As filed with the Securities and Exchange Commission on July 26, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
/ / REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FILE NO. 333-92202
/X/ PRE-EFFECTIVE AMENDMENT NO. 1
/ / POST-EFFECTIVE AMENDMENT NO.
AND/OR
/ / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FILE NO. 811-21147
/X/ AMENDMENT NO. 1
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
MAXIMUM MAXIMUM
TITLE OF AMOUNT BEING OFFERING AGGREGATE AMOUNT OF
SECURITIES REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEES
BEING REGISTERED (1) (1) (1) (1)(2)(3)
---------------------------------------------------------------------------------------------------
Common Shares of Beneficial 6,666,667 $15.00 $100,000,000 $9,200
Interest, $.01 par value
==================================================================================================
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) Includes shares that may be offered by the Underwriters pursuant to an
option to cover over-allotments.
(3) A registration fee of $9,200 was previously paid in connection with the
initial filing, accordingly, no further payment is required.
____________________________________
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 JULY 26, 2002
PROSPECTUS
[EATON VANCE LOGO]
6,000,000 SHARES
EATON VANCE INSURED
CALIFORNIA MUNICIPAL BOND FUND
COMMON SHARES
$15.00 PER SHARE
------------------
Eaton Vance Insured California Municipal Bond Fund (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund's
investment objective is to provide current income exempt from federal income
tax, including alternative minimum tax, and California personal income tax. This
income will be earned by investing primarily in high grade California municipal
obligations that are insured as to the timely payment of principal and interest
and are not subject to alternative minimum tax. The Fund's net asset value and
distribution rate will vary and may be affected by several factors, including
changes in interest rates and the credit quality of municipal issuers.
Fluctuations in net asset value may be magnified as a result of the Fund's use
of leverage, which may be a speculative investment technique. An investment in
the Fund may not be appropriate for all investors, particularly those that are
not subject to federal and California income taxes. There is no assurance that
the Fund will achieve its investment objective.
The Fund's investment adviser is Eaton Vance Management ("Eaton Vance" or
the "Adviser"). Eaton Vance manages 51 different municipal bond funds with
combined assets of about $7 million, including 3 California municipal bond funds
with combined assets of about $428 million.
Because the Fund is newly organized, its common shares have no history of
public trading. The shares of closed-end management investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The Fund has applied to list its
common shares on the American Stock Exchange under the symbol "EVM".
(continued on following page)
------------------
INVESTING IN SHARES INVOLVES CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE,
POLICIES AND RISKS" BEGINNING AT PAGE 13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
PER
SHARE TOTAL(1)
------- --------
Public Offering Price $15.000 $
Sales Load(2) $ 0.675 $
Estimated Offering Expenses(3) $ 0.030 $
Proceeds to the Fund $14.295 $
(footnotes on following page)
The underwriters are offering the shares subject to various conditions and
expect to deliver the shares to purchasers on or about ,
2002.
------------------
SALOMON SMITH BARNEY UBS WARBURG
A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
H&R BLOCK FINANCIAL ADVISORS, INC. QUICK & REILLY, INC.
RAYMOND JAMES RBC CAPITAL MARKETS
TD WATERHOUSE WACHOVIA SECURITIES
WELLS FARGO SECURITIES, LLC
, 2002
(Continued from previous page)
(1) The underwriters named in this Prospectus may purchase up to
additional shares at the public offering price, less sales load,
solely to cover over-allotments, if any. If this option is exercised in
full, the total public offering price, sales load, estimated offering
expenses and proceeds to the Fund will be $ , $ , $ and
$ , respectively.
(2) For a description of all commissions and other compensation paid to the
underwriters by the Fund, see "Underwriting."
(3) Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $ . Eaton Vance or an
affiliate has agreed to pay offering and organizational costs in excess of
$0.03 per share.
------------------
The Fund expects to use financial leverage through the issuance of
preferred shares, initially equal to approximately 38% of its gross assets
(including the amount obtained through leverage). The Fund intends to use
leverage if it is expected to result in higher income to shareholders over time.
Use of financial leverage creates an opportunity for increased income but, at
the same time, creates special risks. There can be no assurance that a
leveraging strategy will be successful. SEE "INVESTMENT OBJECTIVE, POLICIES AND
RISKS -- USE OF LEVERAGE AND RELATED RISKS" AT PAGE 19 AND "DESCRIPTION OF
CAPITAL STRUCTURE" AT PAGE 28.
