As filed with the Securities and Exchange Commission on September 25, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
/x/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FILE NO. 333-
/_/ PRE-EFFECTIVE AMENDMENT NO.
/_/ POST-EFFECTIVE AMENDMENT NO.
AND/OR
/_/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FILE NO. 811-21147
/x/ AMENDMENT NO. 5
EATON VANCE INSURED
CALIFORNIA
MUNICIPAL BOND FUND
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP
CODE)
(617) 482-8260
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
ALAN R. DYNNER
THE EATON VANCE BUILDING
255 STATE STREET, BOSTON, MASSACHUSETTS 02109
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE
COPIES OF COMMUNICATIONS TO:
MARK P. GOSHKO, ESQ. SARAH E. COGAN, ESQ.
KIRKPATRICK & LOCKHART LLP SIMPSON THACHER & BARTLETT
75 STATE STREET 425 LEXINGTON AVENUE
BOSTON, MASSACHUSETTS 02109 NEW YORK , NEW YORK 10017
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. /_/
It is proposed that this filing will become effective (check appropriate
box):
/x/ when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
BEING OFFERING AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED PRICE PER OFFERING FEES (1)(2)
REGISTERED (1) UNIT PRICE (1)
(1)
-------------------------------------------------------------------------------
Auction Preferred Shares, 7,700 $25,000 $192,500,000 $17,710
$0.01 par value
===============================================================================
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) Transmitted prior to filing.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 2002
[EATON VANCE LOGO]
$[ ]
EATON VANCE INSURED MUNICIPAL BOND FUND
[ ] SHARES, SERIES A
[ ] SHARES, SERIES B
[ ] SHARES, SERIES C
[ ] SHARES, SERIES D
[ ] SHARES, SERIES E
EATON VANCE INSURED CALIFORNIA EATON VANCE INSURED NEW YORK
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
[ ] SHARES, SERIES A [ ] SHARES, SERIES A
[ ] SHARES, SERIES B [ ] SHARES, SERIES B
AUCTION PREFERRED SHARES ("APS")
LIQUIDATION PREFERENCE $25,000 PER SHARE
_______________
Each of Eaton Vance Insured Municipal Bond Fund (the "National Fund"),
Eaton Vance Insured California Municipal Bond Fund (the "California Fund") and
Eaton Vance Insured New York Municipal Bond Fund (the "New York 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 and the New York Fund,
certain relevant state and local taxes (as described below). This income will be
earned by investing primarily in high grade municipal obligations that are
insured as to the timely payment of principal and interest and are not subject
to alternative minimum tax. An investment in a Fund may not be appropriate for
all investors, particularly those that are not subject to federal and, with
respect to the California Fund and the New York Fund, applicable state taxes.
There is no assurance that a Fund will achieve its investment objective. See
"Investment Objectives, Policies and Risks" beginning at page [ ].
Each Fund's investment adviser is Eaton Vance Management ("Eaton Vance" or
the "Adviser"). Eaton Vance manages [54] different municipal bond funds with
combined assets of over $[8] billion.
_______________
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.
_______________
Capitalized terms not defined on this cover page 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 $[ ] per share.
PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD(2) FUND(1)(3)
----------- ----------- --------------
National Fund
Per Share.......... $ $ $
Total.............. $ $ $
California Fund
Per Share.......... $ $ $
Total.............. $ $ $
New York Fund
Per Share.......... $ $ $
Total.............. $ $ $
__________
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) Each Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Not including offering expenses payable by each Fund estimated to be [ ] for
the National Fund, [ ] for the California Fund and [ ] for the New York Fund.
The underwriters are offering the APS subject to various conditions. The
underwriters expect to deliver the APS in book-entry form, through the
facilities of the Depository Trust Company on or about October [ ], 2002.
_______________
SALOMON SMITH BARNEY [ ] [ ]
, 2002
2
(CONTINUED FROM THE PREVIOUS PAGE)
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
---------------- -------------- ---------------
National Fund
Series A
Series B
Series C
Series D
Series E
California Fund
Series A
Series B
New York Fund
Series A
Series B
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 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 only may 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.
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 [ ], 2002
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 page [ ] 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.
3
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
PAGE
----
Prospectus Summary........................................
Financial Highlights......................................
The Funds.................................................
Use of Proceeds...........................................
Capitalization............................................
Portfolio Composition.....................................
Investment Objectives, Policies and Risks.................
Management of the Funds...................................
Description of APS........................................
The Auction...............................................
Taxes.....................................................
Description of Capital Structure..........................
Certain Provisions of the Declarations of
Trust...................................................
Underwriting..............................................
Custodian and Transfer Agent
Legal Opinions............................................
Independent Auditors......................................
Additional Information....................................
National Fund Table of Contents for the Statement
of Additional Information...............................
California Fund Table of Contents for the Statement
of Additional Information..............................
New York Fund Table of Contents for the Statement
of Additional Information..............................
Glossary..................................................
4
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. CERTAIN OF THE
CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED IN THE GLOSSARY THAT APPEARS
AT THE END OF THIS PROSPECTUS.
THE FUNDS.............. Each of Eaton Vance Insured Municipal Bond Fund
(the "National Fund"), Eaton Vance Insured
California Municipal Bond Fund (the "California
Fund") and Eaton Vance Insured New York Municipal
Bond Fund (the "New York Fund") (each a "Fund" and
together the "Funds") is a recently organized
closed-end management investment company. The
National Fund was organized as a Massachusetts
business trust on July 2, 2002, and the California
Fund and New York Fund each was organized as a
Massachusetts business trust on July 8, 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 August 30, 2002
upon the closing of an initial public offering of
shares of its common shares of beneficial
interest, par value $0.01 per shares ("Common
Shares"). The Common Shares of each Fund are
traded on the American Stock Exchange ("AMEX")
under the symbols EIM for the National Fund, EVM
for the California Fund, and ENX for the New York
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. 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, Series
A, Series B, Series C, Series D and Series E for
the National Fund, and Series A and Series B for
both the California Fund and the New York Fund
(collectively, the "APS"). See "The Funds."
The Trustees of each Fund have determined that for
cost savings and other reasons that it is
appropriate for the Funds to employ a 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. Consequently, each
Fund disclaims any responsibility for any
misstatement or omission in this Prospectus with
respect to another Fund. In approving the use of a
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.
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 and the New York Fund,
the particular state and local income taxes set
forth below ("state taxes"):
California Fund California State Personal
Income Tax
5
New York Fund New York State and New York
City Personal Income Taxes
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 and the New York Fund applicable
state taxes ("municipal obligations"), 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 comparable unrated
obligations and/or municipal obligations that are
uninsured. 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.
A FUND WILL NOT INVEST IN AN OBLIGATION IF THE
INTEREST ON THAT OBLIGATION IS SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX.
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.
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 [5] national municipal
funds, [38] single state municipal funds, 8
limited maturity municipal funds and 1 money
market municipal fund with combined assets of
about $[8] billion as of August 31, 2002. See
"Management of the Funds."
6
THE OFFERING........... 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 California Fund
Series A -- [ ] Series A -- [ ]
Series B -- [ ] Series B -- [ ]
Series C -- [ ] New York Fund
Series D -- [ ] Series A -- [ ]
Series E -- [ ] Series B -- [ ]
The APS are being offered by the underwriters
("Underwriters") listed under "Underwriting."
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 shares are:
o If an auction fails you may not be able to
sell some or all of your shares;
o 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;
o A rating agency could downgrade APS, which
could affect liquidity;
o A Fund may be forced to redeem your APS to
meet regulatory or rating agency requirements
or may voluntarily redeem your shares in
certain circumstances;
o In extraordinary circumstances a Fund may not
earn sufficient income from its investments
to pay dividends;
o If long-term interest rates rise, the value
of a Fund's investment portfolio will
decline, reducing the asset coverage for its
APS;
o 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;
o Each Fund is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political
or regulatory occurrence; and
o The California Fund's and the New York Fund's
policies of investing primarily in municipal
obligations of issuers located in California
and New York, respectively, 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 risk of investing in APS of
the Fund, see "Investment Objectives, Policies and
Risks - Risk Considerations."
7
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 Subsequent
Date* Auction*
-------------- ----------
National Fund
Series A [ ] [ ]
Series B [ ] [ ]
Series C [ ] [ ]
Series D [ ] [ ]
Series E [ ] [ ]
California Fund
Series A [ ] [ ]
Series B [ ] [ ]
New York Fund
Series A [ ] [ ]
Series B
_____________
* All dates are 2002.
DIVIDENDS AND DIVIDEND The table below shows the dividend rate for the
PERIODS 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."
The table below also shows the date from which
dividends on the APS will accumulate at the
initial rate, the dividend payment date of the
initial dividend period and the day on which
dividends will normally be paid. If dividends are
payable on a Monday or Tuesday and that day is not
a business day, then your dividends will be paid
on the first business day that falls after that
day. If dividends are payable on a Wednesday,
Thursday or Friday and that day is not a business
day, then your dividends will be paid on the first
business day prior to that day.
8
Finally the table below shows the numbers of days
of the initial dividend period for the APS.
Subsequent dividend periods generally will be
seven days. The dividends 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 Subsequent Days of
Initial Accumulation Initial Dividend Initial
Dividend of Initial Dividend Payment Dividend
Rate Rate* Period* Date Period
---- ---- ------ ---- ------
National Fund
Series A [ ]% [ ] [ ] [ ] [ ]
Series B [ ]% [ ] [ ] [ ] [ ]
Series C [ ]% [ ] [ ] [ ] [ ]
Series D [ ]% [ ] [ ] [ ] [ ]
Series E [ ]% [ ] [ ] [ ] [ ]
California Fund
Series A [ ]% [ ] [ ] [ ] [ ]
Series B [ ]% [ ] [ ] [ ] [ ]
New York Fund
Series A [ ]% [ ] [ ] [ ] [ ]
Series B [ ]% [ ] [ ] [ ] [ ]
_____________
* All dates are 2002.
TAXATION Because under normal circumstances the 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 and
the New York Fund, applicable state taxes, the
income you receive will ordinarily be similarly
exempt. To the extent that the California Fund or
the New York 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 "Taxes."
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."
9
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 each series of APS of each Fund will be
issued with a credit quality rating of Aaa from
Moody's and AAA from S&P. 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
agencies' 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."
10
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 August 30, 2002 until [ ], 2002. Since each Fund
commenced operations on August 30, 2002, the tables covers approximately four
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 performances.
NATIONAL FUND AUGUST 30-[ ], 2002
--------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $[_______]
Net Investment Income [_______]
Net Gains on Securities (Unrealized) [_______]
Total from Investment Operations [_______]
Offering Costs [_______]
Net Asset Value, End of Period $[_______]
Per Share Market Value, End of Period $[_______]
Total Return on Net Asset Value [______]%
Total Investment Return on Market Value [______]%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands) $[________]*
Ratio of Expenses to Average Net Assets
Before Reimbursement [____]%*
Ratio of Expenses to Average Net Assets
After Reimbursement [____]%*
Ratio of Net Investment Income to Average
Net Assets for Reimbursement [____]%*
Portfolio Turnover Rate [____]%
______________
*Annualized
CALIFORNIA FUND AUGUST 30-[ ], 2002
--------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $[_________]
Net Investment Income [_________]
Net Gains on Securities (Unrealized) [_________]
Total from Investment Operations [_________]
Offering Costs [_________]
Net Asset Value, End of Period $[_________]
11
Per Share Market Value, End of Period $[_________]
Total Return on Net Asset Value [_________]%
Total Investment Return on Market Value [_________]%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands) $[_________]*
Ratio of Expenses to Average Net Assets
Before Reimbursement [____]%*
Ratio of Expenses to Average Net Assets
After Reimbursement [____]%*
Ratio of Net Investment Income to Average
Net Assets for Reimbursement [____]%*
Portfolio Turnover Rate [____]%
______________
*Annualized
NEW YORK FUND AUGUST 30 - [ ], 2002
---------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $[________]
Net Investment Income [_________]
Net Gains on Securities (Unrealized) [_________]
Total from Investment Operations [_________]
Offering Costs [_________]
Net Asset Value, End of Period $[_________]
Per Share Market Value, End of Period $[_________]
Total Return on Net Asset Value [_________]%
Total Investment Return on Market Value [_________]%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands) $[_________]*
Ratio of Expenses to Average Net Assets
Before Reimbursement [_____]%*
Ratio of Expenses to Average Net Assets
After Reimbursement [_____]%*
Ratio of Net Investment Income to Average
Net Assets for Reimbursement [_____]%*
Portfolio Turnover Rate [_____]%
______________
*Annualized
12
THE FUNDS
Each of Eaton Vance Insured Municipal Bond Fund (the "National Fund"),
Eaton Vance Insured California Municipal Bond Fund (the "California Fund") and
Eaton Vance Insured New York Municipal Bond Fund (the "New York Fund") (each a
"Fund" and together the "Funds") is a non-diversified, closed-end management
investment company. The National Fund was organized as a Massachusetts business
trust on July 2, 2002 and the California Fund and the New York Fund were each
organized as a Massachusetts business trust on July 8, 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 August 30, 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
approximately as follows after the payment of organizational and offering
expenses: National Fund -- $[ ]; California Fund -- $[ ]; and New York Fund --
$[ ]. 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 -- 8,565,000; California Fund -- 2,865,000;
and New York Fund -- 2,058,750. On September 17, 2002, the underwriters
partially exercised the over-allotment with respect to each Fund and purchased
the following amounts of Common Shares: National Fund -- 6,000,000; California
Fund -- 2,000,000; and New York Fund -- 1,500,000. On [ ], 2002, the
underwriters exercised the remainder of the over-allotment with respect to each
Fund (collectively with the September 17, 2002 partial exercise of the
over-allotment, the "Over-allotment Common Shares").
The Trustees of each Fund have determined that for cost savings and other
reasons that it is appropriate for the Funds to employ a 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. Consequently, each Fund disclaims any responsibility for
any misstatement or omission in this Prospectus with respect to another Fund. In
approving the use of a 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.
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 (not expected to
exceed $100,000 per Fund): National Fund -- $[ ]; California Fund -- $[ ]; and
New York Fund -- $[ ]. 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.
13
CAPITALIZATION
The following table sets forth the unaudited capitalization of each Fund
as of [ ], 2002 as if the Over-allotment Common Shares of each Fund had been
issued on that date and as adjusted to give effect to the issuance of the APS
offered hereby.
ACTUAL AS ADJUSTED
-------------- --------------
NATIONAL FUND
Shareholders' equity:
Preferred Shares, par value, $0.01 per share (no shares
issued; [ ], as adjusted, at $25,000 per share $[ ]
liquidation preference).................................. --
Common Shares, par value, $0.01 per share ([ ]
shares issued and outstanding)........................... $[ ] [ ]
Capital in excess of par value attributable to Common
Stock.................................................... [ ] [ ]
Undistributed investment income-- net...................... [ ] [ ]
Accumulated realized gain (loss)-- net..................... [ ] [ ]
Unrealized appreciation on investments-- net............... [ ] [ ]
Net Assets................................................. $[ ] $[ ]
============== =============
ACTUAL AS ADJUSTED
CALIFORNIA FUND -------------- -------------
Shareholders' equity:
Preferred Shares, par value, $0.01 per share (no shares
issued; [ ], as adjusted, at $25,000 per share $[ ]
liquidation preference).................................. --
Common Shares, par value, $0.01 per share ([ ]
shares issued and outstanding)........................... $[ ] [ ]
Capital in excess of par value attributable to Common
Stock.................................................... [ ] [ ]
Undistributed investment income-- net...................... [ ] [ ]
Accumulated realized gain (loss)-- net..................... [ ] [ ]
Unrealized appreciation on investments-- net............... [ ] [ ]
Net Assets................................................. $[ ] $[ ]
ACTUAL AS ADJUSTED
NEW YORK FUND -------------- -------------
Shareholders' equity:
Preferred Shares, par value, $0.01 per share (no shares
issued; [ ], as adjusted, at $25,000 per share $[ ]
liquidation preference).................................. --
Common Shares, par value, $0.01 per share ([ ]
shares issued and outstanding)........................... $[ ] [ ]
Capital in excess of par value attributable to Common
Stock.................................................... [ ] [ ]
Undistributed investment income-- net...................... [ ] [ ]
Accumulated realized gain (loss)-- net..................... [ ] [ ]
Unrealized appreciation on investments-- net............... [ ] [ ]
Net Assets................................................. $[ ] $[ ]
14
PORTFOLIO COMPOSITION
As of [ ], 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 ([ ]% long-term; [ ]% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa...... AAA $
AA Aa....... AA
BBB Baa1..... BBB
NR+ NR+...... NR+
VMIG1 A+.......
Cash............... -- ----------- -----
Total.............. -- $ %
== =========== =====
CALIFORNIA FUND ([ ]% long-term; [ ]% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa...... AAA $
AA Aa....... AA
BBB Baa1..... BBB
NR+ NR+...... NR+
VMIG1 A+.......
Cash.............. -- ----------- -----
Total............. -- $ %
== =========== =====
NEW YORK FUND ([ ]% long-term; [ ]% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa...... AAA $
AA Aa....... AA
BBB Baa1..... BBB
NR+ NR+...... NR+
VMIG1 A+.......
Cash -- ----------- -----
Total -- $ %
== =========== =====
-----------------
* Ratings: Using the higher of S&P's, Moody's or Fitch's ratings on a Fund's
municipal obligations. 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.
+ Securities that are not rated by S&P, Moody's or Fitch. Such Municipal
Obligations may be rated by nationally recognized statistical rating
organizations other than S&P or Moody's, or may not be rated by any such
organization. With respect to the percentage of each Fund's assets invested
in such securities, Eaton Vance Management ("Eaton Vance" or the "Adviser")
believes these are of comparable quality to municipal obligations rated
investment grade. This determination is based on the Adviser's own internal
evaluation and does not necessarily reflect how such securities would be
rated by S&P, Moody's or Fitch if they were to rate the securities.
15
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 and the New York Fund, the particular state and local income
taxes set forth below ("state taxes"):
California Fund California State Personal Income Tax
New York Fund New York State and New York City Personal Income Taxes
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 and the New York 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 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 comparable unrated
obligations and/or municipal obligations that are uninsured. 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%
16
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.
EACH FUND WILL NOT INVEST IN AN OBLIGATION IF THE INTEREST ON THAT
OBLIGATION IS SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
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 and the New York 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 and the New York 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.
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.
