"structural deficit." The Legislative Analyst estimated the structural deficit
for the 2002-2003 fiscal year to be in the range of at least $10 billion, with
similar deficits for several further years, absent corrective action. (See
"Proposed 2003-2004 Governor's Budget" below for estimates of the 2003-2004
structural deficit). Actions to resolve the structural deficit in the future
will be much more challenging because many one-time techniques used in the 2002
Budget Act cannot be replicated.
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Some of the important features of the 2002 Budget Act are the following:
1. Total Proposition 98 spending, which guarantees K-12 schools a minimum share
of General Fund revenues, increased by 8.6 percent to $41.6 billion. Total
K-12 spending per pupil increased by 6.9 percent to $7,067. Total General
Fund spending for K-12 education is $30.8 billion, which funds enrollment
and cost of living increases and also provides additional funding for a
number of programs, such as teacher and principal training programs,
instructional and student achievement improvement programs. In addition, a
total of $143.3 million in Proposition 98 appropriations were vetoed and set
aside to be appropriated later in Fiscal Year 2002-2003 for any increased
costs in existing programs such as enrollment or other necessary funding
adjustments. The 2002 Budget Act reflects a total increase in federal
funding of $738 million under the recently enacted No Child Left Behind Act,
which helps support existing education programs and augments funding in
selected areas.
2. Higher education funding decreased slightly by 0.2 percent, compared to
revised 2001-2002 estimates, but allows for enrollment increases at the
University of California, the California State University and California
Community College systems with no fee increases.
3. Health, welfare and social services funding decreased by 2 percent from
Fiscal Year 2001-2002 to $21.6 billion.
4. The 2002 Budget Act contains $4.4 billion of continuing tax relief.
5. The 2002 Budget Act provides criminal justice assistance to local
governments including $232.6 million for support of local front-line law
enforcement and county juvenile justice crime prevention programs, $50.8
million in federal grant funding to support anti-bioterrorism activities by
the State and its 58 counties and $38.2 million to cities and special
districts for reimbursement of jail booking fees paid to counties and other
cities in 1997-1998.
6. The 2002 Budget Act includes an additional appropriation of $89.6 million
for the California Highway Patrol for security purposes. These costs are
expected to be reimbursed by the federal government.
Complete text of the 2002 Budget Act may generally be obtained upon request to
the State Department of Finance or at the website of the State Department of
Finance, WWW.DOF.CA.GOV, under the heading "California Budget."
Proposed 2003-2004 Governor's Budget. The Proposed 2003-2004 Governor's Budget
(the "Proposed 2003-2004 Governor's Budget"), released on January 10, 2003,
presents the Governor's plan to address the estimated $34.8 billion budget gap
projected by the State for Fiscal Year 2003-2004 (the "2003 Budget Gap"). The
Governor proposed raising the income tax for those in the highest bracket and
increasing the State sales and cigarette taxes. The revenues from such increases
would be directed to local governments in order to assist in the funding of
several programs, the responsibility for which would be shifted from the State
to local governments. The Governor also proposed retention by the State of the
vehicle license fees which are usually sent to local governments. Billions of
dollars in program cuts and loan and fund shifts were also proposed to balance
the budget. Complete text of the Proposed 2003-2004 Governor's Budget may
generally be obtained upon request to the State Department of Finance or at the
website of the State Department of Finance, WWW.DOF.CA.GOV, under the heading
"California Budget."
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FUTURE BUDGETS
It cannot be predicted what actions will be taken in the future by the State
Legislature and the Governor to deal with changing State revenues and
expenditures. The State budget will be affected by national and State economic
conditions and other factors.
RATINGS
Currently, the following ratings for the State of California general obligation
bonds have been received from Moody's Investors Services, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and
Fitch, Inc. ("Fitch"):
FITCH MOODY'S S&P
-----------------------------------------------------------------------
A A1 A
Currently, the State's rating outlook with Moody's remains negative and its
rating with Fitch remains on rating watch--negative.
These ratings apply to the State only and are not indicative of the ratings
assigned to local governments, such as counties, cities, school districts and
other local agencies.
Any explanation of the significance of such ratings may be obtained only from
the rating agency furnishing such ratings. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely if, in the judgment of the particular
rating agency, circumstances so warrant. The most recent rating information may
be obtained from the rating agency furnishing such ratings or at the website of
the Treasurer of the State, www.treasurer.ca.gov, under the heading "Credit
Ratings."
RECENT DEVELOPMENTS REGARDING NATURAL GAS AND ELECTRICITY
During the past two years California experienced difficulties with the prices
and supplies of natural gas and electricity in much of the State. The State
projects these difficulties are likely to continue for several years. The State
Department of Finance believes there is potential for economic disruption if
power supplies are interrupted, and that longer term business investment and
location decisions may be adversely affected by potential disruptions.
Shortages of electricity available within the service areas of California's
three investor-owned utilities (the "Utilities") resulted in the need to
implement rotating electricity blackouts in 2001. Following the first incidence
of such blackouts in January 2001, the Governor proclaimed a state of emergency
to exist in California under the California Emergency Services Act (the
"Emergency Services Act") on the basis that the electricity available from
California's Utilities was insufficient to prevent widespread and prolonged
disruption of electric service in California. The Governor directed the State
Department of Water Resources ("DWR") to enter into contracts and arrangements
for the purchase and sale of electric power as necessary to assist in mitigating
the effects of the emergency (the "Power Supply Program").
DWR borrowed money from the General Fund of the State for DWR's power supply
program between January and June 2001. The amount due to the General Fund was
$6.1 billion plus accrued interest of approximately $500 million. In October and
November of 2002, DWR issued approximately $11.26 billion in revenue bonds in
several series and used the net proceeds of the revenue bonds to repay
outstanding loans from banks and commercial lenders in the amount of
approximately $3.5 billion and to repay the General Fund. The primary source of
money to pay debt service on the DWR revenue bonds is revenue from customers of
the IOUs resulting from charges set by the CPUC. The DWR revenue bonds are not a
debt or liability of the State nor do the DWR revenue bonds
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directly or indirectly or contingently obligate the State to levy or to pledge
any form of taxation whatever therefor or to make any appropriation for their
payment.
The general purpose of the power supply program has been to provide to customers
of the three major investor-owned electric utilities in the State (the "IOUs")
the portion of their power not provided by the IOUs. The power supply program
has become self-supporting and the State does not expect to make any additional
loans from the General Fund will be made.
A number of lawsuits and administrative proceedings involving DWR have been
commenced concerning various aspects of the energy situation. These include
disputes over rates set by the CPUC, certain determinations by DWR pertaining to
repayment of the DWR revenue bonds, and other matters. See also "Pending
Litigation" for a discussion of energy-related litigation involving the State
that may have a direct impact on the State's General Fund.
TOBACCO SETTLEMENT.
In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in
the future for monetary damages. Under the settlement agreement, the tobacco
manufacturers agreed to pay California governments a total of approximately $25
billion (subject to adjustments) over a period of 25 years. Beyond 2025,
payments of approximately $900 million per year will continue in perpetuity.
Under a separate Memorandum of Understanding, half of the moneys will be paid to
the State and half to local governments (all counties and the cities of San
Diego, Los Angeles, San Francisco and San Jose). The 2002 Budget Act forecasts
payments to the State totaling $474 million in 2002-2003 which will be deposited
in a special fund to pay certain healthcare costs and debt service payments for
a Tobacco Settlement securitization.
The specific amount to be received by the State and local governments is subject
to adjustment. Details in the settlement agreement allow reduction of the
tobacco companies' payments because of certain types of federal legislation, or
decreases in cigarette sales. Settlement payments can increase due to inflation
or increases in cigarette sales. The "second annual" payment, received in April
2002, was 15.3 percent lower than the base settlement amount due to reduced
sales. Future payment estimates have been reduced by a similar percentage. In
the event that any of the tobacco companies goes into bankruptcy, the State
could seek to terminate the agreement with respect to those companies filing
bankruptcy actions, thereby reinstating all claims against those companies. The
State may then pursue those claims in the bankruptcy litigation, or as otherwise
provided by law. Also, several parties have brought a lawsuit challenging the
settlement and seeking damages. (See "Constitutional and Statutory Limitations;
Future Initiatives; Pending Litigation" below.)
LOCAL GOVERNMENTS
The primary units of local government in California are the counties, ranging in
population from 1,200 (Alpine) to over 9,800,000 (Los Angeles). Counties are
responsible for providing many basic services, including indigent healthcare,
welfare, jails and public safety in unincorporated areas. There are also about
478 incorporated cities and thousands of special districts formed for education,
utility and other services. The fiscal condition of local governments has been
constrained since the enactment of "Proposition 13" in 1978 and other
constitutional amendments, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose "special
taxes" (those devoted to a specific purpose) without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local governmental entities, and have been required to maintain many
services.
State Funding. In the aftermath of Proposition 13, the State provided aid to
local governments from the General Fund to make up some of the loss of property
tax moneys, including taking over the
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principal responsibility for funding local K-12 schools and community colleges.
During the recession of the early 1990s, the Legislature eliminated most of the
remaining components of the post-Proposition 13 aid to local government entities
other than K-12 education districts, by requiring cities and counties to
transfer some of their property tax revenues to school districts. The 2002
Budget Act expands such transfers to temporarily include community redevelopment
agencies which were not included in the original transfers. These agencies will
have to pay $75 million to school districts in 2002-03.
The State has also provided funding to counties and cities through various
programs. The 2002 Budget Act and related legislation continue to provide
assistance to local governments, including approximately $308 million for
various local public safety programs, including the Citizens' Option for Public
Safety ("COPS") program to support local front-line law enforcement and county
juvenile justice and crime prevention programs, approximately $134 million for
deferred maintenance of local streets and roads, $39 million for property tax
losses incurred by enrolling agricultural land in Williamson Act contracts, $38
million for environmental protection and hundreds of millions for health and
human services. Nevertheless, the State's financial challenges may have an
impact on whether these moneys are actually allocated to the local governments.
Constitutional and Statutory Limitations. On November 5, 1996 voters approved
Proposition 218 called the "Right to Vote on Taxes Act" which incorporates
Articles XIII C and XIII D into the California Constitution. Those provisions
enact limitations on the ability of local government agencies to impose or raise
various taxes, fees, charges and assessments without voter approval. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments, or charges through local initiatives. Proposition 218 does
not affect the State or its ability to levy or collect taxes.
The voters of California adopted a statutory initiative ("Proposition 62") at
the November 4, 1986 election, which added Sections 53720 to 53730 to the
Government Code of the State, and requires that all new local taxes be approved
by the voters. Several courts have held that Proposition 62 does not apply to
charter cities, but does apply to other local government entities such as
non-charter cities, counties and school districts. However, Proposition 218, as
a constitutional amendment, is applicable to charter cities and supersedes many
of the provisions of Proposition 62.
On June 4, 2001, in Howard Jarvis Taxpayers Association v. City of La Habra, the
California Supreme Court held that a local governmental entity's continued
imposition and collection of a tax subject to the requirements of Proposition
62, without voter approval was a continuous violation of Proposition 62 and that
the validity of a tax measure may be challenged within the statutory period
after any collection of the tax, regardless of whether more than three years had
passed since the tax measure was adopted. Thus, each time an unconstitutional
tax is collected, the statue of limitations is triggered again. Various
California local governments may be subject to challenge under the La Habra
ruling. Should a challenge be successful, Proposition 62 provides that the
portion of the one percent general ad valorem property tax levy allocated to
that local government is reduced by $1 for every $1 in revenue attributable to
the improperly imposed tax for each year that such tax is collected. The
practical applicability of this provision has not been determined. Future
litigation and legislation may resolve some or all of the issues raised by the
City of La Habra decision.
Welfare. The entire Statewide welfare system was changed in response to the
change in federal welfare law in 1996. The federal block grant formula
established in 1996 is operative through federal fiscal year 2002. Under the
revised basic State welfare system, California Work Opportunity and
Responsibility to Kids ("CalWORKs"), counties are given flexibility to develop
their own plans, consistent with State law, to implement Welfare-to-Work and to
administer many of its elements and their costs for administrative and support
services are capped at 1996-1997 levels. Counties are also given financial
incentives if, at the individual county level or statewide, the CalWORKs program
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produces savings associated with specified Welfare-to-Work outcomes. Under
CalWORKs, counties will still be required to provide "general assistance" aid to
certain persons who cannot obtain welfare from other programs.
Welfare caseloads have declined with the implementation of the CalWORKs program.
The 2002-2003 CalWORKs caseload is projected by the State to be 522,000, up from
507,000 cases in 2001-2002. This represents a decline from the growth in welfare
caseloads in the early 1990s, when caseload peaked at 921,000 cases in
1994-1995.
Courts. Historically, funding for the State's trial court system was divided
between the State and the counties. In 1997, legislation consolidated the trial
court funding at the State level in order to streamline the operation of the
courts, provide a dedicated revenue source and relieve fiscal pressure on the
counties. Since then, the county general purpose contribution for court
operations was reduced. In 2002-2003, State funding of the State's trial court
system will remain unchanged and county funding will increase slightly by 1.0%,
as compared to 2001-2002 estimates.
Tobacco Settlement. Local governments will receive approximately half of the
settlement payments to be made by the four major cigarette manufacturers under
the 1998 Master Settlement Agreement between the State and the four major
cigarette manufacturers, in which the tobacco companies agreed to make certain
payments to California governments in exchange for the State agreeing to drop
its lawsuit and not to sue in the future for monetary damages. The State
forecasts payments to local governments totaling approximately $323 million in
2002-2003. (See "Tobacco Settlement").
CONSTITUTIONAL AND STATUTORY LIMITATIONS; FUTURE INITIATIVES; PENDING LITIGATION
Constitutional and Statutory Limitations. Article XIII A of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIII A provides
that the maximum ad valorem tax on real property cannot exceed one percent of
the "full cash value" of the property and effectively prohibits the levying of
any other ad valorem tax on real property for general purposes. However, on June
3, 1986, Proposition 46, an amendment to Article XIII A, was approved by the
voters of the State of California, creating a new exemption under Article XIII A
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness. The constitutionality of the practice of the Orange
County assessor's office to increase or "recapture" the assessed values of real
properties that temporarily decline and then increase in value, an assessment
practice utilized by other county assessors in the State, has been legally
challenged. (See "Constitutional and Statutory Limitations; Future Initiatives;
Pending Litigation" below.)
On November 7, 2000, voters approved Proposition 39 called the "Smaller Classes,
Safer Schools and Financial Accountability Act" (the "Smaller Classes Act").
Effective upon its passage, the Smaller Classes Act allows an alternative means
of seeking voter approval for bonded indebtedness by 55 percent of the vote,
rather than the two-thirds majority required under Section 18 of Article XVI of
the California Constitution. The reduced 55 percent voter requirement applies
only to schools and community college districts.
Article XIII B of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local governments have
financial responsibility for providing. To the extent that the revenues of the
State and/or local governments exceed their appropriations, the excess revenues
must be rebated to the public either directly or through a tax decrease.