This Prospectus sets forth concisely information you should know before
investing in the common shares of the Fund. Please read and retain this
Prospectus for future reference. A Statement of Additional Information dated
, 2002, has been filed with the Securities and Exchange Commission
("SEC") and can be obtained without charge by calling 1-800-225-6265 or by
writing to the Fund. A table of contents to the Statement of Additional
Information is located at page 35 of this Prospectus. This Prospectus
incorporates by reference the entire Statement of Additional Information. The
Statement of Additional Information is available along with other Fund-related
materials: at the SEC's public reference room in Washington, DC (call
1-202-942-8090 for information on the operation of the reference room); the
EDGAR database on the SEC's internet site (http://www.sec.gov); upon payment of
copying fees by writing to the SEC's public reference section, Washington, DC
20549-0102; or by electronic mail at publicinfo@sec.gov. The Fund's address is
The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109 and its
telephone number is 1-800-225-6265.
The underwriters named in the Prospectus may purchase up to
additional shares from the Fund under certain circumstances.
The Fund's shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED 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.......................................... 4
Fund Expenses............................................... 11
The Fund.................................................... 13
Use of Proceeds............................................. 13
Investment Objective, Policies and Risks.................... 13
Management of the Fund...................................... 24
Distributions and Taxes..................................... 25
Dividend Reinvestment Plan.................................. 26
Description of Capital Structure............................ 28
Underwriting................................................ 32
Custodian and Transfer Agent................................ 34
Legal Opinions.............................................. 34
Reports to Stockholders..................................... 34
Independent Auditors........................................ 34
Additional Information...................................... 35
Table of Contents for the Statement of Additional
Information............................................... 36
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UNTIL , 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.
THE FUND...................... Eaton Vance Insured California Municipal Bond
Fund (the "Fund") is a newly organized,
non-diversified, closed-end management
investment company. The Fund offers investors
the opportunity to receive current income
exempt from federal income tax, including
alternative minimum tax, and California
personal income tax through a professionally
managed portfolio of municipal obligations.
Investments are based on Eaton Vance
Management's ("Eaton Vance" or the "Adviser")
research and ongoing credit analysis, the
underlying materials for which are generally
not available to individual investors. An
investment in the Fund may not be appropriate
for all investors, particularly those that are
not subject to federal and California income
taxes. There is no assurance that the Fund will
achieve its investment objective.
THE OFFERING.................. The Fund is offering common shares of
beneficial interest, par value $0.01 per share
(the "Shares"), through a group of underwriters
(the "Underwriters") led by Salomon Smith
Barney Inc., UBS Warburg LLC, A.G. Edwards &
Sons, Inc., Prudential Securities Incorporated,
H&R Block Financial Advisors, Inc., Quick &
Reilly, Inc. A FleetBoston Financial Company,
Raymond James & Associates, Inc., RBC Dain
Rauscher, Inc., TD Waterhouse Investor
Services, Inc., Wachovia Securities, Inc. and
Wells Fargo Securities, LLC. The Underwriters
have been granted an option to purchase up to
additional Shares solely to cover
over-allotments, if any. The initial public
offering price is $15.00 per share. The minimum
purchase in this offering is 100 Shares
($1,500). See "Underwriting." Eaton Vance, or
an affiliate, has agreed to pay (i) all
organizational expenses and (ii) offering costs
(other than sales loads) that exceed $0.03 per
Share.
INVESTMENT OBJECTIVE AND
POLICIES...................... The Fund's investment objective is to provide
current income exempt from federal income tax,
including alternative minimum tax, and
California personal income tax. Securities will
be purchased and sold in an effort to maintain
a competitive yield and to enhance return based
upon the relative value of the securities
available in the marketplace.
During normal market conditions, at least 80%
of the 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 California
personal income 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 the Fund. The value of an
obligation will be affected by
4
the credit standing of its insurer. The Fund
primarily invests in high grade municipal
obligations. At least 80% of the 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 the 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,
the 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, the Fund may hold
obligations that are unrated but judged to be
of comparable quality by the Adviser. Under
normal market conditions, the Fund expects to
be fully invested (at least 95% of its net
assets) in accordance with its investment
objective.