17
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 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
18
standards, which correspond generally to the standards the insurer has
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.
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.
19
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 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 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
20
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.
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."
21
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. 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.
RATINGS AND ASSET COVERAGE RISK. While Moody's and S&P assign a rating of
"Aaa" and "AAA," respectively, 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.
See "Description of APS - Rating Agency Guidelines and Asset Coverage" for a
description of the asset tests each Fund must meet.
LIMITED OPERATING HISTORY. Each Fund is a closed-end investment company
with a limited history of operations and is designed for long-term investors and
not as a trading vehicle.
INTEREST RATE AND MARKET RISK. The prices of municipal obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. A
decline in the prices of the municipal obligations owned by a Fund would cause a
decline in the net asset value of the Fund, which could adversely affect the
trading price of the Fund's Common Shares. This risk is usually greater among
municipal obligations with longer maturities or durations. Although each Fund
has no policy governing the maturities or durations of its investments, each
Fund expects that it will invest in a portfolio of longer-term securities. This
means that each Fund will be subject to greater market risk (other things being
equal) than a fund investing solely in shorter-term securities. Market risk is
often greater among certain types of income securities, such as zero-coupon
bonds, which do not make regular interest payments. As interest rates change,
these bonds often fluctuate in price more than coupon bonds that make regular
interest payments. Because each Fund may invest in these types of income
securities, it may be subject to greater market risk than a fund that invests
only in current interest paying securities.
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
22
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.
CALIFORNIA CONCENTRATION. As described above, the California Fund will
invest substantially all of its net assets in municipal obligations that are
exempt from California personal income tax. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
municipal obligations. The information set forth below and the related
information in the Statement of Additional Information is derived from sources
that are generally available to investors. The information is intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of California. It should
be noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
California's economy is the largest among the 50 states and one of the
largest in the world. The State has a diversified economy with major sectors in
manufacturing, agriculture, services, tourism, international trade and
construction. The State has a population of about 35 million, which has been
growing at a 1-2% annual rate for several decades. Gross domestic product of
goods and services in the State exceeds $1 trillion. Personal income was
estimated at $1,095 billion in 2000. Total employment is over 16 million.
Since 1994, the California economy had been growing steadily, outpacing
the rest of the nation, with particular strength in high technology
manufacturing, software, exports, services, entertainment and construction. By
late 2000, unemployment had fallen to its lowest level in three decades. After a
strong fourth quarter of 2000, the economy entered a mild recession in 2001, in
concert with the slowdown of the national economy and a cyclical downturn in the
high technology section. The aftermath of the September 11, 2001 terrorist
attacks has hurt tourism-based areas.
The State received significant tax revenues in recent years, derived from
the strong economy and stock market through 2000. Capital gains and stock
options income represented almost a quarter of General Fund revenue in the
2000-2001 fiscal year. The slowing economy and depressed stock market in 2001
will result in significantly reduced revenues in fiscal year 2001-2002, compared
both to the prior year and to earlier forecasts. Since January 2002, the revenue
situation has deteriorated further. The May Revision to the 2002 Governor's
Budget projects a combined budget gap for 2001-2002 and 2002-2003 of $23.6
billion. A large part of the State's annual budget is mandated by constitutional
guarantees (such as for education funding and debt service) and caseload
requirements for health and welfare programs. State General Obligation bonds
are, as of March 1, 2002, rated "A1" by Moody's, "A+" by S&P, and "AA" by Fitch
23
with some agencies maintaining a negative outlook.
Many local government agencies, particularly counties, continue to face
budget constraints due to limited taxing powers and mandated expenditures for
health, welfare and public safety, among other factors. The State and local
governments are limited in their ability to levy and raise property taxes and
other forms of taxes, fees or assessments, and in their ability to appropriate
their tax revenues, by a series of constitutional amendments, enacted by voter
initiative since 1978. Individual local governments may also have local
initiatives which affect their fiscal flexibility.
The foregoing information constitutes only a brief summary of some of the
general factors that may impact certain issuers of municipal obligations and
does not purport to be a complete or exhaustive description of all adverse
conditions to which issuers of municipal obligations held by the Fund are
subject. Additionally, many factors including national economic, social and
environment policies and conditions, which are not within the control of the
issuers of municipal obligations, could affect or could have an adverse impact
on the financial condition of the issuers. The Fund is unable to predict whether
or to what extent such factors or other factors may affect the issuers of the
municipal obligations, the market value or marketability of municipal
obligations or the ability of the respective issuers of the municipal
obligations acquired by the Fund to pay interest on or principal of the
municipal obligations. This information has not been independently verified. See
the California Fund's Statement of Additional Information for a further
discussion of factors affecting municipal bonds in California.
NEW YORK CONCENTRATION. As described above, the New York Fund will invest
substantially all of its net assets in municipal obligations that are exempt
from New York State ("State") and New York City ("City") personal income taxes.
The Fund is therefore susceptible to political, economic or regulatory factors
affecting issuers of State and City municipal obligations. The information set
forth below and the related information in the Statement of Additional
Information is derived from sources that are generally available to investors.
The information is intended to give a recent historical description and is not
intended to indicate future or continuing trends in the financial or other
positions of the State and the City. It should be noted that the
creditworthiness of obligations issued by local New York issuers may be
unrelated to the creditworthiness of obligations issued by the State and the
City, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
The events of September 11, 2001 had a significant impact upon the State
economy generally and more directly on that of the City. The City and State
expect, based on actions of the U.S. Congress and the President, that they will
be fully reimbursed for the cost to recover from clean up and repair the
consequences of the World Trade Center attack. However, prior to September 11,
the nation's and the State's economies had been weakening and the loss of
approximately one hundred thousand jobs in the City as a direct result of
September 11 will produce material budgetary pressures including increases to
later year budget gaps for the City and reductions to State surpluses. The State
has not quantified the impact of expected reductions in receipts and increased
expenditures for unemployment and economic revitalization resulting from
September 11. The City's Financial Plan for Fiscal Years 2002-2006 released by
the Mayor of the City on June 26, 2002 (the "City Financial Plan"), projects
revenues and expenditures for the 2002 and 2003 fiscal years, balanced in
accordance with GAAP, and projects gaps of $3.7 billion, $4.2 billion, and $4.6
billion for fiscal years 2004 through 2006, respectively.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State's economy grew more slowly than that of
the nation as a whole, gradually eroding the State's relative economic
affluence, as urban centers lost the more affluent to suburbs and people and
business migrated to the South and West. However, since 1999, prior to the
impact of September 11, the growth of the State's economy has equaled or
exceeded national trends. The State has for many years had a very high state and
local tax burden relative to other states. The burden of state and local
taxation, in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and individuals
to relocate outside, or to not locate within, the State and remains an
impediment to growth and job creation. The State's and the City's economies
remain more reliant on the securities industry than is the national economy. As
a result, the downturn in that industry prior to September 11 resulted in
adverse changes in wage and employment levels.
24
The State ended its 2001-2002 fiscal year on March 31, 2002 in balance on
a cash basis, with a reported closing balance in the General Fund of $1.03
billion. The State adopted the debt service portion of the State budget for the
2002-2003 fiscal year on March 26, 2002. The State Legislature adopted the
remainder of the budget for the State's 2002-2003 fiscal year on May 16, 2002,
and the State released a revised State Financial Plan on May 22, 2002 and its
first quarterly Financial Plan update on July 12, 2002. There were no changes to
the State Financial Plan projections in the update. The revised State Financial
Plan projects balance on a cash basis for the 2002-2003 fiscal year. General
Fund disbursements, including transfers to other funds are projected to total
$40.22 billion for 2002-2003. The projected General Fund closing balance is $716
million. The State Financial Plan accompanying the Governor's 2002-2003 amended
Executive Budget projected General Fund budget gaps of $2.8 billion in the
2003-2004 fiscal year and $3.3 billion in the 2004-2005 fiscal year. The State
has noted that there are significant risk factors that could result in a
reduction in economic activity statewide such a greater job losses, weaker
financial markets and smaller bonus payments by Wall Street firms.
New York City's expense and capital budgets were adopted on June 21, 2002.
The City has outlined a gap-closing program for fiscal years 2004 through 2006
to eliminate the $3.7 billion, $4.2 billion and $4.6 billion projected budget
gaps for the 2004 through 2006 fiscal years, respectively. This program, which
is not specified in detail, assumes for the 2004 through 2006 fiscal years,
respectively, additional agency programs to reduce expenditures or increase
revenues by $2.4 billion and $2.5 billion; initiatives requiring State and
Federal action of $625 million in each year; increased State education aid of
$425 million in each fiscal year; savings from transportation policy
innovations, including congestion pricing and E-Z Pass initiatives of $100
million, $500 million and $800 million in fiscal years 2004 through 2006
respectively; savings from management and procurement efficiencies of $50
million, $75 million and $100 million in fiscal years 2004 through 2006,
respectively; savings from restructuring sanitation resources of $50 million,
$75 million and $100 million in fiscal years 2004 through 2006 respectively;
savings from tort reform through local law of $25 million, $50 million, and $75
million in fiscal years 2004 through 2006 respectively; and increased revenues
of $60 million in each year from the sale of Taxi Medallions.
The City depends on aid from the State and federal governments to both
enable the City to balance its budget and to meet its cash requirements. The
City Financial Plan provides for an additional $800 million in State and federal
aid in fiscal year 2003 alone. If State or federal aid for fiscal year 2003 or
thereafter is less than the level projected in the Mayor's proposal, projected
savings may be negatively impacted and the Mayor may be required to proposes
significant additional spending reductions or tax increases to balance the
City's budget. If the State, the State agencies, the City, other municipalities
or school districts were to suffer serious financial difficulties jeopardizing
their respective access to the public credit markets, or increasing the risk of
default, the market price of municipal bonds issued by such entities could be
adversely affected.
As of May 23, 2002, Moody's rated the City's outstanding general
obligation bonds A2, Standard and Poor's rated such bonds A and Fitch rated such
bonds A+. Such ratings reflect only the view of Moody's, Standard and Poor's and
Fitch, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
periods of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an adverse effect on the
market prices of City bonds and could increase the City's borrowing costs. See
"Factors Pertaining to New York" in the Statement of Additional Information for
more information about New York.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal obligations and
does not purport to be a complete or exhaustive description of all adverse
conditions to which issuers of New York municipal obligations held by the Fund
are subject. Additionally, many factors including national economic, social and
environmental policies and conditions, which are not with the control of the
issuers of New York municipal obligations, could affect or could have an adverse
impact on the financial condition of the issuers. The Fund is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of New York municipal obligations, the market value or marketability of New York
municipal obligations or the ability of the respective issuers of the New York
municipal obligations acquired by the Fund to pay interest on or principal of
the municipal obligations. This information has not been independently verified.
25
See the New York Fund's Statement of Additional Information for a further
discussion of factors affecting municipal obligations in New York.
SECTOR AND 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 or in municipal obligations in the same economic sector, including,
without limitation, the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a territory's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals as well as obligations of the education and
transportation sectors. This may make a Fund more susceptible to adverse
economic, political, or regulatory occurrences affecting a particular state or
economic sector. For example, health care related issuers are susceptible to
Medicaid reimbursement policies, and national and state health care legislation.
As concentration increases, so does the potential for fluctuation in the net
asset value of Fund Common Shares.
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. Each Fund has no limitation on the
amount of its assets, which may be invested in securities that 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.
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. Any such downgrade could have
an adverse impact on the net asset value and market price of the Common Shares.
See "Primary Investment Policies -- Municipal Obligation Insurance Generally"
above.
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.
26
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 $[55] billion. 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 [5] national municipal investment
companies, [38] single state municipal investment companies, 8 limited maturity
municipal investment companies and 1 money market municipal investment company,
with assets of over $[8] billion.
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
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 .65%
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.
Cynthia J. Clemson is the portfolio manager of the California Fund and is
responsible for day-to-day management of the 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 and the New
York 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.
Each Fund and the Adviser have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Adviser personnel to invest
27
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 part. The Amended By-Laws
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 Trust may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period as discussed below. 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 so 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
28
"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. 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
Auction--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
29
is a Special Dividend Period, each Fund, at its sole option and to the extent
permitted by law, by telephonic and/or 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,
specified in such notice, provided that a Fund may not give a Request for
Special Dividend Period (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 Moody's Eligible Assets and 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 Moody's and 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 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.
30
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
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 Moody's and S&P (or any Substitute Rating Agency in
lieu of Moody's or S&P in the event such party shall not rate the APS) advises
31
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). Each
Fund estimates that, based on the composition of its portfolio at [ ], asset
coverage with respect to the APS would be at least [ ]% immediately after the
issuance of the APS offered hereby. 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 Moody's Eligible Assets
and 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
"Asset Maintenance" 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 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 Auction--Auction
Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividends," the Fund, within 90 days (and generally within 60 days)
after the end of the Fund's fiscal year for which a 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. Such a retroactive allocation may
happen when such allocation is made as a result of (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 unexpectedly turns out 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"). 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
32
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 to each
holder of APS at the maximum combined marginal federal and relevant state income
tax rate (including any surtax) applicable to the taxable character of the
distribution (i.e., ordinary income or net capital gain) in the hands of an
individual or a corporation, whichever is greater (disregarding the effect of
any other state and local taxes and the phase out of, or provisions 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 Auction--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.
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 Moody's Eligible
Assets and 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
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
the outstanding APS, and all capital stock 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
33
(ii) if redemption thereof would result in a Fund's failure to maintain Moody's
Eligible Assets and 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 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 ,
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
constituting senior securities $_____________
-----------------------------------------
Senior securities representing indebtedness plus = $ = %
liquidation value of APS
34
CALIFORNIA FUND
Value of Fund assets less liabilities not
constituting senior securities $____________
-----------------------------------------
Senior securities representing indebtedness plus = $ = %
liquidation value of APS
NEW YORK FUND
Value of Fund assets less liabilities not
constituting senior securities $____________
-----------------------------------------
Senior securities representing indebtedness plus = $ = %
liquidation value 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 Moody's and 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
Moody's and AAA from S&P. Moody's and S&P, each of which is a Rating Agency,
separately issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and 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 Moody's and 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. Moody's and S&P each have
established separate guidelines for determining Discounted Value. These
guidelines define eligible portfolio assets (respectively, "Moody's Eligible
Assets" and "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 Moody's and 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 Moody's or 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
35
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 Moody's or
S&P, or both, as appropriate, that any such change would not impair the ratings
then assigned by Moody's and S&P to the APS.
As recently described by Moody's and 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 are based on current information
furnished to Moody's and 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
stock 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
36
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 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 the
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 AUCTION
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 [ ] ("[ ]" 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.
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.
37
In addition to serving as the Auction Agent, [ ] 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 Salomon
Smith Barney Inc. [ ] and [ ], 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 Salomon Smith Barney Inc. and 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 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.
38
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"). Auctions for the APS for
Dividend Periods after the Initial Dividend Period normally will be held with
respect to a Fund on every day set forth below after the preceding Dividend
Payment Date, and each subsequent Dividend Period normally will begin on the
following day set forth below (also a Dividend Payment Date):
DIVIDEND PERIOD
AUCTION DAY BEGINNING DAY
National Fund
Series A........... [ ] [ ]
Series B........... [ ] [ ]
Series C........... [ ] [ ]
Series D........... [ ] [ ]
Series E........... [ ] [ ]
California Fund
Series A........... [ ] [ ]
Series B........... [ ] [ ]
New York Fund
Series A........... [ ] [ ]
Series B........... [ ] [ ]
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;
(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
39
(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 Moody's
and S&P (or if Moody's or 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
MOODY'S S&P REFERENCE RATE-- OF REFERENCE RATE--
CREDIT RATINGS CREDIT RATINGS NO NOTIFICATION NOTIFICATION
-------------- -------------- ---------------- ---------------------
Aa3 or Above AA- or higher..... 110% 150%
A3 to a1 A- to A+.......... 125 160
Baa3 to baa1 BBB- to BBB+...... 150 250
Below Baa3 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 Moody's and
S&P to provide a rating for the APS. If Moody's and 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 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
40
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 1:00
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 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 (.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
41
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 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 SHARES. 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, Broder-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer Orders will be required to make
42
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 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.
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 income (see
below), that Fund (but not its shareholders) will not be subject to federal
income tax 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
43
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."
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 would 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.
44
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 its net income 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.
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 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--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.
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 holder's adjusted tax basis in the APS and the amount
received. If the APS are held as a capital asset, the gain or loss will be a
capital 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 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 30% of all taxable dividends, capital
gain dividends 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. Withholding at that rate from taxable dividends
and capital gain distributions is also required for such shareholders who
otherwise are subject to backup withholding.
45
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.
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.
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 July 2, 2002 for the National Fund and dated July 8, 2002 for the
California Fund and the New York Fund (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 [ ],
2002.
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
AMOUNT FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AUTHORIZED ACCOUNT ACCOUNT)
------------------------- ------------- ---------------- ----------------
NATIONAL FUND
Common Shares Unlimited -0 - [ ]
Auction Preferred Shares
Series A [ ] -0- -0-
Series B [ ] -0- -0-
Series C [ ] -0- -0-
Series D [ ] -0- -0-
Series E [ ] -0- -0-
46
CALIFORNIA FUND
Common Shares Unlimited -0- [ ]
Auction Preferred Shares
Series A [ ] -0- -0-
Series B [ ] -0- -0-
NEW YORK FUND
Common Shares Unlimited -0- [ ]
Auction Preferred Shares
Series A [ ] -0- -0-
Series B [ ] -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 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--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 August 28,
2002. At [ ], 2002, 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
47
Fund-- $[ ], $[ ]; California Fund-- $[ ], $[ ]; and New York Fund-- $[ ], $[ ].
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 of Trustees, 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 of Trustees 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 authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees 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 of Trustees 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
48
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 of Trustees 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 the Board of Trustees would vote to convert a Fund to an open-end
investment company.
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the Underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement for each Fund dated the date hereof (each an "Underwriting
Agreement"), each Underwriter named below has severally agreed to purchase, and
the Fund has agreed to sell to such Underwriter, the number of APS set forth
opposite the name of such Underwriter.
UNDERWRITER
SALOMON
SMITH
FUND BARNEY INC. [ ] [ ] [ ] TOTAL
------------------ ----------- ------ ------- ------- -----
National Fund
Series A....... [ ] [ ] [ ] [ ] [ ]
Series B.......
Series C.......
Series D.......
Series E.......