Expenditures for voter-approved debt service costs are not included in the
appropriations limit.
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Because of the complexities of Article XIII B, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and exemptions
and the impossibility of predicting future appropriations, the Fund cannot
predict the impact of this or related legislation on the bonds in the Fund's
portfolios. Other Constitutional amendments affecting State and local taxes and
appropriations have been proposed from time to time. If any such initiatives are
adopted, the State could be pressured to provide additional financial assistance
to local governments or appropriate revenues as mandated by such initiatives,
potentially reducing resources available for other State programs, especially to
the extent the Article XIII B spending limit would restrain the State's ability
to fund such programs by raising taxes.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. Proposition 98 changed State funding of
public education below the university level and the operation of the state
appropriations limit, primarily by guaranteeing K-12 schools a minimum share of
General Fund revenues.
Proposition 98 permits the Legislature by two-thirds vote of both houses, with
the Governor's concurrence, to suspend the K-12 schools' minimum funding formula
for a one-year period. Proposition 98 also contains provisions transferring
certain State tax revenues in excess of the Article XIII B limit to K-12
schools.
Increased total revenues, in the 1994-1995 through 2002-2003 Fiscal Years along
with policy decisions to increase K-12 appropriations have resulted in
significant increases in Proposition 98 appropriations for those years. Because
of the State's increasing revenues and emphasis on improving education
resources, per-pupil funding at the K-12 level has increased by more than 60
percent from the level in place in 1994-1995, to an estimated $7,067 per pupil
in 2002-2003.
At the November 1998 election, voters approved Proposition 2. This proposition
requires the General Fund to repay loans made from certain transportation
special accounts (such as the State Highway Account) at least once per fiscal
year, or up to 30 days after adoption of the annual budget act. Since the
General Fund may reborrow from the transportation accounts soon after the annual
repayment is made the proposition is not expected to have any adverse impact on
the State's cash flow.
Future Initiatives. Articles XIII A, XIII B, XIII C and XIII D and Propositions
2, 62, 98 and 39 were each adopted as measures that qualified for the ballot
pursuant to the State's initiative process. From time to time, other initiative
measures could be adopted that could affect revenues of the State or public
agencies within the State.
Pending Litigation. The State of California is a party to numerous legal
proceedings, many of which normally occur in governmental operations. Some of
the more significant lawsuits pending against the State as disclosed by the
State are described below. The following information is not intended to be
comprehensive and does not include all of the litigation pending against the
State that would ordinarily be included in various public documents issued
thereby, such as the official statements prepared in connection with the
issuance of general obligation bonds of California. Such official statements may
be found at the website of the California State Treasurer's Office,
www.treasurer.ca.gov, under the heading "Bond Information."
The State is a defendant in Paterno v. State of California, a coordinated action
involving 3,000 plaintiffs seeking recovery for damages caused by the Yuba River
flood of February 1986. The State's potential liability to the remaining
plaintiffs ranges from $800 million to $1.5 billion. The Court ruled that the
3,000 plaintiffs take nothing from the State or its co-defendant, Reclamation
District 784. Plaintiffs have appealed. Briefing is underway.
In Howard Jarvis Taxpayers Association et al. v. Kathleen Connell, the Court of
Appeal upheld the Controller's authority to make payments pursuant to continuing
appropriations in the absence of a
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state budget. Thus, the Controller may make payments of principal and interest
on state bonds. However, the Court of Appeal held that absent an adopted budget
or emergency appropriation, the State Controller could not disburse certain
Proposition 98 moneys. The Supreme Court granted the Controller's Petition for
Review on a procedural issue unrelated to continuing appropriations and stayed
the trial court's injunction. However, the Supreme Court may consider all of the
issues raised in the case.
In County of Orange v. Orange County Assessment Appeals Board #3; Bezaire, et.
al., Real Parties in Interest, the Superior Court of Orange County has
determined that the Orange County assessor's office received property taxes from
two taxpayers in excess of the amounts collectable under Article XIIIA of the
California Constitution (sometimes referred to as "Proposition 13"). The
plaintiffs' legal claim focuses on the constitutionality of the practice of the
Orange County assessor's office to increase or "recapture" the assessed values
of real properties that temporarily decline and then increase in value. The
plaintiffs are also seeking the certification of their action as a class action.
Pending the determination of certain class certification issues, the court's
decision is not final. Should the court's determination become final, it will
bind only the County of Orange and its assessor's office. However, indirect
effects of a final determination that the contested assessment practices are
contrary to Proposition 13, could result in costs to the State in an aggregate
amount in excess of $400 million.
In January of 1997, California experienced major flooding with preliminary
estimates of property damage of approximately $1.6 to $2.0 billion. In McMahon
v. State, a substantial number of plaintiffs have joined suit against the State,
local agencies, and private companies and contractors seeking compensation for
the damages they suffered as a result of the 1997 flooding.
The State has been involved in three refund actions, California Assn. of Retail
Tobacconists (CART), et al. v. Board of Equalization et al., Cigarettes Cheaper!
et al. v. Board of Equalization, et al. and McLane/Suneast, et al. v. Board of
Equalization, et al., that challenge the constitutionality of Proposition 10,
which voters passed in 1998 to establish the Children and Families Commission
and local county commissions and to fund early childhood development programs.
Judgment in favor of all defendants as to all 30 consolidated counts was entered
on January 9, 2001. The CART plaintiffs and Cigarettes Cheaper! plaintiffs
timely appealed these and all other issues. Briefing is completed. Due to the
challenge, there is exposure as to the entire $750 million per year collected
under Proposition 10 with interest, which could amount to several billion
dollars by the time the cases are finally resolved.
In Charles Davis, et al. v. California Health and Human Services Agency, et al.,
the plaintiffs have brought a class action under a number of federal acts,
including the Americans with Disabilities Act, seeking declaratory and
injunctive relief, alleging that persons who are institutionalized with
disabilities at Laguna Honda Hospital should be assessed as to whether they can
be treated at home or in community-based facilities, and then provided
appropriate care. Rough estimates suggest that the financial impact of a
judgment against the State defendants could be as high as $1 billion per year in
programmatic costs going forward, assuming the Legislature does not respond by
modifying the scope of the program.
In Stephen Sanchez, et al. v. Grantland Johnson, et al., the plaintiffs have
brought a class action in federal District Court, seeking declaratory and
injunctive relief, alleging, in part, that provider rates for community-based
services for developmentally disabled individuals are discriminatory under the
Americans with Disabilities Act, and various other federal laws, because they
result in unnecessary institutionalization of developmentally disabled persons.
Early estimates suggest that the financial impact of a judgment against the
State defendants could be as high as $1 billion per year in programmatic costs
going forward, assuming the Legislature does not modify the scope of the
program.
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In The Limited Stores, Inc. and Affiliates v. Franchise Tax Board (Alameda
Superior Court No. 837723-0) plaintiff has brought a bank and corporation tax
refund action to recover $5,627,713.30, plus interest, attorney's fees and
costs. Plaintiff's primary allegation is that the Franchise Tax Board
mischaracterized the gross receipts from their sale of certain short-term
financial instruments and that this resulted in a violation of the Due Process
and Commerce Clauses of the U.S. Constitution. Other taxpayers have raised the
same issue in administrative actions. Consequently, final decision in favor of
plaintiff could result in tax reductions of $220 million for prior years, with
an additional $180 million in interest, and potential future annual revenue loss
of $50 million.
In Eisenhower Medical Center, et al. v. State Bd. of Equalization (San Francisco
Superior Court), 118 hospitals claim that certain intravenous sets and
diagnostic substances are "medicines" within the meaning of Revenue and Tax Code
Section 6369 such that they are exempt from sales and use taxes. The trial court
has ruled in favor of the State Board of Equalization. An appeal is expected.
Should the plaintiffs ultimately prevail on all issues, estimated refunds to
plaintiffs and others similarly situated hospitals would total approximately
$400 million and estimated future revenue loss would be $70 million per year.
In FORCES Action Project et al. v. State of California et al., various smokers
rights groups challenge the 1998 Master Settlement Agreement between the State
and the four major cigarette manufacturers as it pertains to California, Utah
and the City and County of San Francisco, in which the State agreed to drop its
lawsuit and not to sue in the future for monetary damages in exchange for the
payment of billions of dollars by tobacco manufacturers and restrictions in
marketing activities for tobacco products. On August 15, 2001, the 9th Circuit
Court of Appeals affirmed the district court's dismissal of plaintiffs' claims
but remanded the case to the district court to rule on whether plaintiffs should
be allowed to amend their complaint. The District Court denied plaintiffs'
motion for leave to amend. Plaintiffs have appealed. No date has been set for
oral argument.
In Grand River Enterprises Six Nations, Ltd., et al. v. Lockyer et al. (U.S.
District Court, S.D. New York), filed on July 1, 2002, six cigarette
manufacturers sued the Attorneys General of 31 states, challenging (1) the
states' escrow statutes, which require tobacco product manufacturers that did
not participate in the Master Settlement Agreement between the states and
certain other tobacco product manufacturers, to pay money into escrow accounts
and (2) several states' complementary contraband statutes, which make it illegal
for distributors to sell cigarettes made by the nonparticipating tobacco product
manufacturers which have not made their required deposits into escrow. On
September 13, 2002, defendants moved to dismiss the case for lack of personal
jurisdiction over the out-of-state Attorneys General and for failure to state a
claim on which relief can be granted. A date for hearing the motions will be set
after all the briefing has been completed.
In Capitol People First v. Department of Development Services a consortium of
law firms and public-interest groups brought suit against the Department of
Finance, California Department of Developmental Services and California
Department of Health Services. It alleges that defendants are violating the
various laws including the Americans with Disabilities Act, by needlessly
isolating thousands of people with developmental disabilities in large
facilities. It seeks sweeping reforms. The potential financial impact of a
judgment against the State Defendants could be as high as $1 billion per year in
programmatic costs going forward, assuming the Legislature does not respond by
modifying the scope of the program.
In Natural Resources Defense Council et al., v. California Department of
Transportation et al., U.S. District Court, Central District, Case No.
93-6073-ER-(JRX), filed October 7, 1993, plaintiffs sought an injunction
requiring the Department of Transportation (the "Department") to comply with
National Pollution Discharge Elimination System requirements under the federal
Clean Water Act ("Act"). The case was tried in 1994 and a permanent injunction
was issued against the Department
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requiring the development of various plans and programs. Plaintiffs' position is
that retrofitting of the Department's facilities should be required as a
stand-alone activity regardless of whether any construction is otherwise planned
in any given area. Currently, for planning purposes, the Department is including
an additional 3 percent in the cost of all construction and maintenance projects
to pay for compliance measures, which amounts to $500 million through fiscal
year 2006-07. The total annual transportation budget for the State, including
all road construction, maintenance and improvement, transportation systems and
program administration, is $9 billion. If retrofitting of existing roads and
highways is required, as plaintiffs envision, the cost would be tens of billions
of dollars.
In February 2001 the Governor, pursuant to his "commandeering" authority under
the California Emergency Services Act, issued executive orders "commandeering"
power purchase arrangements held by PG&E and SCE. The issue of whether and to
what extent compensation is a declaratory relief action filed by the State in
September 2001, People v. ACN Energy, Inc., et al., which names as defendants
those market participants which have and those which, the State believes, might
claim compensation as a result of the Governor's actions. Among the defendants
named by the State in the declaratory relief action are 31 market participants
that previously filed administrative claims in an amount in excess of $1 billion
against the State as a result of the Governor's actions.
On September 6, 2002, PG&E filed a complaint for breach of contract against the
State in Pacific Gas and Electric Company v. The State of California. PG&E's
complaint alleges that statutes enacted in 1996 as part of the restructuring of
the electric power industry in California (Statutes of 1995-1996, Chapter 854;
Assem. Bill 1890, "AB 1890") authorized PG&E to sell the output of its retained
generation facilities in interstate power markets at prices regulated by FERC
and to sell the facilities themselves, and that AB 1890 established a
"regulatory contract" between the State and PG&E. PG&E further alleges that, by
enacting statutes in 2001 (Statutes of 2001-02, First Extraordinary Session,
Chapter 2, Assem. Bill 6 X1) that amended portions of AB 1890, the State
deprived PG&E of the right to such sales and thereby breached the "regulatory
contract" that PG&E claims was established with PG&E in AB 1890. PG&E's
complaint seeks damages in an amount to be proven, but in an administrative
procedure before the California Government Claims Board that preceded this
action, in which PG&E's claims were denied, PG&E sought damages of at least $4.3
billion to compensate for the losses alleged in this action.
U.S. TERRITORIES
PUERTO RICO
Puerto Rico has a diversified economy dominated by the manufacturing and service
sectors. The North American Free Trade Agreement ("NAFTA"), which became
effective January 1, 1994, has led to loss of lower wage jobs such as textiles,
but economic growth in other areas, particularly tourism, pharmaceuticals,
construction and the high technology areas have compensated for that loss
The Commonwealth of Puerto Rico differs from the states in its relationship with
the federal government. Most federal taxes, except those such as social security
taxes that are imposed by mutual consent, are not levied in Puerto Rico. Section
936 of the Code has provided a tax credit for certain qualified U.S.
corporations electing "possessions corporation" status. However, in 1993,
Section 936 was amended to provide for two alternative limitations on the
Section 936 credit attributable to certain active business income. The first
limitation was based on the economic activity of the Section 936 possessions
corporation. The second limited the credit to a specified percentage of the
credit allowed under prior law. In 1996, Section 936 credit was repealed except
that the credit attributable to possessions source business income with respect
to certain existing credit claimants was subjected to a phase out over a ten
year period (subject to additional caps).
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CALIFORNIA AND U.S. TERRITORY INFORMATION
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Also in 1996, a new Section 30A was added to the Code. Section 30A permits a
"qualifying domestic corporation" that meets certain gross income tests to claim
a credit against the federal income tax in an amount equal to the portion of the
tax which is attributable to the taxable income from sources outside of the
United States, from the active conduct of a trade or business in Puerto Rico or
from the sale of substantially all the assets used in such a trade or business.
Section 30A will be phased out by January 1, 2006. The Governor of Puerto Rico
proposed that Congress permanently extend Section 30A until the Puerto Rican
economy achieves certain economic improvements. To date, however, no action has
been taken.
During the mid and late 1990s the Commonwealth of Puerto Rico benefited from a
robust U.S. economy, more aggressive tax collections and low oil prices. This
created an expanded employment base, job growth, reduction in unemployment,
increase in tourism spending, real GDP growth in the 3.1% to 3.5% range over the
last 5 fiscal years and significant increases in General Fund cash balances from
fiscal year end 1997 to fiscal year end 1999. These factors, combined with
minimal negative impact to date from the 1996 federal legislation phasing out
Section 936 tax benefits to Puerto Rico subsidiaries of U.S. corporations,
created a positive outlook for the credit in the late 1990s. Despite the fact
that there have been some high profile U.S. companies that have left the island
partially due to the Section 936 phase out, many corporations have elected to
convert to controlled foreign corporation ("CFC") status, which allows them to
delay federal income taxes until the income is distributed to U.S. shareholders.