The Fund will not invest in an obligation if
the interest on that obligation is subject to
the federal alternative minimum tax.
The 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, to seek to
hedge against changes in interest rates or for
other risk management purposes.
LISTING....................... The Fund has applied for listing on the
American Stock Exchange under the symbol "EVM".
LEVERAGE...................... The Fund expects to use financial leverage
through the issuance of preferred shares. The
Fund intends initially to use financial
leverage of approximately 38% of its gross
assets (including the amount obtained through
leverage). The Fund generally will not use
leverage if it anticipates that it would result
in a lower return to holders of the Shares
("Shareholders") over time. Use of financial
leverage creates an opportunity for increased
income for Shareholders but, at the same time,
creates special risks (including the likelihood
of greater volatility of net asset value and
market price of the Shares), and there can be
no assurance that a leveraging strategy will be
successful during any period in which it is
employed. The Fund intends to issue preferred
shares approximately one to three months after
completion of this offering, subject to market
conditions, and the Fund's receipt of a AAA/Aaa
credit rating on Preferred Shares from any
nationally recognized statistical rating
organization ("Rating Agency")(typically,
Moody's, S&P or Fitch). See "Investment
Objective, Policies and Risks -- Use of
Leverage and Related Risks."
INVESTMENT ADVISER AND
ADMINISTRATOR................. Eaton Vance, an indirect wholly-owned
subsidiary of Eaton Vance Corp., is the Fund's
investment adviser and administrator. The
Adviser manages 4 national municipal funds, 38
single state municipal funds, 8 limited
maturity municipal funds and 1 money market
municipal fund with combined assets of about
5
$7 billion as of June 30, 2002. Ten of the
funds are closed-end. See "Management of the
Fund."
DISTRIBUTIONS................. Commencing with the Fund's first dividend, the
Fund intends to make regular monthly cash
distributions to Shareholders at a level rate
based on the projected performance of the Fund.
The Fund's ability to maintain a level Share
dividend rate will depend on a number of
factors, including dividends payable on the
preferred shares. As portfolio and market
conditions change, the rate of dividends on the
Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all
of its net investment income (after it pays
accrued dividends on any outstanding preferred
shares). In addition, at least annually, the
Fund intends to distribute net capital gain and
taxable ordinary income, if any, to you so long
as the net capital gain and taxable ordinary
income are not necessary to pay accrued
dividends on, or redeem or liquidate, any
preferred shares. Your initial distribution is
expected to be declared approximately 45 days,
and paid approximately 60 days, from the
completion of this offering, depending on
market conditions. You may elect to
automatically reinvest some or all of your
distributions in additional Shares under the
Fund's Dividend Reinvestment Plan. See
"Distributions and Taxes" and "Dividend
Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN.... The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under the Plan,
a Shareholder may elect to have all dividend
and capital gain distributions automatically
reinvested in additional Shares either
purchased in the open market, or newly issued
by the Fund if the Shares are trading at or
above their net asset value. Shareholders may
elect to participate in the Plan by completing
the Dividend Reinvestment Plan Application
Form. If Shareholders do not participate, such
Shareholders will receive all distributions in
cash paid by check mailed directly to them by
PFPC Inc., as dividend paying agent.
Shareholders who intend to hold their Shares
through a broker or nominee should contact such
broker or nominee to determine whether or how
they may participate in the Plan. See "Dividend
Reinvestment Plan."
CLOSED-END STRUCTURE.......... Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that closed-end
funds generally list their shares for trading
on a securities exchange and do not redeem
their shares at the option of the shareholder.
By comparison, mutual funds issue securities
redeemable at net asset value at the option of
the shareholder and typically engage in a
continuous offering of their shares. Mutual
funds are subject to continuous asset in-flows
and out-flows that can complicate portfolio
management, whereas closed-end funds generally
can stay more fully invested in securities
consistent with the closed-end fund's
investment objective and policies. In addition,
in comparison to open-end funds, closed-end
funds have greater flexibility in the
employment of financial leverage and in the
ability to make certain types of investments,
including investments in illiquid securities.