California Fund
Series A....... [ ] [ ] [ ] [ ] [ ]
Series B.......
New York Fund
Series A....... [ ] [ ] [ ] [ ] [ ]
Series B....... [ ] [ ] [ ] [ ] [ ]
Each Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The Underwriters
are obligated to purchase all the APS if they purchase any of the APS.
The Underwriters propose to offer some of the APS directly to the public
at the public offering price set forth on the cover page of this Prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $[ ] per share. The sales load the Fund will pay of $[500] per shares
is equal to [2.00]% of the initial offering price. The Underwriters may allow,
and dealers may reallow, a concession not to exceed $[ ] per share on sales to
other dealers. After the initial public offering, the Underwriters may change
the public offering price and the other selling terms. Investors must pay for
any APS purchased in tithe initial public offering on or before [ ], 2002.
Each Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transaction after they have
ceased to be Underwriters. The Underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, each Fund.
Each Fund anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
49
Information.
Each Fund and the Adviser have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, or to contribute payments the underwriters may be required to make
for any of these liabilities. Insofar as indemnifications for liability arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of each Fund pursuant to the foregoing provisions, or
otherwise, the Fund have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a Fund of
express incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
The settlement date for the purchase of the APS will be [ ], 2002, as
agreed upon by the underwriters, the Fund and the Adviser pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA
02116 is the custodian of each Fund and will maintain custody of the securities
and cash of each Fund. IBT maintains each 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 each
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 each 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 Simpson Thacher & Bartlett, New York, New York. Simpson Thacher
& Bartlett may rely as to certain matters of Massachusetts law on the opinion of
Kirkpatrick & Lockhart LLP. Kirkpatrick & Lockhart LLP and Simpson Thacher &
Bartlett may rely as to certain matters of California law relating to the
California Fund, and New York law relating to the New York Fund, on the opinion
of Sidley Austin Brown & Wood LLP, New York, New York.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, Boston, Massachusetts, is the independent auditor
for each Fund and will audit each Fund's financial statements.
ADDITIONAL INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the SEC. These
50
documents can be inspected and copied for a fee at the public reference
facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and Northeast Regional Office, Woolworth Building, 233
Broadway, New York, New York 10013-2409. Reports, proxy statements and other
information concerning each Fund can also be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified by this reference.
Additional information regarding each Fund and the APS is contained in the
Registration Statement (including amendments, exhibits and schedules) on Form
N-2 filed by each Fund with the SEC. The SEC maintains a Web site
(http://www.sec.gov) that contains each Fund's Registration statement, reports,
proxy and information statements and other information regarding registrants,
including each Fund, that file electronically with the SEC.
51
NATIONAL FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......................B-1
Trustees and Officers....................................................B-9
Investment Advisory and Other Services...................................B-14
Determination of Net Asset Value.........................................B-15
Portfolio Trading........................................................B-16
Taxes....................................................................B-18
Other Information........................................................B-20
Independent Auditors.....................................................B-21
Independent Auditors' Report.............................................B-22
Financial Statements.....................................................B-23
Appendix A: Ratings of Municipal Bonds..................................B-25
Appendix B: Tax Equivalent Yield Table..................................B-31
Appendix C: U.S. Territory Information..................................B-32
Appendix D: Description of Insurers................................. B-
Appendix E: Amended By-Laws.............................................B-
CALIFORNIA FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......................B-1
Trustees and Officers....................................................B-9
Investment Advisory and Other Services...................................B-13
Determination of Net Asset Value.........................................B-15
Portfolio Trading........................................................B-15
Taxes....................................................................B-17
Other Information........................................................B-20
Independent Auditors.....................................................B-21
Independent Auditors' Report.............................................B-22
Financial Statements.....................................................B-23
Appendix A: Ratings of Municipal Bonds..................................B-25
Appendix B: Tax Equivalent Yield Table..................................B-31
Appendix C: California and U.S. Territory Information...................B-32
Appendix D: Description of Insurers.....................................B-
Appendix E: Amended By-Laws.............................................B-
52
NEW YORK FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......................B-1
Trustees and Officers....................................................B-9
Investment Advisory and Other Services...................................B-13
Determination of Net Asset Value.........................................B-14
Portfolio Trading........................................................B-15
Taxes....................................................................B-17
Other Information........................................................B-20
Independent Auditors.....................................................B-20
Independent Auditors' Report.............................................B-21
Financial Statements.....................................................B-22
Appendix A: Ratings of Municipal Bonds...................................B-24
Appendix B: Tax Equivalent Yield Table...................................B-30
Appendix C: New York and U.S. Territory Information......................B-32
Appendix D: Description of Insurers......................................B-
Appendix E: Amended By-Laws..............................................B-
53
GLOSSARY
"7-DAY DIVIDEND PERIOD" means a Dividend Period consisting of seven days.
"ADDITIONAL DIVIDEND" has the meaning set forth on page [ ] 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.
"AMENDED BY-LAWS" means the By-laws of each Fund, as amended , 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 [ ] 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 [ ] of
this Prospectus.
"APS BASIC MAINTENANCE CURE DATE" has the meaning set forth on page [ ] of
this Prospectus.
"AUCTION" means a periodic operation of the Auction Procedures.
"AUCTION AGENT" means [ ], 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 [ ] of this Prospectus.
"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.
54
"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 Salomon Smith Barney Inc. and ,
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 a Moody's
Eligible Assets or S&P Eligible Asset, the quotient of the market value thereof
divided by the applicable Moody's or S&P Discount Factor.
"DIVIDEND PAYMENT DATE" has the meaning set forth on page [ ] of this
Prospectus.
"DIVIDEND PERIODS" has the meaning set forth on page [ ] of this
Prospectus.
"DTC" means The Depository Trust Company.
"ELIGIBLE ASSETS" means Moody's Eligible Assets and 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.
"GENERAL OBLIGATION BOND" has the meaning set forth on page [ ] of this
Prospectus.
"HOLD ORDER" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"IBT" means Investors Bank & Trust Company, the custodian of each Fund's
assets.
"INITIAL DIVIDEND PAYMENT DATE" has the meaning set forth on page [ ] of
this Prospectus.
55
"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 [ ] of this
Prospectus.
"MANDATORY REDEMPTION PRICE" has the meaning set forth on page [ ] 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.
"MOODY'S ELIGIBLE ASSETS" has the meaning set forth on page [ ] of this
Prospectus.
"MUNICIPAL OBLIGATIONS" has the meaning set forth on page [ ] of this
Prospectus.
"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 [ ] of
this Prospectus.
"1940 ACT CURE DATE" has the meaning set forth on page [ ] of this
Prospectus.
"NON-CALL PERIOD" has the meaning set forth under "Specific Redemption
Provisions" below.
"NON-PAYMENT PERIOD" has the meaning set forth on page [ ] of this
Prospectus.
"NON-PAYMENT PERIOD RATE" has the meaning set forth on page [ ] of this
Prospectus.
"NOTICE OF REVOCATION" has the meaning set forth on page [ ] of this
Prospectus.
"NOTICE OF SPECIAL DIVIDEND PERIOD" has the meaning set forth on page [ ]
of this Prospectus.
"OPTIONAL REDEMPTION PRICE" has the meaning set forth on page [ ] 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 [ ] 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.
56
"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 [ ] of this Prospectus.
"RESPONSE" has the meaning set forth on page [ ] of this
Prospectus.
"RETROACTIVE TAXABLE ALLOCATION" has the meaning set forth on page
[ ] of this Prospectus.
"S&P" means Standard & Poor's, or its successors.
"S&P ELIGIBLE ASSETS" has the meaning set forth on page [ ] 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 [ ] of this
Prospectus.
"SPECIAL DIVIDEND PERIOD" has the meaning set forth on page [ ] 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
PaineWebber Incorporated, 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.
57
"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 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.
"TREASURY BONDS" has the meaning set forth on page [ ] of this Prospectus.
"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. "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" has the meaning set forth on page [ ] of this Prospectus.
"WINNING BID RATE" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
58
================================================================================
EATON VANCE INSURED MUNICIPAL BOND FUND
[ ] SHARES, SERIES A
[ ] SHARES, SERIES B
[ ] SHARES, SERIES C
[ ] SHARES, SERIES D
[ ] SHARES, SERIES E
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
[ ] SHARES, SERIES A
[ ] SHARES, SERIES B
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
[ ] SHARES, SERIES A
[ ] SHARES, SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
[EATON VANCE LOGO]
_______________
PROSPECTUS
_______________
SALOMON SMITH BARNEY
[ ]
[ ]
_______________
[ ], 2002
================================================================================
59
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 2002
STATEMENT OF ADDITIONAL INFORMATION
, 2002
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
(800) 225-6265
---------------
TABLE OF CONTENTS
Page
----
Additional Investment Information and Restrictions........................ B-1
Trustees and Officers..................................................... B-9
Investment Advisory and Other Services.................................... B-13
Determination of Net Asset Value.......................................... B-15
Portfolio Trading......................................................... B-15
Taxes..................................................................... B-17
Other Information......................................................... B-20
Independent Auditors...................................................... B-21
Independent Auditors' Report.............................................. B-22
Financial Statements...................................................... B-23
Appendix A: Ratings of Municipal Bonds................................... B-25
Appendix B: Tax Equivalent Yield Table................................... B-31
Appendix C: California and U.S. Territory Information.................... B-32
Appendix D: Description of Insurers...................................... B-54
Appendix E: Amended By-Laws.............................................. B-57
---------------
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 (THE "FUND") DATED , 2002, 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 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 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 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
2
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 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.
3
ECONOMIC SECTOR CONCENTRATION. The Fund may invest 25% or more of its total
assets in municipal obligations of issuers in the same economic sector. There
could be economic, business or political developments which might affect all
municipal obligations in a particular economic sector. In particular,
investments in the industrial revenue bonds listed above might involve (without
limitation) the following risks.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Bonds to finance life care facilities are normally secured only by the
revenues of each facility and not by state or local government tax payments,
they are subject to a wide variety of risks. Primarily, the projects must
maintain adequate occupancy levels to be able to provide revenues sufficient to
meet debt service payments. Moreover, since a portion of housing, medical care
and other services may be financed by an initial deposit, it is important that
the facility maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary cost
pressures is an important factor in this process. The facilities may also be
affected adversely by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.
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 Fund is
4
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.
INVERSE FLOATERS. The Fund currently does not invest in municipal
securities whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index ("inverse floaters"). An
investment in inverse floaters may involve greater risk than an investment in a
fixed rate bond. Because changes in the interest rate on the other security or
index inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a fixed rate
bond. Inverse floaters have interest rate adjustment formulas which generally
reduce or, in the extreme, eliminate the interest paid to 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
5
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. Although the Fund does not intend initially to invest
in inverse floaters, the Fund may do so at some point in the future. The Fund
will provide 30 days' written notice prior to any change in its policy in
investing in inverse floaters.
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 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
6
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 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
7
changes in the overall demand for or supply of various types of municipal
obligations or changes in the investment objectives of investors. Such trading
may be expected to increase the portfolio turnover rate, which may increase
capital gains and the expenses incurred in connection with such trading. The
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;
(8) Invest more than 25% of its total assets in issuers in any one
industry.
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 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%
8
limitation would apply to these issuers. As discussed in the Prospectus and this
SAI, the Fund may invest more than 25% of its total assets in certain economic
sectors, such as revenue bonds, housing, hospitals and other health care
facilities, and industrial development bonds. The Fund reserves the right to
invest more than 25% of total assets in each of these sectors.
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.
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
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL COMPLEX OTHER
WITH THE LENGTH OF OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME AND AGE FUND SERVICE PAST FIVE YEARS TRUSTEE (1) HELD
------------ ----------- ---------- ----------------------------- ----------- -------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee (2) Since President and Chief 174 None
DOB: 11/28/59 7/25/02 Executive Officer of
3 Years 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. (July1997 to April
1999). Formerly, Executive
Vice President of Smith
9
Barney Mutual Funds.
Ms. Bibliowicz is an
interested person because of
her affiliation with a
brokerage firm.
James B. Hawkes Vice Since Chairman, President and 179 Director of
DOB:11/9/41 President 7/8/02 Chief Executive Officer of EVC, EV and
and Trustee 3 Years BMR, Eaton Vance and EVD
(3) their corporate parent
and trustee(EVC and
EV); Vice President of
EVD. President or
officer of 179
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.
NONINTERESTED
TRUSTEES
Donald R. Dwight Trustee (2) Since President of Dwight 179 Trustee/
DOB:3/26/31 7/25/02 Partners, Inc. (a corporate Director of the
3 Years relations and communications Royce Funds
company). (consisting of
17 portfolios)
Samuel L. Hayes, III Trustee (3) Since Jacob H. Schiff Professor of 179 Director of
DOB: 2/23/35 7/25/02 Investment Banking Emeritus, Tiffany & Co.
3 Years Harvard University Graduate (specialty
School of Business retailer) and
Administration Telect, Inc.
(telecom-munication
services company)
Norton H. Reamer Trustee (4) Since President, Unicorn 179 None
DOB: 9/21/35 7/25/02 Corporation (an investment
3 Years 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
10
investment management
firms) and Chairman,
President and Director,
UAM Funds (mutual funds).
Lynn A. Stout Trustee (4) Since Professor of Law, University 173 None
DOB: 9/14/56 7/25/02 of California at Los Angeles
3 Years 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.
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
TERM OF OFFICE
POSITION(S) AND LENGTH OF
NAME AND AGE WITH FUND SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- --------- -------------- --------------------------------------------
Cynthia Clemson Vice President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 3/2/63 Officer of 16 investment companies managed
by Eaton Vance or BMR.
Thomas J. Fetter President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 8/20/43 Officer of 116 investment companies managed
by Eaton Vance or BMR.
Robert B. MacIntosh Vice President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 1/22/57 Officer of 115 investment companies managed
by Eaton Vance or BMR.
Alan R. Dynner Secretary Since 7/8/02 Vice President, Secretary and Chief Legal
DOB: 10/10/40 Officer of BMR, Eaton Vance, EVD and EVC.
Officer of 179 investment companies
managed by Eaton Vance or BMR.
James L. O'Connor Treasurer Since 7/8/02 Vice President of BMR, Eaton Vance and EVD.
DOB: 4/1/45 Officer of 179 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
11
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.
In reviewing the approval of the investment advisory agreement between the
Fund and the investment adviser, the noninterested Trustees considered, among
other things, the following:
o A report comparing the fees and expenses of the Fund to a peer group of
funds;
o Information on the relevant peer group(s) of funds and appropriate indices;
o The economic outlook and the general investment outlook in the relevant
investment markets;
o Eaton Vance's results and financial condition and the overall organization
of the investment adviser;
o Arrangements regarding the distribution of Fund shares;
o The procedures used to determine the fair value of the Fund's assets;
o The allocation of brokerage, including allocations to soft dollar brokerage
and allocations to firms that sell Eaton Vance fund shares;
o Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;
o 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;
o The quality nature, cost and character of the administrative and other non-
investment management services provided by Eaton Vance and its affiliates;
o Investment management staffing;
o Operating expenses (including transfer agency expenses) to be paid to third
parties; and
o 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(s). 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(s), including
the fee structure (described herein) is in the interests of shareholders.
12
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, 2001.
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
DOLLAR RANGE OF OWNED IN ALL REGISTERED
EQUITY SECURITIES FUNDS OVERSEEN BY
OWNED IN THE TRUSTEE IN THE EATON
NAME OF TRUSTEE FUND 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, 2001, 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, 2000 and December 31, 2001, 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, 2000 and December 31, 2001, 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.
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 October 31, 2002, 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, 2001, 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).
13
SOURCE OF JESSICA M. DONALD R. SAMUEL L. NORTON H. LYNN A.
COMPENSATION BIBLIOWICZ DWIGHT HAYES, III REAMER STOUT
------------ ---------- ------------ ---------- -------- ------------
Fund*........................... $ 200 $ 200 $ 200 $ 200 $ 200
Fund Complex.................... $160,000 $ 162,500(2) $170,000 $160,000 $ 160,000(3)
----------
* Estimated
(1) As of August 1, 2002, the Eaton Vance fund complex consisted of 179
registered investment companies or series thereof.
(2) Includes $60,000 of deferred compensation.
(3) Includes $16,000 of deferred compensation.
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
14
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 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 investment 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 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.
15
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 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
16
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 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 has elected
to be treated and intends 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 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.
17
In order to avoid incurring a federal excise tax obligation, the Code
requires that the Fund distribute (or be deemed to have distributed) by December
31 of each calendar year (i) at least 98% of its ordinary income (not including
tax-exempt income) for such year, (ii) at least 98% of its capital gain net
income (which is the excess of its realized capital gains over its realized
capital losses), generally computed on the basis of the one-year period ending
on October 31 of such year, after reduction by any available capital loss
carryforwards and (iii) 100% of any income and capital gains from the prior year
(as previously computed) that 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 interest, and make certain
distributions.
The Fund's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. Such income will be accrued daily by the Fund and, in order to
avoid a tax payable by the Fund, the Fund may be required to liquidate
securities that it might otherwise have continued to hold in order to generate
cash so that the Fund may make required distributions to its shareholders.
Investments in lower-rated or unrated securities may present special tax
issues for the Fund to the extent that the issuers of these securities default
on their obligations pertaining thereto. The Code is not entirely clear
regarding the federal income tax consequences of the Fund's taking certain
positions in connection with ownership of such distressed securities.
Distributions by the Fund of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income 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 preference items
for the purposes of the AMT. Shareholders of the Fund are required to report
tax-exempt interest on their federal income tax returns.
Tax-exempt distributions received from the Fund are taken into account in
determining, and may increase, the portion of social security and certain
railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible to the extent it is deemed related
to the Fund's distributions of tax-exempt interest. Further, entities or persons
who are "substantial users" (or persons related to "substantial users") of
facilities financed by industrial development or private activity bonds should
consult their tax advisers before purchasing shares of the Fund. "Substantial
user" is defined in applicable Treasury regulations to include a "non-exempt
person" who regularly uses in its trade or business a part of a facility
financed from the proceeds of industrial development bonds, and the same
definition should apply in the case of private activity bonds.
Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 (except to the extent of a portion of the
discount attributable to original issue discount), is taxable as ordinary
income. A long-term debt obligation is generally treated as acquired at a market
discount if purchased after its original issue at a price less than (i) the
stated principal amount payable at maturity, in the case of an obligation that
does not have original issue discount or (ii) in the case of an obligation that
does have original issue discount, the sum of the issue price and any original
issue discount that accrued before the obligation was purchased, subject to a de
minimis exclusion.