In fiscal year 2000, the outlook on the credit turned negative due to the
slowdown in the U.S. economy (88% of Puerto Rico's exports go to the U.S.),
uncertainty regarding increasing oil prices, failure of the government to reign
in health care costs, expense overruns in education and a decreasing rate of
employment growth. As a result, the General Fund recorded a $268 million deficit
in fiscal year 2000 due to increased education and health care spending.
A new administration, the Popular Democratic Party that favors Puerto Rico's
commonwealth status over a potential statehood status, took office in January,
2001. It was not long before they realized the presence of continued fiscal
stress and estimated a fiscal year 2001 budget shortfall of $700 million. The
shortfall was stated to be caused by weakened revenue growth due to the slowing
pace of employment and a softening U.S. economy.
On May 30th, S&P downgraded the Commonwealth of Puerto Rico to an A- from an A
due to continued years of operating deficits and the use of borrowing to cover
the deficits. Preliminary indications are that Puerto Rico needed deficit
financing and cash transfers from other accounts to fill the budget deficit for
fiscal year 2002. For fiscal year 2003, Puerto Rico is facing a $500 million
structural imbalance. In order to fill the gap, the legislature has passed a
series of new taxes totaling $596 million.
The major key to maintaining Puerto Rico's external ratings (Baa1/A- from
Moody's and S&P, respectively) is the ability of the government to balance
fiscal year 2002 performance after lackluster fiscal year 2001 results which
necessitated deficit financing. Complicating matters is the uncertainty
surrounding the negative effects on tourism caused by September 11th terrorist
attacks and the scope and duration of the continued slowdown in the U.S.
economy.
THE U.S. VIRGIN ISLANDS
The United States Virgin Islands ("USVI") is heavily reliant on the tourism
industry, with roughly 43% of non-agricultural employment in tourist-related
trade and services. The tourism industry is economically sensitive and is
adversely affected by the recession in the United States and Europe. The attacks
of September 11, 2001 have also had an adverse affect on tourism. For 2001, air
passengers to the USVI were down 2.9% after increasing 12% in 2000. However,
supported by an increase in cruise
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CALIFORNIA AND U.S. TERRITORY INFORMATION
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passengers, total visitors increased by 4.4% in 2001. Hotel room occupancy was
56.5%, down from 58.5% in 2000. Total visitor expenditures were up 1.6%. An
important component of the USVI revenue base is the federal excise tax on rum
exports. Tax revenues rebated by the federal government to the USVI provide the
primary security of many outstanding USVI bonds. Since more than 90% of the rum
distilled in the USVI is distilled at one plant, any interruption in its
operations (as occurred after Hurricane Hugo in 1989) would adversely affect
these revenues. The last major hurricane to impact the USVI was Hurricane
Marilyn on September 15, 1995. Consequently, there can be no assurance that rum
exports to the United States and the rebate of tax revenues to the USVI will
continue at their present levels. The preferential tariff treatment the USVI rum
industry currently enjoys could be reduced under NAFTA. Increased competition
from Mexican rum producers could reduce USVI rum imported to the U.S.,
decreasing excise tax revenues generated. The USVI is periodically hit by
hurricanes. Several hurricanes have caused extensive damage, which has had a
negative impact on revenue collections. There is currently no rated, unenhanced
Virgin Islands debt outstanding (although there is unrated debt outstanding). In
addition, eventual elimination of the Section 936 tax credit for those companies
with operations in USVI may lead to slower growth in the future.
GUAM
The U.S. territory of Guam derives a substantial portion of its economic base
from Japanese tourism. With a reduced U.S. military presence on the island, Guam
has relied more heavily on tourism in past years. During 1998, the Japanese
recession combined with the impact of typhoon Paka resulted in a budget deficit
of $21 million. With hotels alone accounting for 8.5% of Guam's employment and
Japanese tourists comprising 86% of total visitor arrivals, the Japanese
recession and depreciation of the yen versus the dollar earlier this year have
had a negative impact on the island's economy in 1998. Based on these factors,
S&P downgraded Guam's rating to BBB- from BBB with a negative outlook on May 26,
1999. Although total visitors improved in 1999 and 2000, they were weakened by
economic slowdowns and the effects of the September 11th terrorist attacks in
2001. These negative trends have had an unfavorable effect on Guam's financial
position with consistent general fund deficits from 1997-1999 and a small
surplus in 2000. Fiscal year 2001 is expected to be worse than fiscal year 2000.
Financial reporting is historically late with results for the fiscal year ending
September 30, 2001 not yet available. Guam also has a high debt burden with
outstanding debt per capita of $2,800 and debt service representing 12% of
expenditures. These factors caused S&P to downgrade Guam's rating to BB (below
investment grade) from BBB- on March 25, 2002. Guam is not rated by Moody's.
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APPENDIX D
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Description of insurers
The following information relates to the Fund and supplements the information
contained under "Additional Information about Investment Policies--Insurance."
IN GENERAL
Insured obligations held by the Fund will be insured as to their scheduled
payment of principal and interest under (i) an insurance policy obtained by the
issuer or underwriter of the obligation at the time of its original issuance
("Issue Insurance"), (ii) an insurance policy obtained by the Fund or a third
party subsequent to the obligation's original issuance ("Secondary Market
Insurance") or (iii) a municipal insurance policy purchased by the Fund
("Portfolio Insurance"). The Fund anticipates that all or substantially all of
its insured obligations will be subject to Issue Insurance or Secondary Market
Insurance. Although the insurance feature reduces certain financial risks, the
premiums for Portfolio Insurance (which, if purchased by the Fund, are paid from
the Fund's assets) and the higher market price paid for obligations covered by
Issue Insurance or Secondary Market Insurance reduce the Fund's current yield.
Insurance will cover the timely payment of interest and principal on obligations
and will be obtained from insurers with a claims-paying ability rated Aaa by
Moody's or AAA by S&P or Fitch. Obligations insured by any insurer with such a
claims-paying ability rating will generally carry the same rating or credit risk
as the insurer. See Appendix A for a brief description of Moody's, Fitch's and
S&P's claims-paying ability ratings. Such insurers must guarantee the timely
payment of all principal and interest on obligations as they become due. Such
insurance may, however, provide that in the event of non-payment of interest or
principal when due with respect to an insured obligation, the insurer is not
obligated to make such payment until a specified time period has lapsed (which
may be 30 days or more after it has been notified by the Fund that such
non-payment has occurred). For these purposes, a payment of principal is due
only at final maturity of the obligation and not at the time any earlier sinking
fund payment is due. While the insurance will guarantee the timely payment of
principal and interest, it does not guarantee the market value of the
obligations or the net asset value of the Fund.
Obligations are generally eligible to be insured under Portfolio Insurance if,
at the time of purchase by the Fund, they are identified separately or by
category in qualitative guidelines furnished by the mutual fund insurer and are
in compliance with the aggregate limitations on amounts set forth in such
guidelines. Premium variations are based, in part, on the rating of the
obligations being insured at the time the Fund purchases the obligations. The
insurer may prospectively withdraw particular obligations from the
classifications of securities eligible for insurance or change the aggregate
amount limitation of each issue or category of eligible obligations. The insurer
must, however, continue to insure the full amount of the obligations previously
acquired which the insurer has indicated are eligible for insurance, so long as
they continue to be held by the Fund. The qualitative guidelines and aggregate
amount limitations established by the insurer from time to time will not
necessarily be the same as those the Fund would use to govern selection of
obligations for the Fund. Therefore, from time to time such guidelines and
limitations may affect investment decisions in the event the Fund's securities
are insured by Portfolio Insurance.
For Portfolio Insurance that terminates upon the sale of the insured security,
the insurance does not have any effect on the resale value of such security.
Therefore, the Fund will generally retain any insured obligations which are in
default or, in the judgment of the Investment Adviser, are in significant risk
of default and place a value on the insurance. This value will be equal to the
difference between the market value of the defaulted insured obligations and the
market value of similar obligations which are not in default. As a result, the
Investment Adviser may be unable to manage the
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DESCRIPTION OF INSURERS
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securities held by the Fund to the extent the Fund holds defaulted insured
obligations, which will limit its ability in certain circumstances to purchase
other obligations. While a defaulted insured obligation is held by the Fund, the
Fund will continue to pay the insurance premium thereon but will also collect
interest payments from the insurer and retain the right to collect the full
amount of principal from the insurer when the insured obligation becomes due.
The Fund expects that the market value of a defaulted insured obligation covered
by Issue Insurance or Secondary Market Insurance will generally be greater than
the market value of an otherwise comparable defaulted obligation covered by
Portfolio Insurance.
The Fund may also invest in obligations that are secured by an escrow or trust
account which contains securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, that are backed by the full faith and credit
of the United States, and sufficient in amount to ensure the payment of interest
on and principal of the secured California obligation ("collateralized
obligations"). Collateralized obligations generally are regarded as having the
credit characteristics of the underlying U.S. Government, agency or
instrumentality securities. These obligations will not be subject to Issue
Insurance, Secondary Market Insurance or Portfolio Insurance. Accordingly,
despite the existence of these credit support characteristics, these obligations
will not be considered to be insured obligations for purposes of the Fund's
policy of investing at least 80% of its net assets in insured obligations.
PRINCIPAL INSURERS
Currently, Municipal Bond Investors Assurance Corporation ("MBIA"), Financial
Guaranty Insurance Company ("FGIC"), AMBAC Indemnity Corporation ("AMBAC"), ACA,
Radian Asset Assurance ("Radian"), XL Capital Assurance ("XL Capital"), CDC IXIS
Financial Guaranty North America, Inc. ("CIFG NA"), and Financial Security
Assurance Corp., together with its affiliated insurance companies--Financial
Security Assurance International Inc. and Financial Security Assurance of
Oklahoma, Inc. (collectively, "FSA"), are considered to have a high
claims-paying ability and, therefore, are eligible insurers for the Fund's
obligations. Additional insurers may be added without further notification. The
following information concerning these eligible insurers is based upon
information provided by such insurers or information filed with certain state
insurance regulators. Neither the Fund has independently verified such
information and make no representations as to the accuracy and adequacy of such
information or as to the absence of material adverse changes subsequent to the
date thereof.
MBIA is a monoline financial guaranty insurance company created from an
unincorporated association (the Municipal Bond Insurance Association), through
which its members wrote municipal bond insurance on a several and joint-basis
through 1986. On January 5, 1990, MBIA acquired all of the outstanding stock of
Bond Investors Group, Inc., the parent of Bond Investors Guaranty Insurance
Company ("BIG"), which has subsequently changed its name to MBIA Insurance Corp.
of Illinois. Through a reinsurance agreement, BIG ceded all of its net insured
risks, as well as its related unearned premium and contingency reserves, to
MBIA. MBIA issues municipal bond insurance policies guarantying the timely
payment of principal and interest on new municipal bond issues and leasing
obligations of municipal entities, secondary market insurance of such
instruments and insurance on such instruments held in unit investment trusts and
mutual funds. As of December 31, 2001, MBIA had total assets of approximately
$16.12 billion and qualified statutory capital of approximately $4.8 billion.
MBIA has a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's.
Financial Guaranty Insurance Corporation, a wholly owned subsidiary of FGIC
Corporation, which is a wholly owned subsidiary of General Electric Capital
Corporation, is an insurer of municipal securities, including new issues,
securities held in unit investment trusts and mutual funds, and those traded on
secondary markets. The investors in FGIC Corporation are not obligated to pay
the debts of or claims against FGIC. As of December 31, 2000, FGIC had total
assets of approximately
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DESCRIPTION OF INSURERS
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$2.75 billion and qualified statutory capital of approximately $1.99 billion.
FGIC has a claims-paying ability rating of "AAA" by S&P and Fitch, and "Aaa" by
Moody's.
AMBAC, a wholly owned subsidiary of AMBAC Inc., is a monoline insurance company
whose policies guaranty the payment of principal and interest on municipal
obligations issues. As of December 31, 2001, AMBAC had assets of approximately
$12.26 billion and qualified statutory capital of approximately $3.26 billion.
AMBAC has a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's.
ACA is a Maryland domiciled financial insurance company. ACA is the primary
subsidiary of American Access Capital Holding Inc. ACA carries a single A
rating. Total claims paying resources were $383 million in 2001, with total
statutory capital of $120.8 million. Soft capital totaled $135 million, though a
loss coverage agreement with ACE American Insurance Co., (rated A). ACA insures
primarily in the municipal and CDO market and acts as the manager/originator of
CDO issues.
Radian is a wholly owned subsidiary of Radian Group Inc. Radian is rated AA by
S&P and Fitch and provides financial guaranty insurance and reinsurance for debt
and asset backed securities. Radian was formerly known as Asset Guarantee
Company and was purchased by Radian Group for $518 million in February 2001. As
of December 31, 2001, Radian had assets of $381 million and statutory capital of
$169.8 million.
XL Capital is a new AAA rated financial guarantor and a wholly owned subsidiary
of property casualty insurer XL Capital Ltd. XL Capital began transactions in
January of 2001 and is rated AAA/Aaa by Moody's and S&P respectively. It is
currently capitalized with $100 million and cedes 90% of its exposure to XL
Financial Assurance a Bermuda based subsidiary of XL Capital Ltd. XL Financial
Assurance has $274 million in hard capital and $100 million in stop loss
protection. Beyond this XL Financial Assurance further guarantees 100% of XL
Capital exposure with $2.7 billion in shareholders equity. XL Capital has $88
million in assets and through its parent and subsidiary agreements XL Capital
has $1 billion in qualified statutory capital.
CIFG NA is a new financial Guarantor rated AAA from Fitch, Moody's and S&P. CIFG
NA is a subsidiary of CDC IXIS Financial Guaranty ("CIFG"), which is a
subsidiary of CIFG Holding, which is in turn owned by parent company CDC IXIS.
CDC IXIS is a French domiciled corporation with a broad spectrum of insurance
related businesses. CIFG recently entered the bond insurance business with two
companies, CIFG Europe and CIFG NA. CIFG is capitalized with $280 million in
cash, with CIFG NA holding $100 million in cash. CDC IXIS backs the two entities
with $220 million in the form of a subordinated loan agreement. Over 75% of CIFG
NA's business will be passed on through a reinsurance policy to CIFG. Combining
all capital, CIFG NA will have claims paying resources of $500 million.
FSA purchased Capital Guaranty Insurance Company including its book of business
and reserves effective December 20, 1995. FSA is a monoline insurer whose
policies guaranty the timely payment of principal and interest on new issue and
secondary market issue municipal securities transactions, among other financial
obligations. As of December 31, 2001, FSA had total assets of approximately $4.3
billion and qualified statutory capital of approximately $1.52 billion. FSA has
a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's. On March
14, 2000, Dexia, Europe's largest municipal lender with assets in excess of $230
billion announced that it had signed a definitive agreement providing for the
acquisition of FSA Holdings, holding company for FSA, Inc. Dexia acquired the
company in the second quarter of 2000, for $2.6 billion in cash, or $76 per
share.