18
From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain types of municipal obligations, and it can be expected that
similar proposals may be introduced in the future. Under federal tax legislation
enacted in 1986, the federal income tax exemption for interest on certain
municipal obligations was eliminated or restricted. As a result of such
legislation, the availability of municipal obligations for investment by the
Fund and the value of the securities held by it may be affected.
In the course of managing its investments, the Fund may realize some
short-term and long-term capital gains (and/or losses) as well as other taxable
income. Any distributions by the Fund of 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 and allocated to the Fund.
The Fund's investments in options, futures contracts, hedging transactions,
forward contracts (to the extent permitted) and certain other transactions will
be subject to special tax rules (including mark-to-market, constructive sale,
straddle, wash sale, short sale and other rules), the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of Fund securities, convert capital gain into ordinary income
and convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
investors. The Fund may have 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 tax
holding period of 6 months or less will be disallowed to the extent of any
distributions treated as tax-exempt interest with respect to such shares, and if
the loss exceeds the disallowed amount, will be treated as a long-term capital
loss to the extent of any distributions treated as long-term capital gain with
respect to such shares. In addition, all or a portion of a loss realized on a
redemption or other disposition of Fund shares may be disallowed under "wash
sale" rules to the extent the shareholder acquires other shares of the same Fund
(whether through the reinvestment of distributions or otherwise) within the
period beginning 30 days before the redemption of the loss shares and ending 30
days after such date. Any disallowed loss will result in an adjustment to the
shareholder's tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares 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.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS") as well as shareholders with respect to whom the Fund has received
certain information from the IRS or a broker, may be subject to "backup"
withholding of federal income tax arising from the Fund's taxable dividends and
other distributions as well as the proceeds of redemption transactions
(including repurchases and exchanges), at a rate of up to 30% for amounts paid
during 2002 and 2003. An individual's TIN is generally his or her social
security number.
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
19
particular situations, as well as the state, local, and, where applicable,
foreign tax consequences of investing in the Fund.
If the Fund issues preferred shares, the Fund will designate dividends made
to holders of Shares and to holders of those preferred shares in accordance with
each class's proportionate share of each item of Fund income (such as tax-exempt
interest, net capital gains and other taxable income).
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 tax-exempt interest income
derived from obligations of the state and/or municipalities of the state in
which they are resident, but 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 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.
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
20
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.
21
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Insured California Municipal Bond Fund:
We have audited the accompanying statement of assets and liabilities of
Eaton Vance Insured California Municipal Bond Fund (the "Fund") as of August 19,
2002. This financial statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements 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, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of Eaton Vance Insured
California Municipal Bond Fund as of August 19, 2002 in conformity with
generally accepted accounting principles.
Boston, Massachusetts
August 20, 2002
22
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 19, 2002
ASSETS
Cash........................................................ $ 100.000
Offering costs.............................................. $ 300,000
---------
Total assets................................................ $ 400,000
=========
LIABILITIES
Accrued offering costs....................................... $ 300,000
---------
Total liabilities............................................ $ 300,000
=========
Net assets applicable to 6,666.67 common shares of
beneficial interests issued and outstanding.................. $ 100,000
=========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................. $ 15.00
=========
NOTES TO FINANCIAL STATEMENT
NOTE 1: ORGANIZATION
The Fund was organized as a Massachusetts business trust on July 8, 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 pay all
organizational expenses and 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 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 10,000,000
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 0.65% 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, the Adviser has contractually agreed to reimburse the Fund for
fees and expenses during the first 8 years of operations. These reductions range
from 0.32% of the average weekly gross assets during the first year of
operations, declining to 0.08% of the average weekly gross assets during the
eighth year. The Adviser has not agreed to reimburse the Fund for any portion of
its fees and expenses beyond this time.
Eaton Vance serves as the administrator of the Fund, but currently receives
no compensation for providing administrative services to the Fund.
23
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.
24
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.
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:
25
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.
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.
26
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B-- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (--): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
p: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
27
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:
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH RATINGS
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA'. Because bonds rated
in the `AAA' and `AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated `F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
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.
28
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified that could assist
the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD and D: Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. `DDD'
represents the highest potential for recovery on these bonds, and `D' represents
the lowest potential for recovery.
Plus (+) or Minus (--): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a credit
within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
`F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the `F-1+' and `F-1' categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
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.
29
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 and Moody's Investors Service, Inc.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability of AAA has the highest rating assigned by S&P. Capacity to
honor insurance contracts is adjudged by S&P to be extremely strong and highly
likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policy holder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of the these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P or Moody's 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 and Moody's to debt issues that are fully
or partially supported by insurance policies, contracts, or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination of such debt issues.
30
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 2002 regular federal income
tax and California personal income tax rates applicable to individuals.
COMBINED FEDERAL AND
CALIFORNIA STATE TAX RATES TAX-EXEMPT YIELD
-------------------------- -----------------------------------------------------------
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 -- $27,950 $43,652 -- $46,700 15.0% 6.00% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$27,951 -- $30,298 $46,701 -- $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 $60,599 -- $76,582 27.0% 8.00% 32.84% 5.96% 6.70% 7.44% 8.19% 8.93% 9.68% 10.42%
$38,292 -- $67,700 $76,583 -- $112,850 27.0% 9.30% 33.79% 6.04% 6.80% 7.55% 8.31% 9.06% 9.82% 10.57%
$67,751 -- $141,250 $112,851 -- $171,950 30.0% 9.30% 36.51% 6.30% 7.09% 7.88% 8.66% 9.45% 10.24% 11.03%
$141,251 -- $307,050 $171,951 -- $307,050 35.0% 9.30% 41.05% 6.78% 7.63% 8.48% 9.33% 10.18% 11.03% 11.87%
Over $307,050 Over $307,050 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
$137,300. The tax brackets also do not show the effects of phaseout of
personal exemptions for single filers with adjusted gross income in excess
of $103,000 and joint filers with adjusted gross income in excess of
$206,000. 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 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.
31
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. 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. 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 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
249,300 jobs between January and November of 2001. The recession was
concentrated in the state's high-tech sector and tourism industry. The latter
was hit hard by the September 11 terrorist attacks. From November 2001 to April
2002, employment grew by 46,300 jobs, as the state began to recover. But the
recovery has been slow so far, and unemployment continues to rise. Unemployment
has risen from 4.7 percent in February 2001 to 6.4 percent in April 2002. (See
"Current State Budget" below.)
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.
Non-farm employment this year is likely to be up about 1.0 percent from
2001. Further growth is projected in 2003, the year's average growth expected to
be 2.7 percent. The unemployment rate -- a lagging indicator -- is forecast to
edge up to 6.4 percent this year from a 6.0 percent average in 2001, and then
decline to 5.7 percent in 2003.
Construction trends are expected to be mixed. Low interest rates and a
large backlog of unmet demand should encourage further gains in new residential
construction, with 153,000 new units forecast to be authorized by building
permits in 2002, up from 149,000 in 2001. Next year, homebuilding is expected to
decline to 148,000 units.
Although California has avoided the commercial construction excesses of the
1980s, slower job growth, coupled with new supply already under construction,
will result in rising commercial and retail vacancy rates, which in turn will
discourage new construction starts. After several years of strong double-digit
growth, nonresidential permit values (not adjusted for inflation) are expected
to slow this year, but edge back up in 2003.
The weakness in personal income growth in the current year is assumed to be
primarily driven by 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 are projected to slowly recover with
a 5 percent increase in 2002. Stock options are estimated to have dropped by
32
almost 45 percent, to $44 billion in 2001 and are forecast to decline by another
30 percent in 2002, to $31 billion.
PRIOR FISCAL YEARS' FINANCIAL RESULTS
The combination of resurging exports, a strong stock market, and a
rapidly-growing economy in 1999 and early 2000 resulted in strong growth in
General Fund revenues during fiscal year 1999-2000. Currently, however, both the
nation and the State are experiencing an economic downturn.
2000-2001 FISCAL YEAR BUDGET. The 2000-2001 Budget Act (the "2000 Budget
Act"), signed by the Governor on June 30, 2000, was enacted on time for the
second consecutive year. The spending plan assumed General Fund revenues and
transfers of $73.9 billion, a 3.8 percent increase over 1999-2000 estimates. The
2000 Budget Act appropriated $78.8 billion from the General Fund, a 17.3 percent
increase over 1999-2000 and reflected the use of $5.5 billion from the State
budget reserve available from surpluses in the prior year. In order not to place
undue pressure on future budget years, about $7.0 billion of the increased
spending in 2000-2001 was for one-time expenditures and investments.
At the time the 2000 Budget Act was signed, the Department of Finance
estimated the June 30, 2001 State budget reserve balance to be $1.781 billion.
In addition, the Governor held back $500 million as a set-aside for litigation
costs. The Governor vetoed just over $1 billion in General Fund and special fund
appropriations from the Budget approved by the Legislature, in order to achieve
the budget reserve. Because of the State's strong cash position, the State
announced that it would not undertake a revenue anticipation note borrowing in
2000-2001.
The 2000 Budget Act included special fund expenditures of $15.6 billion,
and bond fund expenditures of $5.0 billion. Special fund revenues were estimated
at $16.5 billion.
CURRENT STATE BUDGET
BACKGROUND. The 2001-2002 Governor's Budget, released January 10, 2001
estimated 2001-2002 General Fund revenues and transfers to be about $79.4
billion and proposed $82.9 billion in expenditures, utilizing a portion of the
surplus expected from 2000-2001. The Governor proposed budget reserves in
2001-2002 of $2.4 billion, including $500 million for unplanned litigation
costs.
The May Revision to the 2001-2002 Governor's Budget disclosed a reversal of
the recent General Fund financial trend, as a result of the slowdown in economic
growth in the State starting in the first quarter of 2001 and, most
particularly, the steep drop in stock market levels since early 2000. The Fiscal
Year 2001-2002 Budget Act projects General Fund revenues in 2001-2002 will be
about $75.1 billion, a drop of $2.9 billion from revised 2000-2001 estimates.
Most of the drop is attributed to the personal income tax, which reflects both
slower job and wage growth and a severe decline in capital gains and stock
option income, which is included in personal income tax statistics.
FISCAL YEAR 2001-2002 BUDGET ACT. 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 Governor vetoed almost $500
million General Fund expenditures from the budget passed by the Legislature. The
spending plan for 2001-2002 included General Fund expenditures of $78.8 billion,
a reduction of $1.3 billion from the prior year. This could be accomplished
without serious program cuts because such a large part of the 2000 Budget Act
comprised 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 assumed
that, during the course of the fiscal year, the $6.2 billion advanced by the
General Fund to the Department of Water Resources for power purchases will be
repaid with interest. See "Recent Developments Regarding Natural Gas and
Electricity" below.
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.
Some of the important features of the 2001 Budget Act were the following:
33
1. Proposition 98 per pupil spending was increased by 4.9 percent to
$7,002. Total General Fund spending of $32.4 billion for K-12 education fully
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, energy
cost assistance, and high-tech high schools.
2. Higher education funding was increased to allow for enrollment increases
at both the University of California and the California State University system
with no fee increases. Additional funding was also provided for 3 percent
student growth at community colleges.
3. Health, welfare and social services generally were fully funded for
anticipated caseload growth. The 2001 Budget Act adopted an Administration
proposal to utilize $402 million of tobacco litigation settlement payments to
fund certain health programs.
4. In addition to $4.3 billion of continuing tax relief, the 2001 Budget
Act contained about $125 million in new General Fund tax relief, primarily for
senior citizens property tax assistance and certain new tax credits aimed at
rural areas and agricultural equipment. As noted above, the Legislature modified
the law permitting a 0.25 percent cut in the state sales tax rate if the General
Fund reserve exceeds three percent of revenues in the current fiscal year. This
change was not expected to impact the 2001-2002 fiscal year.
5. The 2001 Budget Act altered the six-year transportation funding plan
started in the 2000-2001 fiscal year. The Legislature postponed for two years
the transfer of sales taxes on gasoline to support transportation programs, and
this transfer will take place during the 2003-2004 to 2007-2008 fiscal years. As
a result, $2.5 billion of these sales tax revenues will remain in the General
Fund over the 2001-2002 and 2002-2003 fiscal years. To allow all current
projects to remain on schedule through 2002-2003, the legislation authorized
certain internal loans from other transportation accounts. Part of the 2001
Budget Act compromise was an agreement to place on the March 2002 statewide
ballot a constitutional amendment which would make permanent, after 2007-2008,
the dedication of sales taxes on gasoline to transportation purposes. The
constitutional amendment was approved on March 5, 2002 by 69.1% of voters in the
State voting for the dedication.
6. The 2001 Budget Act provided significant assistance to local governments
including $232.6 million for the COPS and county juvenile justice crime
prevention programs, $209 million for mental health and social services, $154
million for street and road maintenance, $124 million for various public safety
programs and $34 million for environmental protection.
2002-2003 PROPOSED GOVERNOR'S BUDGET. The Proposed 2002-2003 Governor's
Budget, released on January 10, 2002 (the "2002-2003 Governor's Budget"),
projected a fall-off in General Fund revenues due to the national economic
recession combined with the stock market decline, which began in mid-2000.
Personal Income Tax receipts, which include stock option and capital gains
realizations, are particularly impacted by the slowing economy and stock market
decline. As a result, the Governor projected a combined budget gap for 2001-2002
and 2002-2003 of approximately $12.5 billion.
The May Revision to the 2002 Governor's Budget (the "May Revision")
projected further deterioration in revenues of $9.5 billion and additional costs
of $1.6 billion over the 2001-2002 and 2002-2003 fiscal years. As a result, the
combined budget gap for 2001-2002 and 2002-2003 rose from the $12.5 billion
estimated in January to $23.6 billion.
The May Revision projected revenues from the three largest sources of tax
revenue (personal income, sales and use and corporation) to be about $61.1
billion in 2001-2002. This is $3.8 billion lower than projected in the 2002
Governor's Budget ($64.9 billion) and $11.7 billion lower than the final
estimates for 2000-2001. Most of the decline in projected tax revenues is
attributable to the personal income tax. Total revenues and transfers, projected
to be $73.8 billion in 2001-2002, include the repayment of $6.7 billion from the
sale of Department of Water Resources Revenue Bonds and other sources to repay
General Fund loans with interest. The Power Bonds were originally expected to be
sold in June 2002. However, the cash flows now show that the sale is anticipated
to occur by the end of October, 2002. See "Recent Developments Regarding Natural
Gas and Electricity." The May Revision projected major General Fund tax revenues
of $70.6 billion and total General Fund revenues and transfers of $78.6 billion
for 2002-2003.
34
In early June, actual receipts reported by the State Controller's Office
for the month of May were $372 million below forecast, on a fund cash basis.
This was attributable to an overstated estimate of fund cash by the Department
of Finance for the month in the range of $344 million. The Department of Finance
bases its budgetary revenue forecast on receipts on the Agency cash basis, not
fund cash basis. Therefore, these lower receipts on a cash basis do not
translate into a significant change in budgetary revenues.
The Governor proposed to close the $23.6 billion budget gap through a
combination of spending reductions and revenue proposals, as well as the maximum
fiscally responsible level of fund shifts, loans, accelerations, transfers and
deferrals:
1. Expenditure reductions in the 2001-2002 and 2002-2003 fiscal years (from
currently budgeted and projected expenditures based on current programs)
totaling about $7.597 billion. This includes the proposals made by the Governor
in November 2001, which were substantially enacted by the Legislature.
2. The receipt of $4.5 billion in 2002-2003 from the securitization (sale)
of a large portion of the State's future receipt of payment from tobacco
companies from the settlement of litigation against those companies.
3. A total of $1.729 billion in loans from various funds, including $1.095
billion from transportation funds.
4. The shift of $1.327 billion of expenditures from the General Fund to
other funding sources, such as special funds and proposed future bond funds.
5. General Fund savings of $1.276 billion in 2002-2003 from a temporary
reduction in the Vehicle License Fee offset level from 67.5 percent to 25
percent for the 2003 calendar year only.
6. The receipt of $1.2 billion additional revenues in 2002-2003 from a
two-year suspension of the net operating loss provisions in current law.
7. General Fund savings of $1.149 billion from a one-month deferral of
certain education disbursements from 2001-2002 to July 2002. This total includes
$76 million for the Instructional Time and Staff Development Reform Program, $61
million for the Standardized Testing and Reporting Program, $39 million for
Beginning Teacher Support and Assistance, $713 million for Targeted Instruction
Improvement Block Grant, $144 million for High Achieving/Improving Schools, and
$116 million for community colleges.
8. General Fund savings of $1.083 billion ($223 million in 2001-2002 and
$860 million in 2002-2003) from the Treasurer's Debt Restructuring Plan to
amortize the State's long-term debt to more closely approximate level annual
debt service costs rather than the level annual principal. The plan also
includes the issuance of refunding debt to pay selected maturities of general
obligation bonds due between February 2002 and June 2004.
9. Anticipated increases in federal funding for health and human services
programs, security/bioterrorism and other areas totaling about $1.081 billion.
10. Additional revenue of $938 million in 2002-2003 due to Federal Tax
Conformity ($432 million) and Tax Compliance ($506 million). The former is
comprised of a new proposal to change California tax law to conform with federal
tax law regarding accounting for bad debt reserves for large banks as well as
the pension and individual retirement account conformity package included in the
Governor's Budget, which was passed by the Legislature and signed by the
Governor on May 8, 2002. The latter is comprised of various proposals such as
waiving penalties and interest on delinquent accounts, increasing collections
activities, ensuring proper auditing of tax credits and improving the
effectiveness of the tax protest and settlement programs.
11. Accelerations and transfers from other funds to the General Fund
totaling $1.287 billion.
12. Additional revenues of $475 million in 2002-2003 from a 50-cent
increase in the tobacco excise tax.
All of these proposals are subject to consideration by the Legislature and,
in some cases, action by other bodies, such as the federal government. The final
outcome of these proposals will be known in the upcoming months.
36
Despite the challenge represented by the severe revenue decline and the
budget gap, the May Revision contains the following major components:
1. The May Revision proposed a 4.8 percent increase in K-12 funding for
2002-2003 above the revised 2001-2002 estimates. This would provide funding for
K-12 schools above the minimum requirement under Proposition 98 at the Test 2
level, fully funding statutory growth and cost-of-living adjustments. Total
Proposition 98 expenditures for education would be about $7,186 per pupil, an
increase from the estimated level of $6,618 for 2001-2002. In addition, the May
Revision preserves funding for key education initiatives including teacher
development and recruitment, instructional materials, class size reduction,
assisting low performing schools, and before and after school care expansion.
2. Although the May Revision proposes to reduce funding for higher
education by 0.6 percent in 2002-2003 compared to the revised estimates for
2001-2002, the proposed reductions are intended to have no direct effect on core
classroom instructional needs. In spite of budget constraints, the May Revision
provides full funding for enrollment increases at the University of California,
California State University and the Community Colleges. The May Revision also
continues funding for the new University of California campus at Merced,
scheduled to open in the fall of 2004.
3. The Governor proposed a total of $30 billion in new general obligation
bonds for local school construction and higher education facilities to be
included in amounts of $10 billion each on the 2002, 2004 and 2006 statewide
ballots. Almost all of the last voted bond authorization, $9.2 billion approved
in 1998, has been allocated.
4. Youth and adult corrections expenditures will be reduced by 3.7 percent
from the previous year, reflecting slowing inmate population growth, while
protecting public safety. Health and human services expenditures will be reduced
by 5.3 percent, while providing health insurance coverage for children and
critical care programs for seniors. Combined expenditures for other programs,
such as transportation, resources, environmental protection, general government
and tax relief, will be reduced by 4.2 percent in the aggregate. Many capital
outlay projects currently funded out of the General Fund are proposed to be
funded with bond funding.
5. In addition to the 6,600 positions eliminated since 1999, the May
Revision proposes to eliminate an additional 4,000 state government positions.
The first priority for elimination in each department will be vacant positions
not required to maintain critical public health and safety functions. A process
will be established for the elimination of filled positions in accordance with
state laws, regulations and Memoranda of Understanding with represented
employees.
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 spending plan for 2002-2003
includes General Fund expenditures of $76.7 billion, a reduction of $141 million
from Fiscal Year 2001-2002. The 2002 Budget Act contains a reserve of $1.035
billion.
The 2002 Budget Act closed the $23.6 billion budget gap between
expenditures and revenues (the "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 Budget Gap. The following are important changes to the proposals
contained in the May Revision to close the Budget Gap:
1. A total of $2.028 billion in loans from various funds, an increase from
the $1.729 proposed in the May Revision.
2. General Fund savings of $1.728 billion from a one-month deferral of
certain education disbursements, an increase from the $1.149 billion proposed in
the May Revision.
3. The General Fund savings of $1.276 billion in 2002-2003 from a temporary
reduction in the Vehicle License Fee offset level proposed in the May Revision
was not included in the 2002-2003 Budget Act to address the Budget Gap.
36
The 2002 Budget Act contains the following notable changes since the May
Revision:
1. The 2002 Budget Act increases K-12 funding to $30.8 billion, a 2.1
percent increase from the May Revision; and
2. The 2002 Budget Act eliminates 7,000 State government positions, an
increase of 4,000 positions from the May Revision.
Complete text of the 2002 Budget Act may be found at the website of the
Department of Finance, www.dof.ca.gov, under the heading "California Budget."
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
As of March 2002, the following ratings for the State of California general
obligation bonds have been received from Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and Fitch, Inc. ("Fitch"):
Fitch Moody's S&P
----- ------- ---
AA A1 A+
Currently, the State's rating outlook with Moody's and S&P 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.
RECENT DEVELOPMENTS REGARDING NATURAL GAS AND ELECTRICITY
During the past year California has experienced difficulties with the
prices and supplies of natural gas and electricity in much of the State. 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") have resulted in the need to
implement rotating electricity blackouts, affecting millions of Californians, on
several occasions since the start of 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"). Following the Governor's
proclamation under the Emergency Services Act, the Power Supply Program was
further authorized by the enactment of legislation (Chapter 4 and 9, First
37
Extraordinary Session of 2001, hereafter referred to as the "Power Supply Act")
and the adoption of related orders by the California Public Utilities Commission
("CPUC").
DWR began selling electricity to 10 million retail electric customers in
California in January 2001. DWR purchases power from wholesale supplies under
long-term contracts and in short-term and spot market transactions. DWR
electricity is delivered to the customers through the transmission and
distribution systems of the Utilities and payments from the customers are
collected for DWR by the Utilities pursuant to servicing arrangements ordered by
the CPUC. The DWR power supply program is expected to supply the shortfall (the
"net short") between the amount of electricity required by customers of the
Utilities and the amount of electricity furnished to customers by the Utilities
until December 31, 2002. The Governor and the CPUC are developing plans for the
provision of the net short after 2002, including plans to enable each of the
Utilities to be able to furnish the portion of the net short not provided by
DWR's long-term contracts (the "residual net short"). Alternatively, it is
possible that the authorization of DWR to provide the residual net short will be
extended by legislation or that another State agency will be authorized to
develop a successor program.
DWR's Power Supply Program has been financed by unsecured loans from the
General Fund (and certain other funds) of the State, plus retail customer
payments received by DWR. As of May 31, 2002, DWR had, since the start of the
program on January 17, 2001, incurred power purchase obligations and
administrative expenses aggregating slightly more than $13 billion, of which
$6.2 billion was advanced from the General Fund (of which $116 million has
already been repaid) and $5.2 billion was paid from retail customer payments
received by the DWR. Advances from the General Fund ceased in June 2001 after
DWR arranged secured loans from banks and other financial institutions (the
"Interim Loans"), providing net proceeds aggregating approximately $4.1 billion.
Pursuant to the Power Supply Act, DWR plans to issue approximately $11
billion of revenue bonds to fund its Power Purchase Program (or provide
long-term financing for costs that have been financed on an interim basis with
advances from the General Fund of the State and an interim loan from certain
lenders). The revenue bonds will be repaid from a dedicated revenue stream
derived from retail end use customer payments for electricity. Completion of the
DWR bond sale is dependant on a number of factors. The timing of the bond sale
is uncertain but DWR expects it to occur in 2002. The State may make additional
loans or other advances from the State General Fund to support the Power Supply
Program subsequent to the issuance of the DWR revenue bonds. Alternative sources
of additional funding for the power supply program (if needed) would be rate
increases and additional revenue bonds or other obligations. The principal
amount of revenue bonds that can be issued by DWR may not exceed $13.4 billion.
The terms of the Interim Loans require that the DWR revenue bond proceeds
be used to prepay the Interim Loans before being used to repay the State loans
or to pay expenses of the Power Supply Program. Unless the Interim Loans are
prepaid, Interim Loan principal is payable in eleven quarterly installments
commencing on April 30, 2002. Currently, there is $3.8 billion outstanding.
Interest is payable at variable rates tied to market indices. Interest was
capitalized through February 2002, and thereafter principal and interest are
payable solely from revenues from power sales and other funds of the Power
Supply Program after provision is made for the payment of power purchase costs
and other operating expenses of the Power Supply Program. The Interim Loans are
not a general obligation of the State and are not repayable from or secured by
the General Fund. The loan agreement does not provide for acceleration of the
Interim Loans if DWR is not in compliance with the terms of the loan agreement.
DWR's current revenue requirement includes amounts sufficient to pay scheduled
Interim Loan debt service until a new revenue requirement can be implemented.
Delays in issuing the DWR revenue bonds would in turn delay the DWR's
planned loan repayments to the General Fund and may require additional loans
from the General Fund. If State loans to the DWR affect available resources to
pay for normal State operations, the State could issue short-term obligations to
maintain adequate cash reserves. The State has issued short-term obligations in
the past to meet its cash flow needs.
On April 6, 2001, Pacific Gas & Electric ("PG&E"), a Utility, filed for
voluntary protection under Chapter 11 of the federal Bankruptcy Code. The
bankruptcy proceedings (hereafter the "PG&E Bankruptcy") are pending in U.S.
Bankruptcy Court in San Francisco, California. During the PG&E Bankruptcy, it is
anticipated that PG&E's operations will continue under current management, while
the Bankruptcy Court decides on the allocation of PG&E's available cash flow and
assets among its various creditors. The State has filed numerous claims as a
creditor of PG&E, including, but not limited to, claims for income and property
taxes, regulatory fees, fines and penalties and environmental fees, fines and
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penalties. PG&E or other parties to the PG&E Bankruptcy may seek to have the
Bankruptcy Court take actions that affect prices charged to end users for
electricity or affect existing contracts for purchase or sale of electricity.
Bankruptcies involving large and complex companies typically take several years
to conclude. PG&E's parent company, PG&E Corp., has not filed for bankruptcy
protection. On September 20, 2001, PG&E filed its reorganization plan with the
Bankruptcy Court. The plan seeks an extensive restructuring of PG&E's business
and the transfer of certain of its assets, including its electric and gas
transmission assets, to newly created limited liability companies. PG&E has also
filed the plan at FERC, the Securities and Exchange Commission and the Nuclear
Regulatory Commission seeking their approval of the elements under their
jurisdiction. On November 27, 2001, the CPUC filed its opposition to the PG&E
disclosure statement describing the reorganization plan. On February 27, 2002,
the CPUC filed a term sheet on an alternate plan of reorganization. The
Bankruptcy Judge accepted the term sheet, and ordered the CPUC to file a plan of
reorganization and disclosure statement by April 15, 2002 with no date set for a
hearing. On April 3, 2002, PG&E filed an amended disclosure statement and plan
of reorganization. A hearing on PG&E's amended plan of reorganization was held
on April 11, 2002. On April 15, 2002, the CPUC filed an alternate plan of
reorganization and disclosure statement. Both plans have been submitted to the
creditors for voting. The Bankruptcy Judge has scheduled July 17, 2002, as the
date for filing objections for both plans and August 12, 2002 as the date by
which creditors must return their ballots accepting or rejecting the plans. The
votes have not yet been counted. On August 23, 2002, the CPUC and the creditors'
committee reached an agreement to ask the Bankruptcy Judge to reopen the vote
and let creditors consider a revised version of the CPUC plan.
Southern California Edison ("SCE"), a Utility, has not sought protection of
or been forced into bankruptcy, although this may change in the future. SCE has
entered into a Memorandum of Understanding with the Governor designed to
strengthen its financial condition.
All three Utilities have applications pending before the CPUC seeking
authorization to increase rates further to recover past losses and increase
future revenues. On October 2, 2001, SCE and the CPUC announced the proposed
settlement of certain pending litigation which is intended to allow SCE to
recover from ratepayers a substantial portion of its accumulated debts. The
settlement was approved by the federal District Court on October 5, 2001. A
consumer group has appealed that decision. The group's motions for stay of
judgment pending appeal have been denied by both the District Court (on remand)
and the appellate court. Oral argument on that appeal occurred on March 7, 2002,
but the Court has not yet ruled. SCE had previously indicated that it might seek
bankruptcy law protection if the Legislature did not enact legislation to assist
its financial recovery. See "Pending Litigation" below for a discussion of
related lawsuits. The amount and timing of further rate increases for
electricity supplied by DWR and the Utilities may be affected by a number of
factors, including rehearings and appeals of the applicable CPUC orders and the
PG&E Bankruptcy.
A number of lawsuits have been filed concerning various aspects of the
current energy situation. These include disputes over rates set by the CPUC;
responsibility for electricity and natural gas purchases made by the Utilities
and the California Independent System Operator (the "ISO"); continuing
obligations of certain small power generators; and antitrust and fraud claims
against various parties. (See "Pending Litigation" below for a discussion of
certain of these lawsuits and further discussion of the PG&E Bankruptcy.)
California imports a substantial amount of its natural gas. Limited gas
transmission pipeline capacity into California and a major pipeline break in New
Mexico during the summer of 2000, coupled with increases in wholesale prices for
natural gas in the United States, have resulted in substantial price increases
that are being passed on to business and residential consumers. Also, local
municipalities and governmental entities are paying increased service costs,
which might negatively impact their budgets. Pipeline expansion is planned but
will not be complete for several years. Nationwide, relatively high prices for
natural gas are likely to persist for several years. Supplies of natural gas in
northern and central California are also being affected by the financial
difficulty of the utility company serving that region. Shortages of natural gas
supplies could adversely affect the economy, and particularly generation of
electricity, much of which is fueled by natural gas.
Since January 2001, the Governor and Legislature have implemented a number
of steps through new laws and Executive Orders to respond to the energy problems
in the State. These steps include expediting power plant construction and other
means of increasing electricity supplies, implementing vigorous energy
conservation programs, and entering into long-term power supply and natural gas
supply contracts to reduce reliance on spot markets. The Governor believes the
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combination of these steps, along with moderate temperatures, allowed the State
to avoid any electricity interruptions during the peak summer energy demand
season.
While the State expects that over time the measures described above,
coupled with conservation, load management and improved energy efficiency, will
continue to enable the State to avoid disruptions of the supply of electricity
to the public, and will maintain lower wholesale power prices and ultimately
promote the financial recovery of the Utilities, the situation continues to be
fluid and subject to many uncertainties. There can be no assurance that there
will not be future disruptions in power supplies or related developments which
could adversely affect the State's economy, and which could in turn affect State
revenues, or the health and comfort of its citizens. Further, the PG&E
Bankruptcy interjects a new party, the federal Bankruptcy Court, into the making
of decisions regarding future electricity costs and the role of PG&E. There can
be no assurance that there will not be future disruptions in energy supplies or
related developments that could adversely affect the State's and local
governments' economies, the State's business climate and that could in turn
affect State and local revenues.
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.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding local
K-12 schools and community colleges. During the recession of the early 1990s,
the Legislature eliminated most of the remaining components of the
post-Proposition 13 aid to local government entities other than K-14 education
districts, by requiring cities and counties to transfer some of their property
tax revenues to school districts. However, the Legislature also has provided
additional funding sources (such as sales taxes) and reduced certain mandates
for local services. Local governments sued the State (Sonoma County, et al. v.
Commission on State Mandates, et al.) over these transfers. The appeals court
denied the plaintiffs' position and the subsequent appeal was not heard by the
State Supreme Court.
Since then the State has also provided additional funding to counties and
cities through various programs. The 2001 Budget Act and related legislation
provide assistance to local governments, including $357 million for various
local public safety programs, including the Citizens' Option for Public Safety
("COPS") program to support local front-line law enforcement, sheriffs'
departments for jail construction and operations, and district attorneys for
prosecution, $154 million for deferred maintenance of local streets and roads,
$60 million in assistance for housing, $209 million for mental health and social
services and $34 million for environmental protection. For 2002-2003 the State
proposes to continue to provide $121.3 million for the COPS program,
approximately $134 million for deferred maintenance of local streets and roads,
$38 million for environmental protection and hundreds of millions for health and
human services. Nevertheless, the energy situation may have an impact on whether
these moneys are actually allocated to the local governments. (See "Recent
Developments Regarding Natural Gas and Electricity" above.)
The economies of various local governments may be negatively affected by
the energy situation in California. (See "Recent Developments Regarding Natural
Gas and Electricity" above.) Additionally, for the majority of local governments
that do not have publicly owned utilities, the increased charges for power will
have budgetary impact, but the degree of that impact cannot be ascertained at
this time.
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,
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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 produces savings
associated with specified Welfare-to-Work outcomes. Under Ca1WORKs, counties
will still be required to provide "general assistance" aid to certain persons
who cannot obtain welfare from other programs.
Administration of the CalWORKs program is largely at the county level, and
the counties receive financial incentives for success in this program. Beginning
in 2000-2001, county performance incentive earnings are subject to Budget Act
appropriation. Counties will have earned $1.2 billion through the end of
2001-2002, but have only spent $186.6 million through December 2001. Because the
Department of Social Services (the "DSS") has allocated $1.1 billion to
counties, the majority of this funding currently resides in county bank
accounts.
Recently, the federal government formally notified the DSS that the State
is in violation of the federal Cash Management Act in drawing down federal
Temporary Assistance for Needy Families ("TANF") dollars for fiscal incentive
purposes that were not going to be immediately spent by the counties. TANF is a
federal block grant program with lifetime time limits on TANF recipients, work
requirements and other welfare reform changes. Under the Cash Management Act,
TANF funds are to remain at the federal level until such time as a state is
going to actually expend those funds. The DSS plans to recover the $600 million
that is expected to remain unexpended by the counties. The May Revision to the
2002 Governor's Budget proposes to use $169.2 million as a funding source in
2002-2003 to maintain CalWORKS funding within available resources and $120
million to fund a one-time augmentation to CalWORKS employment services. The
remaining, $310.8 million will be appropriated to counties for 2002-2003. In
addition to $97 million in incentives earned prior to 2000-2001, $169.2 million
may need to be paid to counties in the future. The $120 million would not need
to be paid back because the counties would be required to waive their
entitlement to these incentive funds as a condition for receipt of the one-time
employment services augmentation.
Welfare caseloads have declined considerably with the implementation of the
CalWORKs program. The 2002-2003 CalWORKS caseload is projected to be 524,000, up
from 507,000 cases in 2001-2002. This represents a major improvement from the
rapid growth of the early 1990s, when caseload peaked at 921,000 cases in
1994-1995. The longer-term impact of the Law and CalWORKS is being evaluated by
the RAND Corporation, with a series of reports to be furnished and the final
report to be released in 2002.
The 2001-2002 CalWORKs budget reflects that California has met the
federally-mandated work participation requirements for federal fiscal years
1997, 1998, 1999, and 2000. Having met that goal, the federally-imposed
maintenance-of-effort ("MOE") level for California was reduced from 80 percent
of the federal fiscal year 1994 baseline expenditures for the former Aid to
Families with Dependent Children ("AFDC") program ($2.9 billion) to 75 percent
($2.7 billion). It is expected that California will continue to meet the work
participation goal in federal fiscal year 2001 and beyond. In addition, it is
assumed that California will receive a TANF High Performance Bonus award of $20
million in 2001-2002. This bonus will be awarded to states for their successes
in moving welfare recipients to work and sustaining their participation in the
workforce during federal fiscal year 2001. California also received a TANF High
Performance Bonus Award in 1999-2000 and 2000-2001 based upon the State's
success during federal fiscal years 1999 and 2000 respectively.
In 2002-2003 it is anticipated that California will continue to meet, but
not exceed, the federally-required $2.7 billion combined State and county MOE
requirement. The May Revision includes total CalWORKs-related expenditures of
$7.4 billion for 2002-2003, including child care transfer amounts for the
Department of Education and the general TANF Block Grant reserve.