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APPENDIX E
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Eaton Vance Insured California Municipal Bond Fund II
AMENDMENT NO. 2 TO BY-LAWS--
STATEMENT CREATING ONE SERIES OF AUCTION PREFERRED SHARES
WHEREAS, Section 5.1 of Article VI of the Agreement and Declaration of Trust
dated October 3, 2002 of Eaton Vance Insured California Municipal Bond Fund II
(the "Declaration of Trust"), a copy of which is on file in the office of the
Secretary of the Commonwealth of The Commonwealth of Massachusetts, provides
that the Trustees may, without shareholder approval, authorize one or more
classes of shares (which classes may be divided into two or more series), shares
of each such class or series having such preferences, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption, as the Trustees may determine and as shall be set
forth in the By-laws; and
WHEREAS, pursuant to authority expressly vested in the Trustees of the Trust by
Section 5.1 of Article VI of the Declaration of Trust, the Trustees have
authorized, in addition to that Trust's common shares, a class of 1,350
preferred shares which are now to be issued as one series of 1,350 shares of its
authorized preferred shares, $0.01 par value, liquidation preference $25,000 per
share plus accumulated but unpaid dividends thereon, if any (whether or not
earned or declared), plus the premium, if any, resulting from the designation of
a Premium Call Period, designated respectively Series A Auction Preferred
Shares.
NOW, THEREFORE, the By-laws of Eaton Vance Insured California Municipal Bond
Fund II are hereby amended as follows:
1. ARTICLES VII through XIII shall be redesignated as ARTICLES VIII through
XIV and all affected cross references therein hereby are amended
accordingly.
2. A new ARTICLE VII shall be added as follows:
ARTICLE VII
STATEMENT CREATING ONE SERIES OF AUCTION PREFERRED SHARES DESIGNATION
Auction Preferred Shares, Series A: 1,350 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series A." Each share of Auction Preferred Shares, Series A (sometimes referred
to herein as "Series A APS") may be issued on a date to be determined by the
Board of Trustees of the Trust or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Trustees of the
Trust or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series A
APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series A APS shall be identical. The Series A APS is sometimes
collectively referred to herein as the "APS."
1. DEFINITIONS. (a) Unless the context or use indicates another or different
meaning or intent, in these Amended By-Laws the following terms have the
following meanings, whether used in the singular or plural:
"7-Day Dividend Period" means a Dividend Period consisting of 7 days.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
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"1940 Act APS Asset Coverage" means asset coverage, as defined in section 18(h)
of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Trust which are shares of beneficial interest, including all
outstanding shares of APS and Other APS (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of beneficial interest of a closed-end
investment company as a condition of paying dividends on its Common Shares).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain the
1940 Act APS Asset Coverage (as required by paragraph 6 of these Amended
By-Laws) as of the last Business Day of each month, means the last Business Day
of the following month.
" 'AA' Composite Commercial Paper Rate," on any date of determination, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or the equivalent of such
rating by another nationally recognized rating agency, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York for the Business Day immediately preceding such date, or (ii) in the event
that the Federal Reserve Bank of New York does not make available such a rate,
then the arithmetic average of the Interest Equivalent of the rate on commercial
paper placed on behalf of such issuers, as quoted on a discount basis or
otherwise by UBS Warburg LLC or its successors that are Commercial Paper
Dealers, to the Auction Agent for the close of business on the Business Day
immediately preceding such date. If one of the Commercial Paper Dealers does not
quote a rate required to determine the "AA" Composite Commercial Paper Rate, the
"AA" Composite Commercial Paper Rate will be determined on the basis of the
quotation or quotations furnished by any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Trust to provide such rate
or rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period days shall be (i) 7 or more but fewer than 49 days, such rate
shall be the Interest Equivalent of the 30-day rate on such commercial paper;
(ii) 49 or more but fewer than 70 days, such rate shall be the Interest
Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more days
but fewer than 85 days, such rate shall be the arithmetic average of the
Interest Equivalent on the 60-day and 90-day rates on such commercial paper;
(iv) 85 or more days but fewer than 99 days, such rate shall be the Interest
Equivalent of the 90-day rate on such commercial paper; (v) 99 or more days but
fewer than 120 days, such rate shall be the arithmetic average of the Interest
Equivalent of the 90-day and 120-day rates on such commercial paper; (vi) 120 or
more days but fewer than 141 days, such rate shall be the Interest Equivalent of
the 120-day rate on such commercial paper; (vii) 141 or more days but fewer than
162 days, such rate shall be the arithmetic average of the Interest Equivalent
of the 120-day and 180-day rates on such commercial paper; and (viii) 162 or
more days but fewer than 183 days, such rate shall be the Interest Equivalent of
the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of these
Amended By-Laws.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of these
Amended By-Laws.
"Adviser" means the Trust's investment adviser, which initially shall be Eaton
Vance Management.
"Affiliate" means any Person, other than UBS Warburg LLC or its successors,
known to the Auction Agent to be controlled by, in control of, or under common
control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of APS or a Potential
Beneficial Owner.
"Amended By-Laws" means the By-Laws of the Trust, as amended by this Statement
creating the APS and as may otherwise be amended from time-to-time.
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"Anticipation Notes" shall mean the following Municipal Obligations: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii) of
these Amended By-Laws.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on the APS or Other APS, as the case may be, for any Dividend Period.
"APS" means, as the case may be, the Auction Preferred Shares.
"APS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of shares of APS
and Other APS Outstanding on such Valuation Date multiplied by the sum of (a)
$25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
APS and Other APS Outstanding, in each case, to (but not including) the end of
the current Dividend Period for each series of APS that follows such Valuation
Date in the event the then current Dividend Period will end within 37 calendar
days of such Valuation Date or through the 37th day after such Valuation Date in
the event the then current Dividend Period for each series of APS will not end
within 37 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 37 calendar days of such Valuation Date,
the aggregate amount of cash dividends that would accumulate at the Maximum
Applicable Rate applicable to a Dividend Period of 28 or fewer days on any
shares of APS and Other APS Outstanding from the end of such Dividend Period
through the 37th day after such Valuation Date, multiplied by the larger of the
S&P Volatility Factor, determined from time to time by S&P (except that if such
Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate); (D) the amount of anticipated expenses of the Trust for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Portfolio Insurance policy); (E) the amount of the Trust's Maximum
Potential Additional Dividend Liability as of such Valuation Date; (F) the
amount of any indebtedness or obligations of the Trust senior in right of
payments to the APS; (G) any current liabilities as of such Valuation Date to
the extent not reflected in any of (i)(A) through (i)(E) (including, without
limitation, and immediately upon determination, any amounts due and payable by
the Trust pursuant to repurchase agreements and any amounts payable for
Municipal Obligations purchased as of such Valuation Date); and (H) any premium
currently attributable to Portfolio Insurance less (ii) either (A) the
Discounted Value of any of the Trust's assets, or (B) the face value of any of
the Trust's assets if such assets mature prior to or on the date of redemption
of APS or payment of a liability and are either securities issued or guaranteed
by the United States Government or Deposit Securities, in both cases irrevocably
deposited by the Trust for the payment of the amount needed to redeem shares of
APS subject to redemption or to satisfy any of (i)(B) through (i)(F).
"APS Basic Maintenance Cure Date," with respect to the failure by the Trust to
satisfy the APS Basic Maintenance Amount (as required by paragraph 7(a) of these
Amended By-Laws) as of a given Valuation Date, means the second Business Day
following such Valuation Date.
"APS Basic Maintenance Report" means a report signed by any of the President,
Treasurer, any Senior Vice President or any Vice President of the Trust which
sets forth, as of the related Valuation Date, the assets of the Trust, the
Market Value and the Discounted Value thereof (seriatim and in aggregate), and
the APS Basic Maintenance Amount.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees
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of the Trust or a duly authorized committee thereof enters into an agreement
with the Trust to follow the Auction Procedures for the purpose of determining
the Applicable Rate and to act as transfer agent, registrar, dividend disbursing
agent and redemption agent for the APS and Other APS.
"Auction Procedures" means the procedures for conducting Auctions set forth in
paragraph 10 of this Article VII, of these Amended By-Laws.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of APS or a Broker-Dealer that holds APS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in paragraph 10 of this
Article VII, of these Amended By-Laws, that has been selected by the Trust and
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of this Article VII, of these Amended
By-Laws.
"Business Day" means a day on which the New York Stock Exchange, Inc. is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means UBS Warburg LLC and such other commercial paper
dealer or dealers as the Trust may from time to time appoint, or, in lieu of any
thereof, their respective affiliates or successors.
"Common Shares" means the shares of beneficial interest designated as common
shares, par value $0.01 per share, of the Trust.
"Date of Original Issue" means, with respect to any share of APS or Other APS,
the date on which the Trust originally issues such share.
"Declaration of Trust" means the Agreement and Declaration of Trust, as amended
and supplemented (including these Amended By-Laws), of the Trust.
"Deposit Securities" means cash and Municipal Obligations rated at least A
(having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.
"Discounted Value" as of any Valuation Date, means with respect to an S&P
Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor.
"Dividend Payment Date," with respect to APS, has the meaning set forth in
paragraph 2(b)(i) of these Amended By-Laws and, with respect to Other APS, has
the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend Period
and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Trust that is listed as the holder of record of shares of APS
in the Share Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of this Article
VII, of these Amended By-Laws.
"Holder" means a Person identified as a holder of record of shares of APS in the
Share Register.
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"Independent Accountant" means a nationally recognized accountant, or firm of
accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Trust or their designee with respect
to each series of APS or Other APS, as the case may be.
"Initial Dividend Period" has the meaning set forth in paragraph 2(c)(i) of this
Article VII, of these Amended By-Laws and, with respect to Other APS, has the
equivalent meaning.
"Initial Dividend Rate" means the rate per annum established by the Board of
Trustees or their designee, applicable to the Initial Dividend Period for such
series of APS and, with respect to Other APS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Interest Rate Swaps" means 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.
"Interest Rate Locks" means a forward contract under which the Trust locks in an
interest rate at a future settlement date. If the interest rate on the
settlement date exceeds the lock rate, the buyer pays the seller the difference
between the two rates. If the lock rate exceeds the interest rate on the
settlement date, the seller pays the buyer the difference between the two rates.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more Municipal Obligations that qualify as S&P Eligible
Assets, the interest rates on which are adjusted at short term intervals on a
basis that is inverse to the simultaneous readjustment of the interest rates on
corresponding floating rate trust certificates or other instruments issued by
the same issuer, provided that the ratio of the aggregate dollar amount of
floating rate instruments in inverse floating rate instruments issued by the
same issuer does not exceed one to one at their time of original issuance unless
the floating instruments have only one reset remaining until maturity.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of APS plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market
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conditions. The Pricing Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. In the event the Pricing Service
is unable to value a security, the security shall be valued at the lower of two
dealer bids obtained by the Trust from dealers who are members of the National
Association of Securities Dealers, Inc. and who make a market in the security,
at least one of which shall be in writing. Futures contracts and options are
valued at closing prices for such instruments established by the exchange or
board of trade on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Trustees.
"Maximum Applicable Rate," with respect to APS, has the meaning set forth in
paragraph 10(a)(vii) of this Article VII, of these Amended By-Laws and, with
respect to Other APS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional Dividends that would be due if the
Trust were to make Retroactive Taxable Allocations, with respect to any fiscal
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation, and its
successors.
"Municipal Index" has the meaning set forth in paragraph 8(a) of this Article
VII, of these Amended By-Laws.
"Municipal Obligations" means "municipal obligations" as defined in the Trust's
Registration Statement on Form N-2 (File No. 333-101741) relating to the APS on
file with the Securities and Exchange Commission, as such Registration Statement
may be amended from time to time, as well as short-term municipal obligations.
"Non-Call Period" has the meaning set forth under the definition of "Specific
Redemption Provisions".
"Non-Payment Period" means any period commencing on and including the day on
which the Trust shall fail to (i) declare, prior to the close of business on the
second Business Day preceding any Dividend Payment Date, for payment on or (to
the extent permitted by paragraph 2(c)(i) of this Article VII, of these Amended
By-Laws) within three Business Days after such Dividend Payment Date to the
Holders as of 12:00 noon, New York City time, on the Business Day preceding such
Dividend Payment Date, the full amount of any dividend on shares of APS payable
on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares
payable (if declared) on such Dividend Payment Date or (B) on any redemption
date for any shares of APS called for redemption, the Mandatory Redemption Price
per share of such APS or, in the case of an optional redemption, the Optional
Redemption Price per share, and ending on and including the Business Day on
which, by 12:00 noon, New York City time, all unpaid cash dividends and unpaid
redemption prices shall have been so deposited or shall have otherwise been made
available to Holders in same-day funds; provided that, a Non-Payment Period
shall not end unless the Trust shall have given at least five days' but no more
than 30 days' written notice of such deposit or availability to the Auction
Agent, all Existing Holders (at their addresses appearing in the Share Books)
and the Securities Depository. Notwithstanding the foregoing, the failure by the
Trust to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above
within three Business Days after any Dividend Payment Date or redemption date,
as the case may be, in each case to the extent contemplated by paragraph 2(c)(i)
of these Amended By-Laws, shall not constitute a "Non-Payment Period."
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"Non-Payment Period Rate" means, initially, 200% of the applicable Reference
Rate (or 275% of such rate if the Trust has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
pursuant to paragraph 2(f) hereof that net capital gains or other taxable income
will be included in such dividend on shares of APS), provided that the Board of
Trustees of the Trust shall have the authority to adjust, modify, alter or
change from time to time the initial Non-Payment Period Rate if the Board of
Trustees of the Trust determines and S&P (and any Substitute Rating Agency in
lieu of S&P in the event such party shall not rate the APS) advise the Trust in
writing that such adjustment, modification, alteration or change will not
adversely affect its then current ratings on the APS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph 2(b)(i) of
Article VII, of these Amended By-Laws.
"Notice of Redemption" means any notice with respect to the redemption of shares
of APS pursuant to paragraph 4 of Article VII, of these Amended By-Laws.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
Article VII, of these Amended By-Laws.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of Article VII, of these Amended By-Laws.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Original Issue Insurance" means insurance purchased with respect to a
particular issue of Municipal Obligations at the time of initial issuance. Under
this insurance, the insurer unconditionally guarantees the holder of the
Municipal Obligation timely payment of principal and interest, generally with
certain exceptions for default and acceleration events.
"Other APS" means the auction rate Preferred Shares of the Trust, other than the
APS.
"Outstanding" means, as of any date (i) with respect to APS, shares of APS
therefor issued by the Trust except, without duplication, (A) any shares of APS
theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to paragraph 4(c) and (B) any shares of APS as to which the
Trust or any Affiliate thereof shall be a Beneficial Owner, provided that shares
of APS held by an Affiliate shall be deemed outstanding for purposes of
calculating the APS Basic Maintenance Amount and (ii) with respect to shares of
other Preferred Shares, has the equivalent meaning.
"Parity Shares" means the APS and each other outstanding series of Preferred
Shares the holders of which, together with the holders of the APS, shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Permanent Insurance" means an option generally pursuant to a Portfolio
Insurance policy to purchase an irrevocable commitment by the insurer to insure
a Municipal Obligation sold by the Trust. Such options generally only are
exercised to increase the value of a Municipal Obligation on sale if it is
determined that the increased value will exceed the additional Permanent
Insurance premium.
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"Person" means and includes an individual, a partnership, a Trust, a trust, an
unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.
"Portfolio Insurance" means an insurance policy guaranteeing the payment of
principal and interest on specified eligible Municipal Obligations purchased by
and presently held by the Trust. Portfolio Insurance generally provides the same
type of coverage as Original Issue Insurance or Secondary Market Insurance.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of APS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of APS.
"Potential Holder" means any Broker-Dealer or any such other Person as may be
permitted by the Trust, including any Existing Holder, who may be interested in
acquiring shares of APS (or, in the case of an Existing Holder, additional
shares of APS).
"Preferred Shares" means the preferred shares of beneficial interest, par value
$0.01 per share, of the Trust, and includes APS and Other APS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means Standard & Poor's/J.J. Kenny or any pricing service
designated by the Board of Trustees of the Trust provided the Trust obtains
written assurance from S&P that such designation will not impair the rating then
assigned by S&P to the APS.
"Quarterly Valuation Date" means the last Business Day of the last month of each
fiscal quarter of the Trust in each fiscal year of the Trust, commencing from
the Date of Original Issue.
"Receivables for Municipal Obligations Sold" has the meaning set forth under the
definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of Article VII, of these Amended By-Laws.
"Response" has the meaning set forth in paragraph 2(c)(iii) of Article VII, of
these Amended By-Laws.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph 2(e) of
Article VII, of these Amended By-Laws.
"Right" has the meaning set forth in paragraph 2(e) of Article VII, of these
Amended By-Laws and, with respect to Other APS, has the equivalent meaning.
"S&P" means Standard & Poor's Corporation, a New York Corporation, and its
successors.
"S&P Discount Factor" means, for purposes of determining the Discounted Value of
any Municipal Obligation which constitutes an S&P Eligible Asset, the percentage
determined by reference to (a)(i) the rating by S&P on such Municipal Obligation
or (ii) in the event the Municipal Obligation is
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covered by a Secondary Market Issuance policy, the S&P insurance claims-paying
ability rating of the issuer of the policy or (iii) in the event the Municipal
Obligation is covered by a Portfolio Insurance policy which provides the Trust
with the option to obtain Permanent Insurance with respect to such Municipal
Obligation, at the Trust's option, the S&P rating on such Municipal Obligation
or the S&P insurance claims paying ability of the insurer of the Portfolio
Insurance policy and (b) the rating on such asset and the shortest exposure
period set forth opposite such rating that is the same length as or is longer
than the S&P Exposure Period, in accordance with the table set forth below:
S&P RATING CATEGORY
BB AND AAA
S&P EXPOSURE PERIOD AAA AA A BBB BELOW* ZEROS**
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45 Business Days................................ 200% 205% 220% 260% 230% 498%
25 Business Days................................ 180% 185% 200% 240% 230% 399%
10 Business Days................................ 165% 170% 185% 225% 230% 293%
7 Business Days................................. 160% 165% 180% 220% 230% 263%
3 Business Days................................. 140% 145% 160% 200% 230% 210%
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* Also includes non-rated Municipal Obligations.
** AAA Rated 30-Year General Obligation Zero Coupon Municipal Obligations.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 120% so long as such Municipal Obligations are rated A-1 or
SP-1 by S&P and mature or have a demand feature in 30 days or less, or 125% if
such Municipal Obligations are not rated by S&P but are rated A-1+ or SP-1+ by
another nationally recognized statistical rating organization; provided,
however, that any such non-S&P rated short-term Municipal Obligations having a
demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such non-S&P short-term Municipal Obligations may comprise no more
than 50% of short-term Municipal Obligations that qualify as S&P Eligible
Assets, provided, however, that Municipal Obligations not rated by S&P but rated
equivalent to BBB or lower by another nationally recognized statistical rating
organization, rated BB or lower by S&P or non-rated (such Municipal Obligations
are hereinafter referred to as "High Yield Securities") may comprise no more
than 20% of the short-term Municipal Obligations that qualify as S&P Eligible
Assets; (ii) the S&P Discount Factor for Receivables for Municipal Obligations
Sold that are due in more than five (5) Business Days from such Valuations Date
will be the S&P Discount Factor applicable to the Municipal Obligations sold;
(iii) no S&P Discount Factor will be applied to cash, money market funds with
effective next day maturities rated AAA by S&P or to Receivables for Municipal
Obligations sold is such receivables are due within five (5) Business Days of
Valuation Date; and (iv) except as set forth in clause (i) above, in the case of
any Municipal Obligation that is not rated by S&P but qualifies as an S&P
Eligible Asset pursuant to clause (iii) of that definition, such Municipal
Obligation will be deemed to have an S&P rating one full rating category lower
than the S&P rating category that is the equivalent of the rating category in
which such Municipal Obligation is placed by a nationally recognized statistical
rating organization. "Receivables for Municipal Obligations Sold," for purposes
of calculating S&P Eligible Assets as of any Valuation Date, means the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date. The Trust may adopt S&P Discount Factors for Municipal
Obligations other than Municipal Obligations provided that S&P advises the Trust
in writing that such action will not adversely affect its current rating on the
APS. For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not
rated by S&P, equivalent to A-1+ or SP-1+ by another nationally recognized
statistical rating organization, on a
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case-by-case basis, which do not mature or have a demand feature at par
exercisable in 30 days and that do not have a long-term rating, shall be
considered to be short-term Municipal Obligations.
"S&P Eligible Asset" means cash, short-term money market instruments,
Receivables for Municipal Obligations Sold or a Municipal Obligation that (i)
except for AAA rated 30-year general obligation zero coupon bonds, is interest
bearing and pays interest at least semi-annually; (ii) is issued by any of the
50 states, the territories and their subdivisions, counties, cities, towns,
villages, and school districts, agencies, such as authorities and special
districts created by the states, and certain federally sponsored agencies such
as local housing authorities (payments made on these bonds are exempt from
regular federal income taxes and are generally exempt from state and local taxes
in the state of issuance), (iii) is payable with respect to principal and
interest in United States Dollars; (iv) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, is rated at least A
by Moody's (provided that such Moody's-rated Municipal Obligations will be
included in S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 50% of the aggregate Market Value of the
S&P Eligible Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated Municipal Obligation,
such Municipal Obligation will be deemed to have an S&P rating which is one full
rating category lower than its Moody's rating); (v) is not subject to a covered
call or covered put option written by the Trust; (vi) is not part of a private
placement of Municipal Obligations, except for such Municipal Obligations
distributed in a transaction under Rule 144A under the Securities Act of 1933
that also possesses the characteristics of a public issue transaction such as a)
the offering is underwritten, b) the terms are non-negotiable by investors, c)
public bond market settlement conventions are employed and d) investors receive
mandatory registration rights; and (vii) except for Inverse Floaters, is part of
an issue of Municipal Obligations with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million (but in
no event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding.
Notwithstanding the foregoing:
(1) Municipal Obligations of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 10% of the aggregate Market
Value of the S&P Eligible Assets, provided that 2% is added to the applicable
S&P Discount Factor for every 1% by which the Market Value of such Municipal
Obligations exceeds 5% of the aggregate Market Value of the S&P Eligible Assets;
and
(2) Municipal Obligations issued by issuers in any one state or territory will
be considered S&P Eligible Assets only to the extent the (fair market value) of
such Municipal Obligations does not exceed 20% of the aggregate (fair market
value) of S&P Eligible Assets. (provided, however, that
(a) the fair market value of the Municipal Obligations of each (1) electric,
gas and combination issues (if the combination issue include an electric issued)
(2) water and sewer utilities and combination issues (if the combination issue
does not include an electric issue) and (3) irrigation, resource recovery, solid
waste, and other utilities (provided the security is rated by S&P) comprise no
more than 20% of the Trust's S&P Eligible Assets; and
(b) the fair market value of the Municipal Obligations of (1) streets and
highways, toll roads, bridges and tunnels, airports and multi purpose port
authorities (multiple revenue streams generated by toll roads, air ports, real
estate, bridges) issues and (2) mass transit, parking, seaports and other
transportation issues comprise no more than 40% of the Trust's S&P Eligible
Assets; provided that the fair market value of Municipal Obligations in subgroup
(1) comprises no more than 20% of the Trust's S&P Eligible Assets.
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General Obligation Bonds of the State of California may comprise up to 50% of
the Trust's S&P Eligible Assets. "General Obligation Bonds" include bonds of
issuers that are directly or indirectly guaranteed by the applicable state and
utility issuers where the utility issuer is directly or indirectly supported by
the applicable state.
Escrow bonds (defeased bonds) may comprise 100% of the Trust's S&P Eligible
Assets. Bonds that are legally defeased and secured by direct U.S. government
obligations are not required to meet any minimum issuance size requirement.
Bonds that are economically defeased or secured by other U.S. agency paper must
meet the minimum issuance size requirement for the Trust described above. Bonds
initially rated or rerated as an escrow bond by another Rating Agency are
limited to 50% of the Trust's S&P Eligible Assets; and carry one full rating
lower than the equivalent S&P rating for purposes of determining the applicable
discount factors. Bonds economically defeased and either initially rated or
rerated by S&P or another Rating Agency are assigned that same level as its debt
issuer, and will remain in its original industry category.
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the APS Basic Maintenance Cure Date, that
the Trust has under these Amended By-Laws to cure any failure to maintain, as of
such Valuation Date, the Discounted Value for its portfolio at least equal to
the APS Basic Maintenance Amount (as described in paragraph 7(a) of Article VII,
of these Amended By-Laws).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
Article VII, of these Amended By-Laws.
"S&P Volatility Factor" means, as of any Valuation Date, a multiplicative factor
equal to (i) 305% in the case of a 7-Day Dividend Period or any Special Dividend
Period of 28 days or fewer, (ii) 268% in the case of any Special Dividend Period
of more than 28 days but fewer than 182 days; and (iii) 204% in the case of any
Special Dividend Period of more than 182 days.
"Secondary Market Insurance" means insurance with respect to a Municipal
Obligation purchase after the time or original issue. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Trust as securities depository for the
shares of APS that agrees to follow the procedures required to be followed by
such securities depository in connection with the shares of APS.
"Series A APS" means the Auction Preferred Shares, Series A.
"Service" means the United States Internal Revenue Service.
"Share Books" means the books maintained by the Auction Agent setting forth at
all times a current list, as determined by the Auction Agent, of Existing
Holders of the APS.
"Share Register" means the register of Holders maintained on behalf of the Trust
by the Auction Agent in its capacity as transfer agent and registrar for the
APS.
"Short Term Dividend Period" means a Special Dividend Period consisting of a
specified number of days (other than seven), evenly divisible by seven and not
fewer than 7 nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a specified
number of days (other than seven), evenly divisible by seven and not fewer than
7 nor more than 364 or (ii) a specified period of 1 whole year or more but not
greater than 5 years (in each case subject to adjustment as provided in
paragraph 2(b)(i)).
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"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of APS subject to
such Dividend Period shall not be subject to redemption at the option of the
Trust and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Trustees of the Trust, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of APS subject to such Dividend Period shall be redeemable at
the Trust's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Trustees of the Trust after consultation with the
Auction Agent and the Broker-Dealers.
"Subsequent Dividend Period," with respect to APS, has the meaning set forth in
paragraph 2(c)(i) of Article VII, of these Amended By-Laws and, with respect to
Other APS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial Paper
Dealer or Dealers as the Trust may from time to time appoint or, in lieu of any
thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a nationally
recognized statistical rating organization or two nationally recognized
statistical rating organizations, respectively, selected by PaineWebber
Incorporated or its affiliates and successors, after consultation with the
Trust, to act as the substitute rating agency or substitute rating agencies, as
the case may be, to determine the credit ratings of the shares of APS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means 90%
of the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny Index") or any
successor index, made available for the Business Day immediately preceding such
date but in any event not later than 8:30 a.m., New York City time, on such date
by Kenny Information Systems Inc. or any successor thereto, based upon 30-day
yield evaluations at par of bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny Information Systems Inc. or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
a.m., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Trust may not utilize a successor index to the Kenny Index unless
S&P provides the Trust with written confirmation that the use of such successor
index will not adversely affect the then-current S&P rating of the APS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of Article VII, of
these Amended By-Laws.
"Trust" means Eaton Vance Insured California Municipal Bond Fund II, a
Massachusetts business trust.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the
rate on the actively traded Treasury Bill with a maturity most nearly comparable
to the length of the related Dividend Period, as such rate is made available on
a discount basis or otherwise by the Federal Reserve Bank of
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New York in its Composite 3:30 p.m. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury
Bill Rate" on any date means the Interest Equivalent of the yield as calculated
by reference to the arithmetic average of the bid price quotations of the
actively traded Treasury Bill with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by bid price quotations as
of any time on the Business Day immediately preceding such date, obtained from
at least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the APS Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures contract
owned or sold by the Trust, the amount of cash or securities paid to or received
from a broker (subsequent to the Initial Margin payment) from time to time as
the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, APS Basic
Maintenance Amount, APS Basic Maintenance Cure Date, APS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, S&P
Discount Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging
Transactions, S&P Volatility Factor, Valuation Date and Variation Margin have
been determined by the Board of Trustees of the Trust in order to obtain a AAA
rating from S&P on the APS on their Date of Original Issue; and the Board of
Trustees of the Trust shall have the authority, without shareholder approval, to
amend, alter or repeal from time to time the foregoing definitions and the
restrictions and guidelines set forth thereunder if S&P or any Substitute Rating
Agency advises the Trust in writing that such amendment, alteration or repeal
will not adversely affect its then current rating on the APS.
2. DIVIDENDS. (a) The Holders of a particular series of APS shall be entitled
to receive, when, as and if declared by the Board of Trustees of the Trust, out
of funds legally available therefor, cumulative dividends each consisting of (i)
cash at the Applicable Rate, (ii) a Right to receive cash as set forth in
paragraph 2(e) below, and (iii) any additional amounts as set forth in paragraph
2(f) below, and no more, payable on the respective dates set forth below.
Dividends on the shares of each series of APS so declared and payable shall be
paid (i) in preference to and in priority over any dividends declared and
payable on the Common Shares, and (ii) to the extent permitted under the Code
and to the extent available, out of net tax-exempt income earned on the Trust's
investments. To the extent permitted under the Code, dividends on shares of APS
will be designated as exempt-interest dividends. For the purposes of this
section, the term "net tax-exempt income" shall exclude capital gains of the
Trust.