Authorization for the TANF program ends September 30, 2002. For the TANF
program to continue, the U.S. Congress must pass, and the President must sign,
legislation reauthorizing the program prior to that date. Although
reauthorization could simply involve extending the funding period, it is more
likely that Congress and the President will consider several key policy changes.
It is unknown at this time how California's TANF funding will be affected by
reauthorization.
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
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counties. Since then, the county general purpose contribution for court
operations was reduced by $415 million and cities are retaining $68 million in
fine and penalty revenue previously remitted to the State. The State's trial
court system will receive approximately $1.7 billion in State resources and $475
million in resources from the counties in 2002-2003.
TOBACCO LITIGATION. 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. Tobacco manufacturers
agreed to billions of dollars in payments and restrictions in marketing
activities. 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). During Fiscal Year 2000-2001, the General Fund received
$386 million in settlement payments. The 2001 Budget Act forecasts payments to
the State totaling $488 million in 2001-2002 of which $86 million will go to the
General Fund and the balance will be in a special fund to pay certain healthcare
costs and debt service payments for a Tobacco Settlement securitization. The
2001 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.)
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 and (as a result of a constitutional amendment
approved by California voters on November 7, 2000) on bonded indebtedness for
school facilities and equipment approved by 55 percent of the voters voting on
the bond measure, subject to certain restrictions. "Full cash value" is defined
as "the county assessor's valuation of real property as shown on the 1975-1976
tax bill under `full cash value' or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed two percent) or decreases in the
consumer price index or comparable local data, or to reflect reductions in
property value caused by damage, destruction or other factors.
On November 7, 2000, voters approved Proposition 39 called the "Smaller
Classes, Safer Schools and Financial Accountability Act" (the "Smaller Classes
Act"). The Smaller Classes Act amends Section 1 of Article XIII A, Section 18 of
Article XVI of the California Constitution and Section 47614 of the California
Education Code. Effective upon its passage, the newly added Section 18(b) of
Article XVI 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 Constitution. The reduced 55
percent voter requirement applies only if the bond measure submitted to the
voters includes certain restrictions, identifications and certifications.
Section 1(b)(3) of Article XIII A has been added to except from the one percent
ad valorem tax limitation under Section 1(a) of Article XIII A of the
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Constitution levies to pay bonds approved by 55 percent of the voters subject to
the restrictions with respect to the ballot measure.
The Legislature enacted AB 1908, Chapter 44, which became effective upon
passage of Proposition 39. AB 1908 amends various sections of the Education
Code. Under amendments to Sections 15268 and 15270 of the Education Code, the
following limits on ad valorem taxes apply in any single election: (1) for a
school district, indebtedness shall not exceed $30 per $100,000 of taxable
property; (2) for a unified school district, indebtedness shall not exceed $60
per $100,000 of taxable property; and (3) for a community college district,
indebtedness shall not exceed $25 per $100,000 of taxable property. Finally, AB
1908 requires that a citizens' oversight committee must be appointed who will
review the use of the bond funds and inform the public about their proper usage
and perform annual audits.
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.
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-14 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-14 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-14 schools.
During the recession in the early 1990's, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from the 1991-1992
Fiscal Year to the 1993-1994 Fiscal Year.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, that challenged the validity of these off-budget loans. The settlement of
this case, finalized in July 1996, provides, among other things, that both the
State and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State is repaying $935 million
by forgiveness of the amount owed, while schools are repaying $825 million. The
State's share of the repayment is reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
counts either as appropriations that count toward satisfying the Proposition 98
guarantee, or as appropriations from "below" the current base. Repayments are
spread over the eight-year period of the 1994-1995 Fiscal Year through the
2001-2002 Fiscal Year to mitigate any adverse fiscal impact.
Increased General Fund revenues, above initial budget projections, in the
1994-1995 through 2000-2001 Fiscal Years along with policy decisions to increase
K-14 appropriations have resulted in retroactive increases in Proposition 98
appropriations from subsequent Fiscal Years' budgets. 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 65.2 percent from the level
in place in 1994-1995, to an estimated $7,186 per pupil in 2002-2003.
Although total revenues (General Fund subject to the State Appropriations
Limit (the "SAL") and local property taxes) have increased steadily since
1994-95, the projected level of General Fund SAL revenue has declined by over
$3.5 billion and $3.4 billion for 2001-2002 and 2002-2003, respectively, since
the 2002-2003 Governor's Budget. The estimate of the guarantee has increased
$1.184 billion since the Governor's Budget due primarily to increases in the
California per capita personal income and average daily attendance. In response
to the lower revised revenues for 2001-2002 and 2002-2003, and the increase in
the Proposition 98 guarantee in the budget year, the May Revision proposes to
defer $1.149 billion of undisbursed 2001-2002 appropriations. To further address
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the overall fiscal situation in the current year, the May Revision proposes to
reappropriate over $503 million in unspent Proposition 98 funds from prior years
to backfill an identical decrease to the 2001-2002 Proposition 98 appropriation
level. The reductions in 2001-2002 Proposition 98 appropriations leave the total
appropriation at $5.5 billion above the Test 3 guarantee level.
The revenue projection for 2002-2003 exceeds the revised 2001-2002
estimates by approximately $5.9 billion. The General Fund share of the guarantee
will increase approximately $2.7 billion, from $29.5 billion in 2001-2002 to
$32.2 billion in 2002-2003. Total funding for K-14 education provides a funding
level of approximately $47.2 billion ($7,186 per K-12 pupil), an increase of
nine percent compared to the revised 2001-2002 level.
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. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments, or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt that will require interpretation by the courts or the State
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
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.
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.
Propositions such as Proposition 98 and others that may be adopted in the future
may place increasing pressure on the State's budget over future years,
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 other programs by raising taxes.
The voters of California adopted a statutory initiative ("Proposition 62")
at the November 4, 1986 election. Proposition 62, as enacted in the California
Government Code, among other things, generally (1) requires that any tax for
general governmental purposes imposed by local governmental entities be approved
by resolution or ordinance adopted by two-thirds vote of the governmental
agency's legislative body and by a majority of the electorate of the
governmental entity and (2) requires that any special tax (defined as taxes
levied for other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters within that
jurisdiction.
Following its adoption by the voters, various provisions of Proposition 62
were declared unconstitutional at the appellate court level and in reliance on
such decisions many local governments imposed taxes without compliance with the
specified voter approval requirements of Proposition 62. On September 28, 1995,
however, the California Supreme Court, in Santa Clara County Local
Transportation Authority v. Guardino, upheld the constitutionality of the
portion of Proposition 62 requiring voter approval as a condition precedent to
the imposition of taxes by a local government.
On June 4, 2001, in Howard Jarvis Taxpayers Association v. City of La
Habra, the California Supreme Court disapproved a December 15, 1997 holding in
McBreaty v. City of Brawley in which the State Court of Appeals concluded that
the three-year statute of limitations applicable to taxes subject to Proposition
62 requirements ran from the date of the Guardino decision. The Supreme Court
held that a local governmental entity's continued imposition and collection of a
tax without voter approval was an ongoing or 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
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years had passed since the tax measure was adopted. Thus, each time an
unconstitutional tax is collected, the statute of limitations is triggered
again.
As a result of this ruling, absent the application of a different statute
of limitations, a tax originally imposed in violation of Proposition 62
requirements is potentially subject to court challenge within three years of its
collection. 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 GUARDINO AND CITY OF LA HABRA decisions.
FUTURE INITIATIVES. Articles XIII A, XIII B, XIII C and XIII D 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 are described below.
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 trial court found liability in inverse
condemnation and awarded damages of $500,000 to a sample of plaintiffs. The
State's potential liability to the remaining plaintiffs ranges from $800 million
to $1.5 billion. In 1992, the State and plaintiffs filed appeals. In August
1999, the court of appeal issued a decision reversing the trial court's judgment
against the State and remanding the case for retrial on the inverse condemnation
cause of action. The California Supreme Court denied plaintiffs' petition for
review. By "Intended Decision" dated September 11, 2001, following a four-month
bench trial, the judge ruled that the 3,000 plaintiffs take nothing from the
State or its co-defendant, Reclamation District 784. Plaintiffs have appealed.
Appellant's Opening Brief is due August 23, 2002.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a State budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for Fiscal Year 1998-1999, with certain
limited exceptions, in the absence of a State budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation. On July 22 and July 27, 1998,
various employee unions that had intervened in the case appealed the trial
court's preliminary injunction and asked the court of appeal to stay the
preliminary injunction. On July 28, 1998, the court of appeal granted the
unions' requests and stayed the preliminary injunction pending the court of
appeal's decision on the merits of the appeal. On August 5, 1998, the court of
appeal denied the plaintiffs' request to reconsider the stay. Also on July 22,
1998, the State Controller asked the California Supreme Court to immediately
stay the trial court's preliminary injunction and to overrule the order granting
the preliminary injunction on the merits. On July 29, 1998, the Supreme Court
transferred the State Controller's request to the court of appeal. On May 29,
2002, the court of appeal upheld the Controller's authority to make payments
pursuant to continuing appropriations in the absence of a 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. This ruling could result in the State suspending certain Proposition 98
payments to school districts for Fiscal Year 2002-2003 if the State does not
adopt a budget or pass an emergency appropriation in order to make such
payments. In prior years the State has enacted an emergency appropriation in the
absence of an adopted budget in order to disburse Proposition 98 moneys to the
State's school districts.
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
45
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. After various
pre-trial proceedings, the State filed its answer to the plaintiffs' complaint
in January 2000. The State is defending the action.
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 the voters passed in 1998 to establish the Children and
Families Commission and local county commissions and to fund early childhood
development programs. CART AND CIGARETTES CHEAPER! allege that Proposition 10,
which increases the excise tax on tobacco products, violates 11 sections of the
California Constitution and related provisions of law. McLane/Suneast challenges
only the "double tax" aspect of Proposition 10. Trial of these three
consolidated cases commenced on September 15, 2000 and concluded on November 15,
2000. A final statement of decision was issued on December 7, 2000, and 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. Respondents filed their brief on July 5,
2002. Reply briefs are due September 3, 2002. Due to the facial challenge, there
is exposure as to the entire $750 million per year collected under Proposition
10 together 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 a San Francisco-run 1,200-bed skilled nursing facility (Laguna
Honda) who require long term care should be assessed as to whether they can be
treated at home or in community-based facilities, and then provided appropriate
care. The State has filed an answer. At this early stage in the proceedings, it
is difficult to assess the financial impact of a judgment against the State.
Should the plaintiffs prevail, however, the State's liability could exceed $400
million. The State is defending this action.
In STEPHEN SANCHEZ, ET AL. V. GRANTLAND JOHNSON, ET AL., the plaintiffs
have brought a class action in federal District Court for the Northern District
of California, 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
violate the Social Security Act, the Civil Rights Act and the Rehabilitation
Act, because they result in unnecessary institutionalization of developmentally
disabled persons. The State has filed a responsive pleading and is contesting
this case. At this early stage in the proceedings, it is difficult to assess the
financial impact of a judgment against the State. Should the plaintiffs prevail,
however, the State's liability could exceed $400 million.
A number of lawsuits have been commenced concerning various aspects of the
current energy situation. These include disputes over rates set by the CPUC;
responsibility for the electricity and natural gas purchases made by the
Utilities and the ISO and the just and reasonable nature of certain of DWR's
long-term power purchase contracts. Except for the consolidated actions
challenging the Governor's authority to commandeer "block forward contracts"
referred to below, these actions do not seek a judgment against the State's
General Fund, and in some cases neither the State nor the DWR is even a party to
these actions. However, these cases may have an impact on the price or supply of
energy in California, or impact the timing of the sale of the DWR revenue bonds
expected to occur in 2002.
More than thirty market participants filed claims aggregating over $1
billion for compensation from the State as a result of the Governor's
commandeering of block forward contracts by Executive Orders in February 2001.
The Victim Compensation and Government Claims Board was divested of jurisdiction
to hear these claims as a result of a petition for writ of mandate by claimants
46
the California Power Exchange ("CalPX"), PG&E and Reliant. The issue of whether
and to what extent compensation is due is now before the Sacramento County
Superior Court in a declaratory relief action filed by the State, PEOPLE V. ACN
ENERGY, INC., ET AL. (O1AS05497), which names as defendants those market
participants which the State believes might claim compensation as a result of
the Governor's actions. Pending inverse condemnation actions against the State
by the CalPX (Los Angeles County Superior Court No. BC 254509), PG&E (San
Francisco City and County Superior Court No. 322921) and Reliant (Los Angeles
County Superior Court No. BC 254563) have been joined with the declaratory
relief action in JUDICIAL COUNCIL COORDINATION PROCEEDING NO. 4203, the
Sacramento County Superior Court. The applicable Bankruptcy Courts have granted
relief from the automatic stay of bankruptcy to enable the parties to prosecute
and defend to final judgment the claims pertaining to PG&E and the Ca1PX.
In DUKE ENERGY TRADING AND MARKETING V. DAVIS, ET AL. (U.S. District Court,
C.D. Cal.), the plaintiff challenges the Governor's orders commandeering SCE and
PG&E block forward market contracts held by the California Power Exchange on the
ground that the orders violated the Supremacy Clause and other constitutional
provisions. Duke Energy seeks a temporary restraining order ("TRO") and an
injunction barring the Governor from taking any action against Duke Energy under
the authority of the Executive Orders and a declaration that Duke Energy has no
obligation to deliver power under the block forward contracts. The hearing on
the TRO, seeking an order restraining the ISO from requiring the energy producer
to supply energy under the contracts, was taken off calendar. Pursuant to an
interim settlement, Duke Energy delivered power to the DWR through April 30,
2001. On April 30, 2001, the U.S. district court granted Governor Davis' motion
to dismiss plaintiff's complaint based on Eleventh Amendment immunity and denied
plaintiff's motions for partial summary judgment to certify final judgment. On
May 4, 2001, Duke Energy dismissed its claims in the district court against
co-defendant, the Power Exchange, without prejudice and filed its notice of
appeal to the Ninth Circuit Court of Appeal. The United States Court of Appeals
for the Ninth Circuit found that the Ex parte Young exception to the Eleventh
Amendment applied and that the Governor's interference with the block forward
contracts' security provisions was preempted by the federal scheme established
by FERC. The Governor's petition for certiorari in the United States Supreme
Court was denied on May 30, 2002.
In PACIFIC GAS AND ELECTRIC COMPANY V. THE CALIFORNIA DEPARTMENT OF WATER
RESOURCES, ET AL. (Sacramento County Superior Court, 01CS01200) PG&E contends
that when DWR reached the determination that its revenue requirement for 2001-02
was "just and reasonable" (a determination the Power Supply Act authorizes DWR
to make), DWR failed to follow the California Administrative Procedure Act (the
"APA"). On June 7, 2002, the superior court issued a judgment finding that DWR
had failed to follow the APA in making its "just and reasonable" determination,
and commanded DWR to follow the procedures mandated by the APA before making any
"just and reasonable" determination. The court's order also stated that its
ruling does not in any way affect any action taken by the CPUC, including the
enforcement and collection of certain existing rates and charges based on a CPUC
order implementing cost recovery of DWR's 2001-02 revenue requirement (CPUC
Decision 02-02-052, dated February 21, 2002, and mailed February 22, 2002). This
matter may be appealed during the 60 days following the notice of entry of
judgment. DWR has not yet determined whether to appeal this decision. The
California Supreme Court denied a petition filed by DWR in this same case
seeking review of an earlier decision of the superior court denying DWR's motion
for judgment on the pleadings.
In CARBONEAU V. STATE OF CALIFORNIA ET AL., filed on November 9, 2001 in
Sacramento Superior Court (01AS06848), the plaintiffs make factual allegations
that include, among others, that certain named defendants who participated in
the negotiation of certain long-term contracts had conflicts of interest. The
plaintiffs plead, among other things, that in negotiating these power contracts,
defendants engaged in unfair business practices and violated anti-trust laws.
Plaintiffs seek declaratory and injunctive relief as well as damages, with a
main objective being to have all electricity contracts entered into by the DWR
since January 2001 declared void as against public policy. On May 17, 2002, the
Superior Court issued a tentative ruling granting the State's demurrer of
plaintiffs' complaint, without leave to amend.
In MCCLINTOCK, ET. AL. V. BUDHRAJA, DWR, ET. AL., filed May 1, 2002, in Los
Angeles County Superior Court (GC029447), plaintiffs, including eight members of
the California State Legislature, allege a DWR consultant involved in
negotiating certain of the long-term power contracts had a conflict of interest,
and as a result certain of the long-term contracts are void. The plaintiffs
seek, among other things, to restrain or enjoin DWR's performance under the
long-term power contracts, a declaration that the contracts are void, an order
of restitution to the General Fund of amounts paid by the State to power
47
providers, and an order of restitution to the General Fund of amounts paid by
the State to power providers with knowledge of the conflict.
In MILLAR V. ALLEGHENY ENERGY, ET. AL., filed May 13, 2002, in San
Francisco City and County Superior Court (407867), plaintiff alleges that the
sellers who entered into certain of the long-term power contracts engaged in
unfair business acts and practices, and seeks to enjoin the enforcement of
certain terms and conditions of the long-term power contracts and restitution of
moneys wrongfully obtained by the power providers. DWR is named solely as a
"nominal defendant," and restitution is not sought from DWR or the State.
In SEMPRA ENERGY RESOURCES V. DEPARTMENT OF WATER RESOURCES, filed May 29,
2002, in San Diego County Superior Court (789291), plaintiff seeks declaratory
relief as to the respective rights and duties of plaintiff and DWR under the
long-term energy contract between the parties. Plaintiff claims that it is not
in breach of that contract, and that moreover, its actions would not constitute
a material breach entitling DWR to suspend its performance under the contract.
At the time the California energy market was deregulated, the CPUC froze
IOU rates at levels then thought to be sufficient to permit the Utilities an
opportunity to recover certain pre-deregulation costs from their customers. SCE
and PG&E have alleged that these rates are insufficient to permit recovery of
FERC-tariffed power purchase costs, and have sought to have the rate freeze
lifted. The CPUC has not lifted the rate freeze, and the two Utilities have
filed separate actions alleging that the CPUC refusal violates the filed rate
doctrine and various constitutional provisions.
PACIFIC GAS AND ELECTRIC V. LYNCH is pending in the United States District
Court, Northern District of California (C 01-3023 VRW). Both plaintiff and
defendants have filed motions for summary judgment, which were heard on May 24,
2002. The court took the matters under submission. If required, a trial has been
scheduled for January of 2003.