(b)(i) Cash dividends on shares of each series of APS shall accumulate from the
Date of Original Issue and shall be payable, when, as and if declared by the
Board of Trustees, out of funds legally
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available therefor, commencing on the Initial Dividend Payment Date. Following
the Initial Dividend Payment Date for a series of APS, dividends on that series
of APS will be payable, at the option of the Trust, either (i) with respect to
any 7-Day Dividend Period and any Short Term Dividend Period of 28 or fewer
days, on the day next succeeding the last day thereof, or (ii) with respect to
any Short Term Dividend Period of more than 28 days and with respect to any Long
Term Dividend Period, monthly on the first Business Day of each calendar month
during such Short Term Dividend Period or Long Term Dividend Period and on the
day next succeeding the last day thereof (each such date referred to in clause
(i) or (ii) being herein referred to as a "Normal Dividend Payment Date"),
except that if such Normal Dividend Payment Date is not a Business Day, then the
Dividend Payment Date shall be the first Business Day next succeeding such
Normal Dividend Payment Date. Although any particular Dividend Payment Date may
not occur on the originally scheduled date because of the exception discussed
above, the next succeeding Dividend Payment Date, subject to such exception,
will occur on the next following originally scheduled date. If for any reason a
Dividend Payment Date cannot be fixed as described above, then the Board of
Trustees shall fix the Dividend Payment Date. The Board of Trustees by
resolution prior to authorization of a dividend by the Board of Trustees may
change a Dividend Payment Date if such change does not adversely affect the
contract rights of the Holders of shares of APS set forth in the Declaration of
Trust or the Amended By-Laws. The Initial Dividend Period, 7-Day Dividend
Periods and Special Dividend Periods with respect to a series of APS are
hereinafter sometimes referred to as Dividend Periods. Each dividend payment
date determined as provided above is hereinafter referred to as a "Dividend
Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the Stock
Register as of 12:00 noon, New York City time, on the Business Day preceding the
Dividend Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as they appear on the Stock Register on a date, not
exceeding 15 days prior to the payment date therefor, as may be fixed by the
Board of Trustees of the Trust.
(c)(i) During the period from and including the Date of Original Issue to but
excluding the Initial Dividend Payment Date for each series of APS (the "Initial
Dividend Period"), the Applicable Rate shall be the Initial Dividend Rate.
Commencing on the Initial Dividend Payment Date for each series of APS, the
Applicable Rate for each subsequent dividend period (hereinafter referred to as
a "Subsequent Dividend Period"), which Subsequent Dividend Period shall commence
on and include a Dividend Payment Date and shall end on and include the calendar
day prior to the next Dividend Payment Date (or last Dividend Payment Date in a
Dividend Period if there is more than one Dividend Payment Date), shall be equal
to the rate per annum that results from implementation of the Auction
Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-Payment
Period shall be equal to the Non-Payment Period Rate; and each Dividend Period,
commencing after the first day of, and during, a Non-Payment Period shall be a
7-Day Dividend Period in the case of each series of APS. Except in the case of
the willful failure of the Trust to pay a dividend on a Dividend Payment Date or
to redeem any shares of APS on the date set for such redemption, any amount of
any dividend due on any Dividend Payment Date (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Trust has declared such dividend payable on such Dividend Payment Date to the
Holders of such shares of APS as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to any shares of APS not paid to such Holders when due may be paid to
such Holders in the same form of funds by 12:00 noon, New York City time, on any
of the first 3 Business Days after such Dividend Payment Date or due date, as
the case may be, provided that, such amount is accompanied by a late charge
calculated for such period of non-payment at the Non-Payment Period Rate applied
to the amount of such non-payment based on the actual number of days comprising
such period divided by 365. In the
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case of a willful failure of the Trust to pay a dividend on a Dividend Payment
Date or to redeem any shares of APS on the date set for such redemption, the
preceding sentence shall not apply and the Applicable Rate for the Dividend
Period commencing during the Non-Payment Period resulting from such failure
shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment
to a person in same-day funds on any Business Day at any time shall be
considered equivalent to payment to such person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any payment
made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
(ii) The amount of cash dividends per share of any series of APS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period shall be computed
by multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be the number of days in such Dividend Period or part
thereof that such share was outstanding and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of a series of APS payable (if declared) on any
Dividend Payment Date shall be computed by multiplying the Applicable Rate for
such Dividend Period by a fraction, the numerator of which will be such number
of days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend Period,
the Trust may, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of APS be a number of days (other than seven),
evenly divisible by 7 and not fewer than 7 nor more than 364 in the case of a
Short Term Dividend Period or one whole year or more but not greater than 5
years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Trust may not give a Request for Special Dividend Period of
greater than 28 days (and any such request shall be null and void) unless, for
any Auction occurring after the initial Auction, Sufficient Clearing Bids were
made in the last occurring Auction and unless full cumulative dividends, any
amounts due with respect to redemption's, and any Additional Dividends payable
prior to such date have been paid in full. Such Request for Special Dividend
Period, in the case of a Short Term Dividend Period, shall be given on or prior
to the second Business Day but not more than seven Business Days prior to an
Auction Date for a series of APS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
28 days prior to an Auction Date for a series of APS. Upon receiving such
Request for Special Dividend Period, the Broker-Dealer(s) shall jointly
determine whether, given the factors set forth below, it is advisable that the
Trust issue a Notice of Special Dividend Period for the series of APS as
contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the APS during such Special Dividend Period and the Specific
Redemption Provisions and shall give the Trust and the Auction Agent written
notice (a "Response") of such determination by no later than the second Business
Day prior to such Auction Date. In making such determination the
Broker-Dealer(s) will consider (1) existing short-term and long-term market
rates and indices of such short-term and long-term rates, (2) existing market
supply and demand for short-term and long-term securities, (3) existing yield
curves for short-term and long-term securities comparable to the APS, (4)
industry and financial conditions which may affect the APS, (5) the investment
objective of the Trust, and (6) the Dividend Periods and dividend rates at which
current and potential beneficial holders of the APS would remain or become
beneficial holders. If the Broker-Dealer(s) shall not give the Trust and the
Auction Agent a Response by such second Business Day or if the Response states
that given the factors set forth above
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it is not advisable that the Trust give a Notice of Special Dividend Period for
the series of APS, the Trust may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Trust give a Notice of Special Dividend
Period for the series of APS, the Trust may by no later than the second Business
Day prior to such Auction Date give a notice (a "Notice of Special Dividend
Period") to the Auction Agent, the Securities Depository and each Broker-Dealer
which notice will specify (i) the duration of the Special Dividend Period, (ii)
the Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Trust also shall provide a copy of such Notice of Special Dividend Period to
S&P. The Trust shall not give a Notice of Special Dividend Period and, if the
Trust has given a Notice of Special Dividend Period, the Trust is required to
give telephonic and written notice of its revocation (a "Notice of Revocation")
to the Auction Agent, each Broker-Dealer, and the Securities Depository on or
prior to the Business Day prior to the relevant Auction Date if (x) either the
1940 Act APS Asset Coverage is not satisfied or the Trust shall fail to maintain
S&P Eligible Assets with an aggregate Discounted Value at least equal to the APS
Basic Maintenance Amount, on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Auction Date on an actual basis
and on a pro forma basis giving effect to the proposed Special Dividend Period
(using as a pro forma dividend rate with respect to such Special Dividend Period
the dividend rate which the Broker-Dealers shall advise the Trust is an
approximately equal rate for securities similar to the APS with an equal
dividend period), (y) sufficient funds for the payment of dividends payable on
the immediately succeeding Dividend Payment Date have not been irrevocably
deposited with the Auction Agent by the close of business on the third Business
Day preceding the related Auction Date or (z) the Broker-Dealer(s) jointly
advise the Trust that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation. The Trust also
shall provide a copy of such Notice of Revocation to S&P. If the Trust is
prohibited from giving a Notice of Special Dividend Period as a result of any of
the factors enumerated in clause (x), (y) or (z) above or if the Trust gives a
Notice of Revocation with respect to a Notice of Special Dividend Period for any
series of APS, the next succeeding Dividend Period will be a 7-Day Dividend
Period. In addition, in the event Sufficient Clearing Bids are not made in the
applicable Auction or such Auction is not held for any reason, such next
succeeding Dividend Period will be a 7-Day Dividend Period and the Trust may not
again give a Notice of Special Dividend Period for the APS (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a 7-Day Dividend Period.
(d)(i) Holders shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends and applicable late
charges, as herein provided, on the shares of APS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(i) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the shares of APS that
may be in arrears.
(ii) For so long as any share of APS is Outstanding, the Trust shall not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares of beneficial
interest, if any, ranking junior to the shares of APS as to dividends or upon
liquidation) in respect of the Common Shares or any other shares of beneficial
interest of the Trust ranking junior to or on a parity with the shares of APS as
to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of APS as to dividends and upon liquidation)
or any other such Parity Shares (except by conversion into or exchange for stock
of the Trust ranking junior to or on a parity with the shares of APS as to
dividends and upon liquidation), unless (A) immediately after such transaction,
the Trust
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shall have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount and the Trust shall maintain the
1940 Act APS Asset Coverage, (B) full cumulative dividends on shares of APS and
shares of Other APS due on or prior to the date of the transaction have been
declared and paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent, (C) any Additional Dividend
required to be paid under paragraph 2(e) below on or before the date of such
declaration or payment has been paid and (D) the Trust has redeemed the full
number of shares of APS required to be redeemed by any provision for mandatory
redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an
uncertificated right (a "Right") to receive an Additional Dividend (as defined
below), and (iii) any additional amounts as set forth in paragraph 2(f) below.
Each Right shall thereafter be independent of the share or shares of APS on
which the dividend was paid. The Trust shall cause to be maintained a record of
each Right received by the respective Holders. A Right may not be transferred
other than by operation of law. If the Trust retroactively allocates any net
capital gains or other income subject to regular Federal income taxes to shares
of APS without having given advance notice thereof to the Auction Agent as
described in paragraph 2(f) hereof solely by reason of the fact that such
allocation is made as a result of the redemption of all or a portion of the
outstanding shares of APS, the liquidation of the Trust, or a debt obligation
believed to be a Municipal Obligation unexpectedly turns out to be an obligation
subject to federal income tax (and/or California state personal income tax) (the
amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Trust will, within 90 days (and generally within 60 days)
after the end of the Trust's fiscal year for which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and to each
holder of a Right applicable to such shares of APS (initially Cede & Co. as
nominee of The Depository Trust Company) during such fiscal year at such
holder's address as the same appears or last appeared on the Share Books of the
Trust. The Trust will, within 30 days after such notice is given to the Auction
Agent, pay to the Auction Agent (who will then distribute to such holders of
Rights), out of funds legally available therefor, an amount equal to the
aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of shares
of APS of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after Federal
and California state personal income tax consequences) from the aggregate of
both the Retroactive Taxable Allocations and the Additional Dividend to be equal
to the dollar amount of the dividends which would have been received by such
holder if the amount of the aggregate Retroactive Taxable Allocations would have
been excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of APS is subject to the Federal
alternative minimum tax with respect to dividends received from the Trust; and
(iii) assuming that each Retroactive Taxable Allocation would be taxable in the
hands of each holder of shares of APS at the greater of: (x) the maximum
marginal combined regular Federal and California state personal income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (y) the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or capital gains depending on the taxable character of the distribution
(disregarding in both (x) and (y) the effect of any state or local taxes and the
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets).
(f) Except as provided below, whenever the Trust intends to include any net
capital gains or other income subject to regular Federal income taxes in any
dividend on shares of APS, the Trust will notify the Auction Agent of the amount
to be so included at least 5 Business Days prior to the Auction Date
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on which the Applicable Rate for such dividend is to be established. The Trust
may also include such income in a dividend on shares of a series of APS without
giving advance notice thereof if it increases the dividend by an additional
amount calculated as if such income was a Retroactive Taxable Allocation and the
additional amount was an Additional Dividend, provided that the Trust will
notify the Auction Agent of the additional amounts to be included in such
dividend at least 5 Business Days prior to the applicable Dividend Payment Date.
(g) No fractional shares of APS shall be issued.
3. LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of the
Trust, whether voluntary or involuntary, the Holders shall be entitled to
receive, out of the assets of the Trust available for distribution to
shareholders, before any distribution or payment is made upon any Common Shares
or any other shares of beneficial interest ranking junior in right of payment
upon liquidation to the APS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Trust, the amounts
payable with respect to the APS and any other Outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the APS as to payment
upon liquidation are not paid in full, the Holders and the holders of such other
class or series will share ratably in any such distribution of assets in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the Holders will not be entitled to any further participation in
any distribution of assets by the Trust except for any Additional Dividends. A
consolidation, merger or statutory share exchange of the Trust with or into any
other Trust or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Trust shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Trust.
4. REDEMPTION. (a) Shares of APS shall be redeemable by the Trust as provided
below:
(i) To the extent permitted under the 1940 Act and Massachusetts law, upon
giving a Notice of Redemption, the Trust at its option may redeem shares of
any series of APS, in whole or in part, out of funds legally available
therefor, at the Optional Redemption Price per share, on any Dividend
Payment Date; provided that no share of APS may be redeemed at the option
of the Trust during (A) the Initial Dividend Period with respect to a
series of shares or (B) a Non-Call Period to which such share is subject.
In addition, holders of APS which are redeemed shall be entitled to receive
Additional Dividends to the extent provided herein. The Trust may not give
a Notice of Redemption relating to an optional redemption as described in
this paragraph 4(a)(i) unless, at the time of giving such Notice of
Redemption, the Trust has available Deposit Securities with maturity or
tender dates not later than the day preceding the applicable redemption
date and having a value not less than the amount due to Holders by reason
of the redemption of their shares of APS on such redemption date, and the
Discounted Value of S&P Eligible Assets at least equals the APS Basic
Maintenance Amount, and would at least equal the APS Basic Maintenance
Amount immediately subsequent to such redemption if such redemption were to
occur on such date.
(ii) The Trust shall redeem, out of funds legally available therefor, at
the Mandatory Redemption Price per share, shares of APS to the extent
permitted under the 1940 Act and Massachusetts law, on a date fixed by the
Board of Trustees, if the Trust fails to maintain S&P Eligible Assets with
an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount as provided in paragraph 7(a) or to satisfy the 1940 Act
APS Asset Coverage as provided in paragraph 6 and such failure is not cured
on or before the APS Basic Maintenance Cure Date or
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the 1940 Act Cure Date (herein collectively referred to as a "Cure Date"),
as the case may be. In addition, holders of APS so redeemed shall be
entitled to receive Additional Dividends to the extent provided herein. The
number of shares of APS to be redeemed shall be equal to the lesser of (i)
the minimum number of shares of APS the redemption of which, if deemed to
have occurred immediately prior to the opening of business on the Cure
Date, together with all shares of other Preferred Shares subject to
redemption or retirement, would result in the Trust having S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset
Coverage, as the case may be, on such Cure Date (provided that, if there is
no such minimum number of shares of APS and shares of other Preferred
Shares the redemption of which would have such result, all shares of APS
and shares of other Preferred Shares then Outstanding shall be redeemed),
and (ii) the maximum number of shares of APS, together with all shares of
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of APS required to be
redeemed in accordance with the foregoing, the Trust shall allocate the
number required to be redeemed which would result in the Trust having S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than
the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset
Coverage, as the case may be, pro rata among shares of APS of all series,
Other APS and other Preferred Shares subject to redemption pursuant to
provisions similar to those contained in this paragraph 4(a)(ii); provided
that, shares of APS which may not be redeemed at the option of the Trust
due to the designation of a Non-Call Period applicable to such shares (A)
will be subject to mandatory redemption only to the extent that other
shares are not available to satisfy the number of shares required to be
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the
lowest number of days to be redeemed first) and by lot in the event of
shares having an equal number of days in such Non-Call Period. The Trust
shall effect such redemption on a Business Day which is not later than 35
days after such Cure Date, except that if the Trust does not have funds
legally available for the redemption of all of the required number of
shares of APS and shares of other Preferred Shares which are subject to
mandatory redemption or the Trust otherwise is unable to effect such
redemption on or prior to 35 days after such Cure Date, the Trust shall
redeem those shares of APS which it is unable to redeem on the earliest
practicable date on which it is able to effect such redemption out of funds
legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of APS
may be redeemed pursuant to paragraph 4(a)(i) of Article VII, of these Amended
By-Laws (i) unless all dividends in arrears on all remaining outstanding shares
of Parity Shares shall have been or are being contemporaneously paid or declared
and set apart for payment and (ii) if redemption thereof would result in the
Trust's failure to maintain S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount. In the event
that less than all the outstanding shares of a series of APS are to be redeemed
and there is more than one Holder, the shares of that series of APS to be
redeemed shall be selected by lot or such other method as the Trust shall deem
fair and equitable.
(c) Whenever shares of APS are to be redeemed, the Trust, not less than 17 nor
more than 30 days prior to the date fixed for redemption, shall mail a notice
("Notice of Redemption") by first-class mail, postage prepaid, to each Holder of
shares of APS to be redeemed and to the Auction Agent. The Trust shall cause the
Notice of Redemption to also be published in the eastern and national editions
of The Wall Street Journal. The Notice of Redemption shall set forth (i) the
redemption date, (ii) the amount of the redemption price, (iii) the aggregate
number of shares of APS of such series to be redeemed, (iv) the place or places
where shares of APS of such series are to be surrendered for payment of the
redemption price, (v) a statement that dividends on the shares to be redeemed
shall cease to
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accumulate on such redemption date (except that holders may be entitled to
Additional Dividends) and (vi) the provision of these Amended By-Laws pursuant
to which such shares are being redeemed. No defect in the Notice of Redemption
or in the mailing or publication thereof shall affect the validity of the
redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and, concurrently
or thereafter, the Trust shall have deposited in trust with the Auction Agent,
or segregated in an account at the Trust's custodian bank for the benefit of the
Auction Agent, Deposit Securities (with a right of substitution) having an
aggregate Discounted Value utilizing an S&P Exposure Period of 22 Business Days
equal to the redemption payment for the shares of APS as to which such Notice of
Redemption has been given with irrevocable instructions and authority to pay the
redemption price to the Holders of such shares, then upon the date of such
deposit or, if no such deposit is made, then upon such date fixed for redemption
(unless the Trust shall default in making the redemption payment), all rights of
the Holders of such shares as shareholders of the Trust by reason of the
ownership of such shares will cease and terminate (except their right to receive
the redemption price in respect thereof and any Additional Dividends, but
without interest), and such shares shall no longer be deemed outstanding. The
Trust shall be entitled to receive, from time to time, from the Auction Agent
the interest, if any, on such Deposit Securities deposited with it and the
Holders of any shares so redeemed shall have no claim to any of such interest.
In case the Holder of any shares so called for redemption shall not claim the
redemption payment for his shares within one year after the date of redemption,
the Auction Agent shall, upon demand, pay over to the Trust such amount
remaining on deposit and the Auction Agent shall thereupon be relieved of all
responsibility to the Holder of such shares called for redemption and such
Holder thereafter shall look only to the Trust for the redemption payment.
5. VOTING RIGHTS. (a) General. Except as otherwise provided in the
Declaration of Trust or Amended By-Laws, each Holder of shares of APS shall be
entitled to one vote for each share held on each matter submitted to a vote of
shareholders of the Trust, and the holders of outstanding shares of Preferred
Shares, including APS, and of shares of Common Shares shall vote together as a
single class; provided that, at any meeting of the shareholders of the Trust
held for the election of trustees, the holders of outstanding shares of
Preferred Shares, including APS, shall be entitled, as a class, to the exclusion
of the holders of all other securities and classes of capital stock of the
Trust, to elect two trustees of the Trust. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Trust, including the
holders of outstanding shares of Preferred Shares, including APS, voting as a
single class, shall elect the balance of the trustees.
(b) Right to Elect Majority of Board of Trustees. During any period in which
any one or more of the conditions described below shall exist (such period being
referred to herein as a "Voting Period"), the number of trustees constituting
the Board of Trustees shall be automatically increased by the smallest number
that, when added to the two directors elected exclusively by the holders of
shares of Preferred Shares, would constitute a majority of the Board of Trustees
as so increased by such smallest number; and the holders of shares of Preferred
Shares shall be entitled, voting separately as one class (to the exclusion of
the holders of all other securities and classes of shares of beneficial interest
of the Trust), to elect such smallest number of additional trustees, together
with the two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of APS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
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(ii) if at any time holders of any other shares of Preferred Shares are
entitled to elect a majority of the trustees of the Trust under the 1940
Act. Upon the termination of a Voting Period, the voting rights described
in this paragraph 5(b) shall cease, subject always, however, to the
reverting of such voting rights in the Holders upon the further occurrence
of any of the events described in this paragraph 5(b)
(c) Right to Vote with Respect to Certain Other Matters. So long as any shares
of APS are outstanding, the Trust shall not, without the affirmative vote of the
Holders of at least a majority of the shares of Preferred Shares Outstanding at
the time, voting separately as one class, approve any conversion of the Trust
from a closed-end to an open-end investment company and (i) authorize, create or
issue any class or series of shares of beneficial interest ranking prior to the
APS or any other series of Preferred Shares with respect to payment of dividends
or the distribution of assets on liquidation, or (ii) amend, alter or repeal the
provisions of the Declaration of Trust, whether by merger, consolidation or
otherwise, so as to adversely affect any of the contract rights expressly set
forth in the Declaration of Trust of holders of shares of APS or any other
Preferred Shares. To the extent permitted under the 1940 Act, in the event
shares of more than one series of APS are outstanding, the Trust shall not
approve any of the actions set forth in clause (i) or (ii) which adversely
affects the contract rights expressly set forth in the Declaration of Trust of a
Holder of shares of a series of APS differently than those of a Holder of shares
of any other series of APS without the affirmative vote of the holders of at
least a majority of the shares of APS of each series adversely affected and
outstanding at such time (each such adversely affected series voting separately
as a class). The Trust shall notify S&P 10 Business Days prior to any such vote
described in clause (i) or (ii). Unless a higher percentage is provided for
under the Declaration of Trust, the affirmative vote of the holders of a
majority of the outstanding shares of Preferred Shares, including APS, voting
together as a single class, will be required to approve any plan of
reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a) of
the 1940 Act. The class vote of holders of shares of Preferred Shares, including
APS, described above will in each case be in addition to a separate vote of the
requisite percentage of shares of Common Shares and shares of Preferred Shares,
including APS, voting together as a single class necessary to authorize the
action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of
shares of Preferred Shares to elect additional trustees as described in
paragraph 5(b) above, the Trust shall call a special meeting of such holders and
instruct the Auction Agent to mail a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 20 days after
the date of mailing of such notice. If the Trust fails to send such notice to
the Auction Agent or if the Trust does not call such a special meeting, it may
be called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting held during a
Voting Period, such Holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elect the number of directors prescribed in
paragraph 5(b) above. At any such meeting or adjournment thereof in the absence
of a quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an announcement
at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on any
matter or the number of shares required to constitute a quorum, whether such
right is created by these Amended By-Laws, by the other provisions of the
Declaration of Trust, by statute or otherwise, a share of APS which is not
Outstanding shall not be counted.
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(iii) The terms of office of all persons who are trustees of the Trust at the
time of a special meeting of Holders and holders of other Preferred Shares to
elect trustees shall continue, notwithstanding the election at such meeting by
the Holders and such other holders of the number of trustees that they are
entitled to elect, and the persons so elected by the Holders and such other
holders, together with the two incumbent trustees elected by the Holders and
such other holders of Preferred Shares and the remaining incumbent trustees
elected by the holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms of office
of the additional trustees elected by the Holders and holders of other Preferred
Shares pursuant to paragraph 5(b) above shall terminate, the remaining trustees
shall constitute the trustees of the Trust and the voting rights of the Holders
and such other holders to elect additional trustees pursuant to paragraph 5(b)
above shall cease, subject to the provisions of the last sentence of paragraph
5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of shares
of APS shall not have any rights or preferences other than those specifically
set forth herein. The Holders of shares of APS shall have no preemptive rights
or rights to cumulative voting. In the event that the Trust fails to pay any
dividends on the shares of APS, the exclusive remedy of the Holders shall be the
right to vote for trustees pursuant to the provisions of this paragraph 5.
(f) Notification to S&P. In the event a vote of Holders of APS is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Trust shall,
not later than ten Business Days prior to the date on which such vote is to be
taken, notify S&P that such vote is to be taken and the nature of the action
with respect to which such vote is to be taken and, not later than ten Business
Days after the date on which such vote is taken, notify S&P of the result of
such vote.
6. 1940 ACT APS ASSET COVERAGE. The Trust shall maintain, as of the last
Business Day of each month in which any share of APS is outstanding, the 1940
Act APS Asset Coverage.
7. APS BASIC MAINTENANCE AMOUNT. The following references in this paragraph 7
to S&P Eligible Assets, as the case may be, are only applicable if S&P, as the
case may be, is rating the APS. (a) The Trust shall maintain, on each Valuation
Date, and shall verify to its satisfaction that it is maintaining on such
Valuation Date S&P Eligible Assets having an aggregate Discounted Value equal to
or greater than the APS Basic Maintenance Amount. Upon any failure to maintain
the required Discounted Value, the Trust will use its best efforts to alter the
composition of its portfolio to retain a Discounted Value at least equal to the
APS Basic Maintenance Amount on or prior to the APS Basic Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day after
a Valuation Date on which the Trust fails to satisfy the APS Basic Maintenance
Amount, the Trust shall complete and deliver to the Auction Agent, S&P, a
complete APS Basic Maintenance Report as of the date of such failure, which will
be deemed to have been delivered to the Auction Agent if the Auction Agent
receives a copy or telecopy, telex or other electronic transcription thereof and
on the same day the Trust mails to the Auction Agent for delivery on the next
Business Day the complete APS Basic Maintenance Report. The Trust will deliver
an APS Basic Maintenance Report to the Auction Agent, S&P, on or before 5:00
p.m., New York City time, on the third Business Day after a Valuation Date on
which the Trust cures its failure to maintain S&P Eligible Assets, with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount or on which the Trust fails to maintain S&P Eligible Assets, with an
aggregate Discounted Value which exceeds the APS Basic Maintenance Amount by 5%
or more. The Trust will also deliver an APS Basic Maintenance Report to the
Auction Agent and S&P as of each Quarterly Valuation Date on or before the third
Business Day after such date. Additionally, on or before 5:00 p.m., New York
City time, on the third Business Day after the first day of a Special Dividend
Period, the Trust will deliver an APS Basic Maintenance
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Report to S&P and the Auction Agent. The Trust shall also provide S&P with an
APS Basic Maintenance Report when specifically requested by S&P. A failure by
the Trust to deliver an APS Basic Maintenance Report under this paragraph 7(b)
shall be deemed to be delivery of an APS Basic Maintenance Report indicating the
Discounted Value for S&P Eligible Assets of the Trust is less than the APS Basic
Maintenance Amount, as of the relevant Valuation Date.
(c) Within 10 Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent and S&P (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Trust
during the quarter ending on such Quarterly Valuation Date), (ii) that, in such
Report (and in such randomly selected Report), the Trust correctly determined
the assets of the Trust which constitute S&P Eligible Assets at such Quarterly
Valuation Date in accordance with these Amended By-Laws, (iii) that, in such
Report (and in such randomly selected Report), the Trust determined whether the
Trust had, at such Quarterly Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these Amended By-Laws, S&P
Eligible Assets of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, (iv) with respect to the S&P ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent Accountant has requested that S&P verify such information
and the Independent Accountant shall provide a listing in its letter of any
differences, and (v) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Trust's assets to the Trust for purposes of valuing securities
in the Trust's portfolio, the Independent Accountant has traced the price used
in such Report to the bid or mean price listed in such Report as provided to the
Trust and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences).
(d) Within 10 Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to any
Valuation Date on which the Trust failed to maintain S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount, and relating to the APS Basic Maintenance Cure Date with respect to such
failure, the Independent Accountant will provide to the Auction Agent and S&P an
Accountant's Confirmation as to such APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraphs (c) or
(d) of this paragraph 7 shows that an error was made in the APS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets of the Trust was
determined by the Independent Accountant, the calculation or determination made
by such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver the APS
Basic Maintenance Report to the Auction Agent and S&P promptly following receipt
by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day after
the Date of Original Issue of the shares of APS, the Trust will complete and
deliver to S&P an APS Basic Maintenance Report as of the close of business on
such Date of Original Issue. Within 5 Business Days of such Date of Original
Issue, the Independent Accountant will confirm in writing to S&P (i) the
mathematical accuracy of the calculations reflected in such Report and (ii) that
the aggregate Discounted Value of S&P Eligible Assets, as applicable reflected
thereon equals or exceeds the APS Basic Maintenance Amount reflected thereon.
Also, on or before 5:00 p.m., New York City time, on the first Business Day
after shares of Common Shares are repurchased by the Trust, the Trust will
complete and deliver to
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S&P an APS Basic Maintenance Report as of the close of business on such date
that Common Shares is repurchased.
8. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any shares of APS are rated by S&P, the Trust will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the shares of APS by S&P except that the Trust may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds"), write, purchase or sell put and call options on such contracts, enter
into Interest Rate Locks and enter into Interest Rate Swaps (collectively, "S&P
Hedging Transactions"), subject to the following limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract
or option held by the Trust by the Trust's taking an opposite position
thereto ("Closing Transactions")), which would cause the Trust at the time
of such transaction to own or have sold the least of (A) more than 1,000
outstanding futures contracts based on the Municipal Index, (B) outstanding
futures contracts based on the Municipal Index exceeding in number 25% of
the quotient of the Market Value of the Trust's total assets divided by
$1,000 or (C) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 25% of the quotient of the Market Value of the
Trust's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding futures contracts
based on Treasury Bonds exceeding in number 10% of the average number of
daily traded futures contracts based on Treasury Bonds in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have S&P Eligible Assets Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount
on two consecutive Valuation Dates and (B) the Trust is required to pay
Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated A
or better by S&P), fixed-income securities in a segregated account with the
Trust's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of
the Trust's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or, in the event the
Trust writes a futures contract or option thereon which requires delivery
of an underlying security, it shall hold such underlying security in its
portfolio.
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For purposes of determining whether the Trust has S&P Eligible Assets with
a Discounted Value that equals or exceeds the APS Basic Maintenance Amount,
the Discounted Value of cash or securities held for the payment of Initial
Margin or Variation Margin shall be zero and the aggregate Discounted Value
of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on the Municipal Index which are owned by the Trust
plus (ii) 25% of the aggregate settlement value, as marked to market, of
any outstanding futures contracts based on Treasury Bonds which contracts
are owned by the Trust.
(vi) the Trust will only enter into Interest Rate Locks subject to the
following conditions: (A) for counterparties with a S&P short-term rating,
the counterparty to the transaction must have either (1) a short-term
rating of A-1+ or (2) a long-term rating of AAA; (B) for counterparties
without an S&P short-term rating, the counterparty to the transaction must
have a senior unsecured long-term debt rating equal to or higher than the
desired rating of the issue; (C) the original aggregate notional amount of
the Interest Rate Lock transaction(s) must not be greater than the
liquidation preference or the Preferred Shares originally issued; (C) the
Interest Rate Lock transaction is marked-to-market on a daily basis by a
broker covering the transaction and verified by the Trust's custodian; (D)
the terms of the Interest Rate Lock agreement provides for its immediate
termination if the Trust fails to maintain an aggregate discounted value at
least equal to the APS Basic Maintenance Amount on 2 consecutive Valuation
Dates; (E) the counterparty to the Interest Rate Lock agrees not to cause
the Trust to file for Bankruptcy, voluntarily or involuntarily; and (F) for
purposes of calculating the APS Basic Maintenance Amount, the Discount
Factor for Interest Rate Lock is 95% for any positive mark-to-market
valuation of the Trust's rights under an Interest Rate Lock and 100% for
any negative mark-to-market valuation of the Trust's rights under an
Interest Rate Lock.
(vii) the Trust will only enter into Interest Rate Swaps subject to the
following conditions: (A) the counterparty to the swap transaction has a
short-term rating of not less than the desired rating of the issue or, if
the counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is equal to or higher than the
desired rating of the issue; (B) the original aggregate notional amount of
the Interest Rate Swap transaction(s) is not greater than the liquidation
preference of the Preferred Shares originally issued; (C) the Interest Rate
Swap transaction is marked-to-market daily by the swap counterparty; (D)
the terms of the Interest Rate Swap agreement provides for its immediate
termination if the Trust fails to maintain an aggregate discounted value at
least equal to the APS Basic Maintenance Amount on 2 consecutive Valuation
Dates; (E) the counterparty to the Interest Rate Swap agrees not to cause
the Trust to file for Bankruptcy, voluntarily or involuntarily; and (F) for
purposes of calculating the APS Basic Maintenance Amount, the Discount
Factor for Interest Rate Swaps is 95% for any positive mark-to-market
valuation of the Trust's rights under an Interest Rate Swap and 100% for
any negative mark-to-market valuation of the Trust's rights under an
Interest Rate Swap.
(b) For so long as shares of APS are rated by S&P, the Trust will not, unless
it has received written confirmation from S&P that such action would not impair
the rating then assigned to shares of APS by S&P (i) borrow money except for the
purpose of clearing transactions in portfolio securities (which borrowings shall
under any circumstances be limited to the lesser of $10 million or an amount
equal to 5% of the Market Value of the Trust's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of S&P
Eligible Assets to be less than the APS Basic Maintenance Amount), (ii) engage
in short sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Trust, (v) reissue any APS
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previously purchased or redeemed by the Trust, (vi) merge or consolidate into or
with any other Trust or entity, (vii) change the Pricing Service or (viii)
engage in reverse repurchase agreements.
A preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock obligations. The ratings on the Preferred Shares
are not recommendations to purchase, hold, or sell those shares, inasmuch as the
ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines described above also do not address the
likelihood that an owner of Preferred Shares will be able to sell such shares in
an Auction or otherwise.
The Trust agrees to notify S&P with no less than 30 days' notification of: (i)
any material changes to the Trust's organizational documents and material
contracts, as determined by the Trust's officers, in their sole discretion, (ii)
any redemptions of APS by the Trust, or (iii) any failed Auctions.
9. NOTICE. All notices or communications, unless otherwise specified in the
Amended By-Laws of the Trust or these Amended By-Laws, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid. Notice shall be deemed given on the earlier of the date
received or the date 7 days after which such notice is mailed.
10. AUCTION PROCEDURES. (a) Certain definitions. As used in this paragraph
10, the following terms shall have the following meanings, unless the context
otherwise requires:
(i) "APS" means the shares of APS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first day
of a Dividend Period.
(iii) "Available APS" has the meaning specified in paragraph 10(d)(i)
below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the credit rating assigned on such date to such
shares by S&P (or if S&P shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency) and (ii) whether
the Trust has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend pursuant to
paragraph 2(f) hereof that net capital gains or other taxable income will
be included in such dividend on shares of APS as follows:
PERCENTAGE OF PERCENTAGE OF
CREDIT RATINGS REFERENCE RATE REFERENCE RATE
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S&P.......................................... No Notification Notification
AA- or higher................................ 110% 150%
A- to A+..................................... 125% 160%
BBB- to BBB+................................. 150% 250%
Below BBB-................................... 200% 275%
The Trust shall take all reasonable action necessary to enable S&P to
provide a rating for each series of APS. If S&P shall not make such a
rating available, UBS Warburg LLC or its affiliates and successors, after
consultation with the Trust, shall select a nationally recognized
statistical rating organization to act as a Substitute Rating Agency.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i) below.
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(x) "Submission Deadline" means 1:30 p.m., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for
the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph 10(d)(i)
below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph 10(d)(i)
below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-Dealers.
Broker-Dealers will submit the Orders of their respective customers who are
Beneficial Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares subject to
Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of APS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for the next succeeding Dividend
Period;
(2) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to
hold, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such
Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next succeeding Dividend Period;
and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of Outstanding shares, if any, of APS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of
information referred to in clause (A) or (B) of this paragraph 10(b)(i) is
hereinafter referred to as an "Order" and each Beneficial Owner and each
Potential Beneficial
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Owner placing an Order, including a Broker-Dealer acting in such capacity
for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing
the information referred to in clause (A)(2) or (B) of this paragraph
10(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the
information referred to in clause (A)(3) of this paragraph 10(b)(i) is
hereinafter referred to as a "Sell Order". Inasmuch as a Broker-Dealer
participates in an Auction as an Existing Holder or a Potential Holder only
to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and
Potential Holders also applies to the underlying beneficial ownership
interests represented.
(ii)(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than
the rate per annum specified in such Bid; or (1) such number or a lesser
number of Outstanding shares of APS to be determined as set forth in
paragraph 10(e)(i)(D) if the Applicable Rate determined on such Auction
Date shall be equal to the rate per annum specified therein; or
(2) a lesser number of Outstanding shares of APS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per annum
shall be higher than the Maximum Applicable Rate and Sufficient Clearing
Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of APS specified in such Sell
Order; or
(2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in paragraph 10(e)(ii)(C) if Sufficient Clearing
Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than
the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's
Auction Processing System to the Auction Agent prior to the Submission Deadline
on each Auction Date all Orders obtained by such Broker-Dealer, designating
itself (unless otherwise permitted by the Trust) as an Existing Holder in
respect of shares subject to Orders submitted or deemed submitted to it by
Beneficial Owners and as a Potential Holder in respect of shares subject to
Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding shares of APS that are the subject
of such Order;
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(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of APS subject to any
Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of APS subject to any Bid
placed by such Existing Holder and the rate per annum specified in such
Bid; and
(3) the number of Outstanding shares, if any, of APS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of APS held
by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding shares of APS held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of APS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of Outstanding shares of
APS held by such Existing Holder; provided that if more than one Hold Order
is submitted on behalf of such Existing Holder and the number of shares of
APS subject to such Hold Orders exceeds the number of Outstanding shares of
APS held by such Existing Holder, the number of shares of APS subject to
each of such Hold Orders shall be reduced pro rata so that such Hold
Orders, in the aggregate, will cover exactly the number of Outstanding
shares of APS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of APS
held by such Existing Holder over the number of shares of APS subject to
any Hold Order referred to in paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of paragraph
10(c)(iv)(A) above and of the foregoing portion of this paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of APS held by such Existing
Holder over the number of shares of APS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of APS subject to such Sell Orders
is greater than such excess,
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the number of shares of APS subject to each of such Sell Orders shall be
reduced pro rata so that such Sell Orders, in the aggregate, cover exactly
the number of shares of APS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted shall be a separate Bid with the rate per annum and number of
shares of APS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial Owner
to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent shall assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of APS over the
number of Outstanding shares of APS that are the subject of Submitted Hold
Orders (such excess being hereinafter referred to as the "Available APS");
(B) from the Submitted Orders whether the number of Outstanding shares of
APS that are the subject of Submitted Bids by Potential Holders specifying
one or more rates per annum equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of APS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of APS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of APS in clause (1) above
and this clause (2) are each zero because all of the Outstanding shares
of APS are the subject of Submitted Hold Orders), such Submitted Bids by
Potential Holders being hereinafter referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified
in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid
Rate and all other Submitted Bids from Existing Holders specifying lower
rates per annum were rejected, thus entitling such Existing Holders to
continue to hold the shares of APS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential
Holders to purchase the shares of APS that are the subject of such
Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per annum
being at least equal to the Available APS.
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(ii) Promptly after the Auction Agent has made the determinations pursuant to
paragraph 10(d)(i), the Auction Agent shall advise the Trust of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the Outstanding shares of APS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of APS are the subject of Submitted
Hold Orders, that the Dividend Period next succeeding the Auction shall
automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period
shall be equal to 40% of the Reference Rate (or 60% of such rate if the
Trust has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph
2(f) hereof that net capital gains or other taxable income will be included
in such dividend on shares of APS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations made pursuant to paragraph
10(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or
rejected and the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order
of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted,
thus requiring each such Existing Holder to sell the Outstanding shares
of APS that are the subject of such Submitted Sell Order or Submitted
Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to hold
the Outstanding shares of APS that are the subject of such Submitted
Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding
shares of APS that are the subject of such Submitted Bid, unless the
number of Outstanding shares of APS subject to all such Submitted Bids
shall be greater than the number of Outstanding shares of APS
("Remaining Shares") equal to the excess of the Available APS over the
number of Outstanding shares of APS subject to Submitted Bids described
in paragraph 10(e)(i)(B) and paragraph 10(e)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each
such Existing Holder shall be required to sell Outstanding shares of
APS, but only in an amount equal to the difference between (1) the
number of Outstanding shares of APS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of APS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of Outstanding
shares of APS held by such Existing Holder subject to such Submitted Bid
and the denominator of which shall be the sum of the number of
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Outstanding shares of APS subject to such Submitted Bids made by all
such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of Outstanding shares of APS
obtained by multiplying (x) the difference between the Available APS and
the number of Outstanding shares of APS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number
of Outstanding shares of APS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding
shares of APS subject to such 74 Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning
Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding shares of APS are subject to Submitted Hold Orders),
subject to the provisions of paragraph 10(e)(iii), Submitted Orders shall
be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall
be rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of APS that are the subject of such Submitted Bid;
and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be accepted,
in both cases only in an amount equal to the difference between (1) the
number of Outstanding shares of APS then held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and (2) the number
of shares of APS obtained by multiplying (x) the difference between the
Available APS and the aggregate number of Outstanding shares of APS
subject to Submitted Bids described in paragraph 10(e)(ii)(A) and
paragraph 10(e)(ii)(B) by (y) a fraction the numerator of which shall be
the number of Outstanding shares of APS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the number of Outstanding shares of APS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i) or
paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of APS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down
the number of shares of APS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each Outstanding share of
APS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of APS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of APS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate shares of APS
for purchase among Potential Holders so that only whole shares of APS are
purchased on
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such Auction Date by any Potential Holder, even if such allocation results
in one or more of such Potential Holders not purchasing any shares of APS
on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding shares of APS to be purchased and the aggregate
number of the Outstanding shares of APS to be sold by such Potential
Holders and Existing Holders and, to the extent that such aggregate number
of Outstanding shares to be purchased and such aggregate number of
Outstanding shares to be sold differ, the Auction Agent shall determine to
which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of APS
(f) Miscellaneous. The Trust may interpret the provisions of this paragraph 10
to resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not substantially adversely affect the
rights of Beneficial Owners of APS. A Beneficial Owner or an Existing Holder (A)
may sell, transfer or otherwise dispose of shares of APS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of APS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Trust nor any Affiliate shall submit an Order in any Auction. Any Beneficial
Owner that is an Affiliate shall not sell, transfer or otherwise dispose of
shares of APS to any Person other than the Trust. All of the Outstanding shares
of APS of a series shall be represented by a single certificate registered in
the name of the nominee of the Securities Depository unless otherwise required
by law or unless there is no Securities Depository. If there is no Securities
Depository, at the Trust's option and upon its receipt of such documents as it
deems appropriate, any shares of APS may be registered in the Stock Register in
the name of the Beneficial Owner thereof and such Beneficial Owner thereupon
will be entitled to receive certificates therefor and required to deliver
certificates therefor upon transfer or exchange thereof.
11. SECURITIES DEPOSITORY; STOCK CERTIFICATES. (a) If there is a Securities
Depository, one certificate for all of the shares of APS of each series shall be
issued to the Securities Depository and registered in the name of the Securities
Depository or its nominee. Additional certificates may be issued as necessary to
represent shares of APS. All such certificates shall bear a legend to the effect
that such certificates are issued subject to the provisions restricting the
transfer of shares of APS contained in these Amended By-Laws. Unless the Trust
shall have elected, during a Non-Payment Period, to waive this requirement, the
Trust will also issue stop-transfer instructions to the Auction Agent for the
shares of APS. Except as provided in paragraph (b) below, the Securities
Depository or its nominee will be the Holder, and no Beneficial Owner shall
receive certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of APS of a series shall be
the Non-Payment Period Rate or there is no Securities Depository, the Trust may
at its option issue one or more new certificates with respect to such shares
(without the legend referred to in paragraph 11(a)) registered in the names of
the Beneficial Owners or their nominees and rescind the stop-transfer
instructions referred to in paragraph 11(a) with respect to such shares.
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EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND II
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 15, 2003
---------------------
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 AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116