SOUTHERN CALIFORNIA EDISON V. LYNCH is now pending in the United States
Court of Appeals for the Ninth Circuit (01-56879, 01-56993 and 01-57020,
consolidated). The CPUC and SCE had reached settlement, and that settlement had
been approved by the district court. The district court had also denied motions
of several electricity generators to intervene in opposition of the settlement.
The electricity generators and a consumer group have appealed the settlement and
the order denying intervention. Oral argument was heard on March 4, 2002, and
the matter was submitted. The court has not entered a decision.
PG&E filed an adversary proceeding in bankruptcy court (see "Recent
Developments Regarding Natural Gas and Electricity" above) to prevent the CPUC
from implementing or enforcing any order that requires PG&E to make certain
transfers between certain regulatory accounts which track PG&E revenues and
costs. PG&E asserts that such an order would have the effect of extending the
rate freeze presently in effect, and delaying the time when PG&E can seek rates
sufficient to recover its costs of obtaining power. The bankruptcy court
dismissed this complaint with prejudice and denied PG&E's motion for preliminary
injunction. Cross-appeals are pending in the United States District Court, in
PACIFIC GAS AND ELECTRIC COMPANY (PG&E) v. Lynch, U.S. District Court, Northern
District of California (01-2490 VRW). All briefing has been submitted. PACIFIC
GAS AND ELECTRIC BANKRUPTCY
On April 6, 2001, PG&E filed a voluntary Chapter 11 bankruptcy petition in
United States Bankruptcy Court for the Northern District of California, San
Francisco Division (In re Pacific Gas and Electric, United States Bankruptcy
Court, N.D. Cal.). The State has filed numerous claims as a creditor of PG&E,
including, but not limited to, claims for income and property taxes, regulatory
fees, fines and penalties, and environmental fees, fines and penalties. The
bankruptcy proceedings are pending.
DWR has filed administrative claims for post-petition purchases of
electricity on PG&E's behalf, arising from the sale of electric energy or
services for the customers of PG&E for the period April 7, 2001, through
December 31, 2001, in an estimated amount of approximately $311.5 million.
Claims for amounts due for January, 2002, and beyond, if any, may be filed. DWR
has also filed claims for pre-petition power-related matters in the estimated
amount of approximately $225 million.
PG&E's proposed plan of reorganization seeks an extensive restructuring of
PG&E's business and the transfer of certain of its assets, including its
electric and gas transmission assets, to newly created limited liability
companies on the theory that the Bankruptcy Code preempts state law. The plan
48
states that PG&E will seek to establish conditions to PG&E's resumption of its
responsibility for the power currently being provided its customers by DWR, and
a ruling to prohibit it from accepting an assignment of any of DWR's long-term
power purchase contracts. The court ruled that PG&E must amend its plan to
remove relief that is contrary to the State's sovereign immunity or prove that
the State has waived its sovereign immunity, and that PG&E must proceed on an
implied preemption theory, rather than on an express preemption theory. PG&E has
appealed the bankruptcy court's decision in the United States District Court,
Northern District of California (IN RE PACIFIC GAS AND ELECTRIC COMPANY, CASE
NO. 3:02-CV-01550 (VRW)) on two separate grounds, and the CPUC and state
agencies have cross-appealed and objected to the appeal. The CPUC and state
agencies' motion to dismiss the appeal is scheduled to be heard on June 13,
2002.
PG&E filed a second amended plan and disclosure statement, and, in response
to an order of the court, filed a further amended disclosure statement. The
court has approved PG&E's disclosure statement, which will be sent to creditors
concurrently with the disclosure statement of the alternative plan of
reorganization filed on April 15, 2002, by the CPUC. Both plans have been
submitted to the creditors for voting. The Bankruptcy Judge has scheduled July
17, 2002 as the date for filing objections for both plans and August 12, 2002 as
the date by which creditors must return their ballots accepting or rejecting the
plans.
PG&E has also requested that the bankruptcy court deny implementation of
the "Servicing Agreement" with DWR. The Servicing Agreement, provides the
procedural mechanisms for PG&E to supply distribution and billing services to
allow DWR to deliver its power to retail end users and receive payment therefor.
PG&E contends that the CPUC order is tantamount to a diversion of the assets of
the bankruptcy estate, which would be detrimental to the estate and its
reorganization efforts. DWR and the CPUC filed oppositions to the motion on
various grounds. Because of developments at the CPUC, PG&E must amend its motion
if the matter is to be heard by the bankruptcy court. The matter has been
postponed indefinitely.
The California Power Exchange (the "PX") served as an independent,
non-profit entity responsible for administering the competitive wholesale
electricity market in California. After a December 2000 FERC order permitting
the Utilities to purchase and sell other than through the PX, PX operations
slowed dramatically and the PX suspended trading on January 31, 2001. The PX
filed for protection under Chapter 11 of the Bankruptcy Code on March 9, 2001
(United States Bankruptcy Court, Central District of California, No.
LA01-16577-ES). The Bankruptcy Court approved the fifth amended disclosure
statement filed by the Participant's Committee on June 28, 2002, and has
scheduled September 23, 2002, as the date for the hearing on the confirmation of
the plan. The estimated combined total of claims in two claimant classes that
pertain to the Utilities and the ISO is $2.9 billion.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs.
In 1997, a new program provided for the State to substantially take over
funding for local trial courts (saving cities and counties some $400 million
annually). For 2001-02, the State has provided over $350 million to support
local law enforcement costs. The current fiscal crisis may result in some
reductions in these payments in 2002-03.
49
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy. The recent economic
slowdown in the State, with its corresponding reduction in State and local
revenues, will put additional pressure on local government finances in the
coming years.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
ASSESSMENT BONDS. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
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suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event has had any long-term negative economic impact.
Any California Municipal Obligation in the Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer
to perform on its contracts of insurance in the event of widespread losses; or
(iii) the federal or State government to appropriate sufficient funds within
their respective budget limitations.
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).
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.
51
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.
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 would likely be adversely affected by a recession in
either the United States or Europe. The attacks of September 11, 2001 will
likely have an adverse affect on tourism, the extent of which is unclear. 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. Guam also has a high debt burden. 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.
52
APPENDIX D
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
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.
53
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 $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
54
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.
55
APPENDIX E
AMENDED BY-LAWS
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
Amendment No. 1 to By-laws - Statement
creating two series of
Auction Preferred Shares
WHEREAS, Section 5.1 of Article VI of the Agreement and Declaration of
Trust dated July 8, 2002 of Eaton Vance Insured California Municipal Bond Fund
(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 [ ]
preferred shares which are now to be issued divided into one series of [ ]
shares and one series of [ ] 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, and Series B Auction Preferred
Shares.
NOW, THEREFORE, the By-laws of Eaton Vance Insured California Municipal
Bond Fund 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 TWO SERIES OF AUCTION PREFERRED SHARES
DESIGNATION
Auction Preferred Shares, Series A: [ ] shares of beneficial interest of
Preferred Shares, par value $.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.
Auction Preferred Shares, Series B: [ ] shares of beneficial interest of
Preferred Shares, par value $.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 B." Each share of Auction Preferred Shares, Series B (sometimes referred
to herein as "Series B 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 B
APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series B APS shall be identical. The Series A APS and the Series B
APS are 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:
"`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 "Aa" by Moody's
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 [Merrill Lynch, Pierce, Fenner & Smith
Incorporated] 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
2
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 Salomon Smith Barney, Inc. 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.
"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
Moody's Volatility Factor and the S&P Volatility Factor, determined from time to
time by Moody's and S&P, respectively (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; and (F) 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) 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.
3
"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.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means [___________] unless and until another commercial
bank, trust company or other financial institution appointed by a resolution of
the Board of Trustees 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.
"Declaration of Trust" means the Agreement and Declaration of Trust , as
amended and supplemented (including these Amended By-Laws), of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Salomon Smith Barney Inc. 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 $.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.
"Deposit Securities" means cash and Municipal Obligations rated at least
A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
4
"Discounted Value" as of any Valuation Date, means (i) with respect to an
S&P Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor and (ii)(a) with respect to a Moody's Eligible
Asset that is not currently callable as of such Valuation Date at the option of
the issuer thereof, the quotient of the Market Value thereof divided by the
applicable Moody's Discount Factor, or (b) with respect to a Moody's Eligible
Asset that is currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of (1) the lesser of the Market Value or call price
thereof, including any call premium, divided by (2) the applicable Moody's
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.
"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
fo their respetive 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 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
Moody's Eligible Assets and/or 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
he ration 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
5
at their time of original issuance unless the floating instruments have only one
reset remaining until maturity.
"Issue Type Category" means, with respect to a Municipal Obligation
acquired by the Trust, (A) for purposes of calculating Moody's Eligible Assets
as of any Valuation Date, one of the following categories into which such
Municipal Obligation falls based upon a good faith determination by the Fund:
health care issues (including issues related to teaching and non-teaching
hospitals, public or private); housing issues (including issues related to
single- and multi-family housing projects); educational facilities issues
(including issues related to public and private schools); student loan issues;
resource recovery issues; transportation issues (including issues related to
mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); utility issues
(including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not falling within one of the aforementioned categories; the general
obligation issue category includes any issue that is directly or indirectly
guaranteed by the State of California or its political subdivisions. Utility
issues are included in the general obligation issue category if the issue is
directly or indirectly guaranteed by the State of California or its political
subdivisions. Municipal Obligations in the utility issue category will be
classified within one of the three following sub-categories: (i) electric, gas
and combination issues (if the combination issue includes an electric issue);
(ii) water and sewer utilities and combination issues (if the combination issue
does not include an electric issue); and (iii) irrigation, resource recovery,
solid waste and other utilities. Municipal Obligations in the transportation
issue category will be classified within one of the two following
sub-categories: (i) streets and highways, toll roads, bridges and tunnels,
airports and multi-purpose port authorities (multiple revenue streams generated
by toll roads, airports, real estate, bridges); (ii) mass transit, parking
seaports and others.
"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 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
6
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.
"Moody's Discount Factor" means for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined by reference to
(i) (A) in the even such Municipal obligation is covered by an Original Issue
Insurance policy or a Portfolio Insurance policy which does not provide the
Trust with the option to obtain Permanent Insurance with respect to such
Municipal Obligation, or is not covered by bond insurance, the Moody's or S&P
rating on such Municipal Obligation, (B) in the event such Municipal Obligation
is covered by a Secondary Market Insurance policy, the Moody's insurance
claims-paying ability rating of the issuer of the policy, or (C) in the event
such Municipal Obligation is covered by a Portfolio Insurance with respect to
such Municipal Obligation, at the Trust's option, the Moody's or S&P rating on
such Municipal Obligation or the Moody's insurance claims-paying ability rating
of the issuer of the Portfolio Insurance policy and (ii) 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 Moody's Exposure Period, in accordance
with the table set forth below:
RATING CATEGORY
Exposure
Period Aaa Aa* A* Baa* Other** (V)MIG-1*** SP-1**** UNRATED*****
------ --- --- -- ---- ------- ----------- -------- ------------
7 weeks 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less
but greater
than 7 weeks 154% 161% 168% 176% 190% 137% 149% 231%
9 weeks or less
but greater
than 8 weeks 158% 163% 170% 177% 192% 138% 150% 240%
--------------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P. ***
Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not have
a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which
do not mature or have a demand feature at par exercisable in 30 days and
which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB by
S&P or not rated by Moody's or S&P.
If the Moody's Discount Factor used to discount a particular Municipal
Obligation is determined by reference to the insurance claims-paying ability
rating of the insurer of such Municipal Obligation, such Moody's Discount Factor
will be increased by an amount equal to 50% of the difference between (i) the
percentage set forth in the above table under the applicable rating category,
and (ii) the percentage set forth in the above table under the rating category
that is one rating category below the applicable rating category.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMG-1 or P-1 by Moody's and mature or have
a demand feature at par exercisable in 30 days or less or 125%, as long as such
Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature
or have a demand feature at par exercisable in 30 says or less and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.
"Moody's Eligible Asset" means cash, Receivables for Municipal Obligations
Sold, futures and options (to the extent entered into in Moody's Hedging
7
Transactions) and similar instruments (including Inverse Floaters (provided that
the trusts in which such Inverse Floaters are held may be terminated within five
(5) Business Days) and structured notes), or a Municipal Obligation that (i)
pays interest in cash, (ii) does not have its Moody's rating, as applicable,
suspended by Moody's, and (iii) is part of an issue of Municipal Obligations of
at least $5,000,000 except for Municipal Obligations rated below A by Moody's,
Municipal Obligations within the healthcare Issue Type Category, in which case
the minimum issue size is $10,000,000. Except for general obligation bonds,
Municipal Obligations issued by any one issuer and rated BBB or lower by S&P, Ba
or B by Moody's, or not rated by S&P and Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by the same
issuer and rated Baa by Moody's or A by S&P, may comprise no more than 6% of
total Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more than 10% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same and issuer and rated Aa by Moody's or AAA by S&P, may comprise no more
than 20% of total Moody's Eligible Assets. For purposes of the foregoing
sentence, any Municipal Obligation backed by the guaranty, letter of credit or
insurance issued by a third party shall be deemed to be issued by such third
party if the issuance of such third party credit is the sole determinant of the
rating on such Municipal Obligation.
Other Securities falling within a particular Issue Type Category may
comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Baa by Moody's or A by S&P, may
comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
A by Moody's or AA by S&P, may comprise no more than 40% of total Moody's
Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular issue Type Category and rated Aa by Moody's or AAA by S&P, may
comprise no more than 60% of total Moody's Eligible Assets. For purposes of this
definition, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise
more than 4% of Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations issued by issuers located within the same county
and rated Baa by Moody's or A by S&P, may comprise no more than 6% of Moody's
Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by issuers located within
the same county and rated A by Moody's or Aa by S&P, may comprise no more than
10% of Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same county and rated Aa by Moody's or AAA by S&P,
may comprise no more than 20% of Moody's Eligible Assets; and (B) in no event
may (i) student loan Municipal Obligations comprise more than 10% of Moody's
Eligible Assets; (ii) resource recovery Municipal Obligations comprise more than
10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than 10% of
Moody's Eligible Assets. For purposes of applying the foregoing requirements, a
Municipal Obligation rated BBB- by S&P shall not be considered to be rated BBB
by S&P, Moody's Eligible Assets shall be calculated without including cash, and
Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's
rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-time rating
of A.
When the Trust sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the APS Basic Maintenance
Amount. When the Trust purchases a Moody's Eligible Asset and agrees to sell it
at a future date, such Eligible Asset shall be valued at the amount of cash to
be received by the Trust upon such future date, provided that the counterparty
to the transaction has a long-term debt rating of at least A2 from Moody's and
the transaction has a term of no more than 30 days, otherwise such Eligible
Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
8
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by Eaton Vance Management, the Trust's custodian or the Auction Agent
and (d) Liens by virtue of any repurchase agreement; or (ii) deposited
irrevocably for the payment of any liabilities for purposes of determining the
APS Basic Maintenance Amount.
For purposes of determining as of any Valuation Date whether the Trust has
Moody's Eligible Assets with an aggregate Discounted Value at least equal to the
APS Basic Maintenance Amount, the Trust shall include as a liability in the
calculation of the APS Basic Maintenance Amount an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining Permanent
Insurance with respect to Moody's Eligible Assets that are (i) covered by
Portfolio Insurance policies which provide the Trust with the option to obtain
such Permanent Insurance and (ii) discounted by a Moody's Discount Factor
determined by reference to the insurance claims-paying ability rating of the
issuer of such Portfolio Insurance policy.
"Moody's Exposure Period" means the period commencing on a given Valuation
Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Amended By-Laws.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any 7-Day Dividend Period, any Special Dividend Period of 28 days or
fewer, or any Special Dividend Period of 57 days or more, a multiplicative
factor equal to 275%, except as otherwise provided in the last sentence of this
definition; (ii) in the case of any Special Dividend Period of more than 28 but
fewer than 36 days, a multiplicative factor equal to 203%; (iii) in the case of
any Special Dividend Period of more than 35 but fewer than 43 days, a
multiplicative factor equal to 217%; (iv) in the case of any Special Dividend
Period of more than 42 but fewer than 50 days, a multiplicative factor equal to
226%; and (v) in the case of any Special Dividend Period of more than 49 but
fewer than 57 days, a multiplicative factor equal to 235%. If, as a result of
the enactment of changes to the Code, the greater of the maximum marginal
Federal individual income tax rate applicable to ordinary income and the maximum
marginal Federal corporate income tax rate applicable to ordinary income will
increase, such increase being rounded up to the next five percentage points (the
"Federal Tax Rate Increase"), until the effective date of such increase, the
Moody's Volatility Factor in the case of any Dividend Period described in (i)
above in this definition instead shall be determined by reference to the
following table:
Federal Tax Rate Increase Volatility Factor
[5%] [295%]
[10%] [317%]
[15%] [341%]
[20%] [369%]
[25%] [400%]
[30%] [436%]
[35%] [477%]
[40%] [525%]
"Municipal Obligations" means "Municipal Obligations" as defined in the
Trust's Registration Statement on Form N-2 (File No. 333-[______]) 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.
"Municipal Index" has the meaning set forth in paragraph 8(a) of this
Article VII, of these Amended By-Laws.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
9
"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.
"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."
"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.
10
"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.
"Other Issues" have the respective meanings specified in the definition of
"Issue Type Category."
"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.
"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 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 $.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.
11
"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
[ ], 2002.
"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 or Moody's on
such Municipal Obligation or (ii) in the event the Municipal Obligation is
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 or Moody's 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
------------------------------------------------------------------------------
S&P Exposure Period AAA AA A BBB BB and AAA
Below* Zeros**
45 Business Days 190% 195% 210% 250% 220% 488%
25 Business Days 170% 175% 190% 230% 220% 389%
10 Business Days 155% 160% 175% 215% 220% 283%
7 Business Days 150% 155% 170% 210% 220% 253%
3 Business Days 130% 135% 150% 190% 220% 200%
------------------------------------------------------------------------------
* 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
12
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 BBB, 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 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 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, 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 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.
13
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 industry, except
the utility and transportation sectors, 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 includes an
electric issue) (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.
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 rating 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.
14
"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.
"Service" means the United States Internal Revenue Service.
"Series A APS" means the Auction Preferred Shares, Series A.
"Series B APS" means the Auction Preferred Shares, Series B.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"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 seven 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 seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"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.
"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.
"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
15
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, 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 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. 27 "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, Moody's
Discount Factor, S&P Discount Factor, Moody's Eligible Asset, S&P Eligible
Asset, Moody's Exposure Period, S&P Exposure Period, Moody's Hedging
Transactions, S&P Hedging Transactions, Moody's Volatility Factor, 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 and
Aaa rating from Moody's 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 Moody's, 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
16
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 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 35 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 35 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 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 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 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
17
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 seven 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 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 Moody's and 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 or Moody's 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
18
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 and Moody's. 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 shall have S&P Eligible Assets and Moody's 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 or the liquidation of the Trust (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 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
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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 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 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 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
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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.
(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 and Moody's 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 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 and Moody's 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 and Moody's 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
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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 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 in the case of S&P an S&P
Exposure Period of 22 Business Days and in the case of Moody's the Moody's
Exposure Period of 49 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
(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
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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 a majority of the shares of Preferred Shares Outstanding at
the time, voting separately as one class: (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 and Moody's ten (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.
(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
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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 and Moody's. 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 and/or Moody's Eligible Assets, as the case
may be, are only applicable if S&P and/or Moody's, 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 and Moody's 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,
Moody's and 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,
Moody's and 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 and Moody's, 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 and Moody's 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, Moody's 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 Report to S&P,
Moody's and the Auction Agent. The Trust shall also provide S&P and Moody' with
an APS Basic Maintenance Report when specifically requested by S&P or Moody's,
as applicable. 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 and
Moody's Eligible Assets of the Trust is less than the APS Basic Maintenance
Amount, as of the relevant Valuation Date.
(c) Within ten 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 50 Date, the Independent Accountant will confirm in writing
to the Auction Agent, Moody's 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 and
Moody's 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 and Moody's 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
24
differences, (v) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any differences),
(vi) 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) and (vii) with respect to such confirmation to Moody's, that the
Trust has satisfied the requirements of paragraph 8(b) of these Amended By-Laws
(such confirmation is herein called the "Accountant's Confirmation").
(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 and
Moody's 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, Moody's and S&P an Accountant's Confirmation as to such
APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(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 and Moody's
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, Moody's 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 and Moody's an APS Basic Maintenance Report as of the close
of business on such Date of Original Issue. Within five Business Days of such
Date of Original Issue, the Independent Accountant will confirm in writing to
S&P and Moody's (i) the mathematical accuracy of the calculations reflected in
such Report and (ii) that the aggregate Discounted Value of S&P Eligible Assets
or Moody's 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 S&P
and Moody's 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.
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(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,
purchase 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
25
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.
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 purchase Interest Rate Locks subject to the
following conditions: [insert guidelines as well as applicable Discount
Factor information].
(vii) the Trust will only enter into purchase Interest Rate Swaps subject
to the following conditions: [insert guidelines as well as applicable Discount
Factor information].
(b) For so long as any shares of APS are rated by Moody's, the Trust will
not buy or sell futures contracts, write, purchase or sell put or call options
on futures contracts or write put or call options (except covered call or put
options) on portfolio securities unless sit receives written confirmation from
Moody's that engaging in such transactions would not impair the rating then
assigned to the shares of APS by Moody's, except that the Trust may purchase or
sell exchange-traded futures contracts based on the Municipal Index or Treasury
Bonds and purchase, write or sell exchange-traded put options on such futures
contracts and purchase, write or sell exchange-traded call options on such
futures contracts (collectively, Moody's Hedging Transactions"), subject to the
following limitations:
26
(i) the Trust will not engage in any Moody's Hedging Transactions based on
the Municipal Index (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold (A) 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 thirty days preceding the time of effecting such transaction as reported by
THE WALL STREET JOURNAL or (B) outstanding futures contracts based on the
Municipal Index having a Market Value exceeding 50% of the Market Value
constituting Moody's Eligible Assets owned by the Trust;
(ii) the Trust will not engage in any Moody's 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 in the aggregate (A)
outstanding futures contracts based on Treasury Bonds having an aggregate Market
Value exceeding 5% of the aggregate Market Value of all Moody's Eligible Assets
owned by the Trust and rated Aaa by Moody's, (B) outstanding futures contracts
based on Treasury Bonds having an aggregate Market Value exceeding 25% of the
aggregate Market Value of all Moody's Eligible Assets owned by the Trust and
rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by
S&P) or (C) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 45% of the aggregate Market Value of Moody's
Eligible Assets owned by the Trust and rated Baa or A by Moody's (or, if not
rated by Moody's but rated by S&P, rated A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Trust shall be deemed to own the number of
futures contracts that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of open
interest in the Municipal Index as reported by The Wall Street Journal is less
that 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction to
close out any outstanding option on a futures contract by no later than the
first Business Day of the month in which such options expires;
(v) the Trust will engage in Moody's Hedging Transaction only with respect
to futures contracts or options thereon having the next settlement date for such
type of futures contract or options, or the settlement date immediately
thereafter;
(vi) the Trust will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the Trust that to
do so would not adversely affect Moody's then current rating of the shares of
APS; provided, however, that the Trust will not be deemed to have engaged in a
futures or options transaction for leveraging or speculative purposes so long as
it has done so otherwise in accordance with this paragraph 8; and
(vii) the Trust will not enter into an option or futures transaction
unless, after giving effect thereto, the Trust would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Trust is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows (unless the Trust receives written
confirmation to the contrary from Moody's): (i) assets subject to call options
written by the Trust which are either exchange-traded and "readily reversible"
or which expire within 48 days after the date as of which such valuation is made
shall be valued at the lesser of (a) Discounted Value and (b) the exercise price
of the call option written by the Trust; (ii) assets subject to call options
written by the Trust not meeting the requirements of clause (i) of this sentence
shall have no value; (iii) assets subject to put options written by the Trust
shall be valued at the lesser of (a) the exercise price and (b) the Discounted
Value of such security; and (iv) futures contracts shall be valued at the lesser
of (a) settlement price and (b) the Discounted Value of the subject security,
provided that, if a contract matures within 48 days after the date as of which
such valuation is made, where the Trust is the seller the contract may be valued
27
at the settlement price and where the Trust is the buyer the contract may be
valued at the Discounted Value of the subject securities.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the following amounts shall be added to the APS Basic
Maintenance Amount required to be maintained by the Trust under paragraph 7 of
these By-Laws (unless the Trust receives written confirmation to the contrary
from Moody's): (i) 10% of the exercise price of a written call option; (ii) the
exercise price of any written put option; (iii) where the Trust is the seller
under a futures contract, 10% of the settlement price of the futures contract;
(iv) where the Trust is the purchaser under a futures contract, the settlement
price of assets to be purchased under such futures contract; (v) the settlement
price of the underlying futures contract if the Trust writes put options on a
futures contract; and (vi) 105% of the Market Value of the underlying futures
contracts if the Trust writes call options on futures contracts and does not won
the underlying contract.
(viii) the Trust will only purchase Interest Rate Locks subject to the
following conditions: [insert guidelines as well as applicable Discount
Factor information].
(ix) the Trust will only enter into Interest Rate Swaps subject to the
following conditions: [insert guidelines as well as applicable Discount
Factor information].
(c) For so long as any shares of APS are rated by Moody's the Trust will
not enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under paragraph 8(b)), except
that the Trust may enter into such contracts to purchase newly-issued securities
on the date such securities are issued ("Forward Commitments"), subject to the
following limitations:
(i) the Trust will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed income securities rated P-1, MIG-1
or VMIG-1 by Moody's and maturing prior to the date of the Forward Commitment
with a face value that equals or exceeds the amount of the Trust's obligations
under any Forward Commitments to which it is form time to time a party or
long-term fixed income securities with a Discounted Value that equals or exceeds
the amount of the Trust's obligations under any Forward Commitments to which it
is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless, after
giving effect thereto, the Trust would continue to have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the Discounted Value of all Forward Commitment to which the
Trust is a party and of all securities deliverable to the Trust pursuant to such
Forward Commitments shall be zero.
(e) For so long as shares of APS are rated by S&P or Moody's, the Trust
will not, unless it has received written confirmation from S&P or Moody's, as
applicable, that such action would not impair the rating then assigned to shares
of APS by S&P or Moody's, as applicable (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 and 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 and
Moody's 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
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.
28
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 and Moody's (or if S&P or Moody's 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 Reference
Rate Rate
Moody's S&P No Notification Notification
aa3 or higher AA- or higher [110%] [150%]
a3 to a1 A- to A+ [125%] [160%]
baa3 to baa1 BBB- to BBB+ [150%] [250%]
Below baa3 Below BBB- [200%] [275%]
The Trust shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for each series of APS. If S&P or Moody's shall not
make such a rating available, Salomon Smith Barney, Inc. 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.
(x) "Submission Deadline" means 1:00 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.
29
(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 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:
30
(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;
(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.
31
(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, 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:
32
(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.
(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:
33
(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 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
34
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 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 77 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
35
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.
36
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
, 2002
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
24 Federal Street
Boston, MA 02110
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
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A:
Financial Highlights*
Included in Part B:
Independent Auditor's Report
Statement of Assets and Liabilities as of August 19, 2002
Note to Financial Statement
------------
*To be added by amendment.
(2) Exhibits:
(a) Agreement and Declaration of Trust dated July 8, 2002 is herein
by reference to the Registrant's initial Statement on Form N-2
(File Nos. 333-92202 and 811-21147) as to the Registrant's common
shares of beneficial interest ("Common Shares") filed with the
Securities and Exchange Commission (the "Commission") on July 10,
2002 (Accession No. 0000898432-02-000465) ("Initial Common Shares
Registration Statement").
(b)(1) By-Laws are incorporated herein by reference to the Trust's
Initial Common Shares Registration Statement.
(2) Form of Amended By-Laws filed herewith as Appendix E to
Registrant's Statement of Additional Information contained in
this registration statement and incorporated herein by
reference.
(c) Not applicable.
(d)(1) Form of Specimen Certificate for Common Shares of Beneficial
Interest incorporated herein by reference to the Trust's Initial
Common Shares Registration Statement.
(2) Form of Specimen Certificate of Series A Auction Preferred Shares
filed herewith.
(3) Form of Specimen Certificate of Series B Auction Preferred Shares
filed herewith.
(e) Dividend Reinvestment Plan is incorporated herein by reference to
the Trust's Initial Common Shares Registration Statement.
(f) Not applicable.
(g) Investment Advisory Agreement dated July 25, 2002 is incorporated
herein by reference to Pre-Effective Amendment No. 1 to the
Registrant's Common Shares Registration Statement filed with the
Commission on July 26, 2002 (Accession No. 0000950135-02-003434)
("Initial Common Shares Registration Statement Pre-Effective
Amendment No. 1").
(h)(1) Form of Underwriting Agreement as to Registrant's Common Shares
is incorporated herein by reference to Initial Common Shares
Registration Statement Pre-Effective Amendment No. 3 filed with
the Commission on August 27, 2002 (Accession No.
0000950135-02-003951) ("Initial Common Shares Registration
Statement Pre-Effective Amendment No. 3").
(2) Form of Master Agreement Among Underwriters as to Registrant's
Common Shares is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment No.
3.
(3) Form of Master Selected Dealers Agreement as to Registrant's
Common Shares is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment No.
3.
(4) Form of Underwriting Agreement to be filed by amendment.
(5) Form of Master Agreement Among Underwriters as to Registrant's
Auction Preferred Shares is incorporated herein by reference to
Initial Common Shares Registration Statement Pre-Effective
Amendment No. 3.
(6) Form of Master Selected Dealers Agreement as to Registrant's
Auction Preferred Shares is incorporated herein by reference to
Initial Common Shares Registration Statement Pre-Effective
Amendment No. 3.
(i) The Securities and Exchange Commission has granted the Registrant
an exemptive order that permits the Registrant to enter into
deferred compensation arrangements with its independent Trustees.
See in the matter of Capital Exchange Fund, Inc., Release No.
IC-20671 (November 1, 1994).
(j)(1) Master Custodian Agreement with Investors Bank & Trust Company
dated July 25, 2002 is incorporated herein by reference to
Initial Common Shares Registration Statement Pre-Effective
Amendment No. 1.
(2) Extension Agreement dated August 31, 2000 to Master Custodian
Agreement with Investors Bank & Trust Company filed as Exhibit
(g)(4) to Post-Effective Amendment No. 85 of Eaton Vance
Municipals Trust (File Nos. 33-572, 811-4409) filed with the
Commission on January 23, 2001 (Accession No.
0000940394-01-500027) and incorporated herein by reference.
(3) Delegation Agreement dated December 11, 2000, with Investors Bank
& Trust Company filed as Exhibit (j)(e) to the Eaton Vance Prime
Rate Reserves N-2, Amendment No. 5 (File Nos. 333-32267,
811-05808) filed April 3, 2002 (Accession No.
0000940394-01-500126) and incorporated herein by reference.
(k)(1) Amendment to the Transfer Agency and Services Agreement dated
July 25, 2002 is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment No.
1.
(2) Transfer Agency and Services Agreement dated December 21,1998 is
incorporated herein by reference to Initial Common Shares
Registration Statement Pre-Effective Amendment No. 1.
(3) Administration Agreement dated July 25, 2002 is incorporated
herein by reference to Initial Common Shares Registration
Statement Pre-Effective Amendment No.1
(4) Form of Auction Agreement between Registrant and the Auction
Agent as to Registrant's Auction Preferred Shares to be filed by
amendment.
(5) Form of Broker-Dealer Agreement as to Registrant's Auction
Preferred Shares to be filed by amendment.
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP as to
Registrant's Auction Preferred Shares to be filed by amendment.
(m) Not applicable.
(n) Consent of Independent Auditors filed herewith.
(o) Not applicable.
(p) Letter Agreement with Eaton Vance Management is incorporated
herein by reference to Initial Common Shares Registration
Statement Pre-Effective Amendment No. 3.
(q) Not applicable.
(r) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance
Management, Boston Management and Research, Eaton Vance
Distributors, Inc. and the Eaton Vance Funds effective September
1, 2000, as revised June 4, 2002, filed as Exhibit (p) to
Post-Effective Amendment No. 45 of Eaton Vance Investment Trust
(File Nos, 33-1121, 811-4443) filed July 24, 2002 (Accession No.
0000940394-02-000462) and incorporated herein by reference.
(s) Power of Attorney filed herewith.
Item 25. Marketing Arrangements
See Form of Underwriting Agreement filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The approximate expenses in connection with the offering are as
follows:
Registration and Filing Fees $17,710
National Association of Securities Dealers,
Inc. Fees
Rating Agency Fees
Costs of Printing and Engraving
Accounting Fees and Expenses
Legal Fees and Expenses
--------
Total $
--------
Item 27. Persons Controlled by or Under Common control
None.
Item 28. Number of Holders of Securities
Set forth below is the number of record holders as of
____________________, 2002 of each class of securities of the
Registrant:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Shares of Beneficial [ ]
interest, par value $0.01 per
share
Series A Auction Preferred 0
Shares, par value $0.01 per
share
Series B Auction Preferred 0
Shares, par value $0.01 per
share
Item 29. Indemnification
The Registrant's By-Laws and the Underwriting Agreement filed in the
Trust's Initial Common Shares Registration Statement contain and the form of
Underwriting Agreement to be filed is expected to contain provisions limiting
the liability, and providing for indemnification, of the Trustees and officers
under certain circumstances.
Registrant's Trustees and officers are insured under a standard
investment company errors and omissions insurance policy covering loss incurred
by reason of negligent errors and omissions committed in their official
capacities as such.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and other Connections of Investment Adviser
Reference is made to: (i) the information set forth under the caption
"Investment Advisory and Other Services" in the Statement of Additional
information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 1-8100); and (iii) the Form ADV of Eaton Vance Management
(File No. 801-15930) filed with the Commission, all of which are incorporated
herein by reference.
Item 31. Location of Accounts and Records
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
16th Floor, Boston, MA 02116, and its transfer agent, PFPC Inc., 4400 Computer
Drive, Westborough, MA 01581-5120, with the exception of certain corporate
documents and portfolio trading documents which are in the possession and
custody of Eaton Vance Management, The Eaton Vance Building, 255 State Street,
Boston, MA 02109. Registrant is informed that all applicable accounts, books and
documents required to be maintained by registered investment advisers are in the
custody and possession of Eaton Vance Management.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. The Registrant undertakes to suspend offering of Preferred Shares until
the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of this Registration
Statement or (2) the net asset value increases to an amount greater than
its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant
to 497(h) under the 1933Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of an oral or written request, its Statement of Additional
Information.
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance Insured
California Municipal Bond Fund is on file with the Secretary of State of the
Commonwealth of Massachusetts and notice is hereby given that this instrument is
executed on behalf of the Registrant by an officer of the Registrant as an
officer and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or shareholders
individually, but are binding only upon the assets and property of the
Registrant.
SIGNATURES
Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Boston and the Commonwealth of Massachusetts, on the 25th day of
September 2002.
EATON VANCE INSURED CALIFORNIA
MUNICIPAL BOND FUND
By: /s/ Thomas J. Fetter*
------------------------
Thomas J. Fetter
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas J. Fetter*
--------------------------- President and Principal September 25, 2002
Thomas J. Fetter Executive Officer
/s/ James L. O'Connor*
--------------------------- Treasurer and Principal September 25, 2002
James L. O'Connor Financial and
Accounting Officer
/s/ Jessica M. Bibliowicz*
--------------------------- Trustee September 25, 2002
Jessica M. Bibliowicz
/s/ Donald R. Dwight*
--------------------------- Trustee September 25, 2002
Donald R. Dwight
/s/ James B. Hawkes*
--------------------------- Trustee September 25, 2002
James B. Hawkes
/s/ Samuel L. Hayes, III*
--------------------------- Trustee September 25, 2002
Samuel L. Hayes, III
/s/ Norton H. Reamer*
--------------------------- Trustee September 25, 2002
Norton H. Reamer
/s/ Lynn A. Stout*
--------------------------- Trustee September 25, 2002
Lynn A. Stout
*By: /s/ Alan R. Dynner
-----------------------------
Alan R. Dynner (As attorney-in-fact)
INDEX TO EXHIBITS
(d) (2) Form of Specimen Certificate of Series A Auction Rate Preferred
Shares.
(3) Form of Specimen Certificate of Series B Auction Rate Preferred
Shares.
(n) Consent of Independent Auditors.
(s) Power of Attorney.