However, shares of
6
closed-end funds frequently trade at a discount
from their net asset value. In recognition of
the possibility that the Shares might trade at
a discount to net asset value and that any such
discount may not be in the interest of
Shareholders, the Fund's Board of Trustees (the
"Board"), in consultation with Eaton Vance,
from time to time may review possible actions
to reduce any such discount. The Board might
consider open market repurchases or tender
offers for Shares at net asset value. There can
be no assurance that the Board will decide to
undertake any of these actions or that, if
undertaken, such actions would result in the
Shares trading at a price equal to or close to
net asset value per Share. The Board might also
consider the conversion of the Fund to an
open-end mutual fund. The Board believes,
however, that the closed-end structure is
desirable, given the Fund's investment
objective and policies. Investors should
assume, therefore, that it is highly unlikely
that the Board would vote to convert the Fund
to an open-end investment company. See
"Description of Capital Structure."
SPECIAL RISK CONSIDERATIONS... No Operating History. The Fund is a closed-end
investment company with no 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 or durations 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 the Fund would
cause a decline in the net asset value of the
Fund, which could adversely affect the trading
price of the Fund's Shares. This risk is
usually greater among municipal obligations
with longer maturities or durations. Although
the Fund has no policy governing the maturities
or durations of its investments, the Fund
expects that it will invest in a portfolio of
longer-term securities. This means that the
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 debt 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
the Fund may invest in these types of debt
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
the 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, investors'
income from the Fund over time 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
7
a call were exercised by the issuer during a
period of declining interest rates, the 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 could affect the market price of Shares.
Similar risks exist when the 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 bonds in the Fund's portfolio
will decline in price, or fail to pay interest
or principal when due, because the issuer of
the bond experiences a decline in its financial
status.
Liquidity Risk. The Fund may invest in
securities for which there is no readily
available trading market or which are otherwise
illiquid. The Fund may not be able to readily
dispose of such securities at prices that
approximate those at which the Fund could sell
such securities if they were more widely traded
and, as a result of such illiquidity, the Fund
may have to sell other investments or engage in
borrowing transactions if necessary to raise
cash to meet its obligations. In addition, the
limited liquidity could affect the market price
of the securities, thereby adversely affecting
the Fund's net asset value and ability to make
dividend distributions.
Municipal Bond Market. Certain obligations in
which the Fund will invest will not be
registered with the Securities and Exchange
Commission or any state securities commission
and will not be listed on any national
securities exchange. Therefore, the amount of
public information available about portfolio
securities will be limited, and the performance
of the Fund is more dependent on the analytical
abilities of Eaton Vance than would be the case
for an investment company that invests
primarily in registered or exchange-listed
securities.
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 bonds insured by such
insurer, and municipal bonds insured under
Portfolio Insurance (as defined below) issued
by such insurer also would be of reduced
quality in the portfolio of the Fund. Any such
downgrade could have an adverse impact on the
net asset value and market price of the Shares.
In addition, to the extent the Fund employs
Portfolio Insurance, the Fund may be subject to
certain restrictions on investments imposed by
guidelines of the insurance companies issuing
such Portfolio Insurance. The Fund does not
expect these guidelines to prevent Eaton Vance
from managing the Fund's portfolio in
accordance with the Fund's investment objective
and policies.
California Concentration. The Fund's policy of
investing primarily in municipal obligations of
issuers located in California
8
makes the Fund more susceptible to adverse
economic, political or regulatory occurrences
affecting such issuers.
Sector and Territory Concentration. The Fund
may invest 25% or more of its total assets in
municipal obligations of issuers located in the
same U.S. territory or 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 state'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 the Fund
more susceptible to adverse economic, political
or regulatory occurrences affecting a
particular territory or economic sector.
Effects of Leverage. The use of leverage
through issuance of preferred shares by the
Fund creates an opportunity for increased net
income, but, at the same time, creates special
risks. There can be no assurance that a
leveraging strategy will be successful during
any period in which it is employed. The Fund
intends to use leverage to provide the holders
of Shares with a potentially higher return.
Leverage creates risks for holders of Shares,
including the likelihood of greater volatility
of net asset value and market price of the
Shares and the risk that fluctuations in
dividend rates on any preferred shares may
affect the return to Shareholders. It is
anticipated that preferred share dividends will
be based on the yields of short-term municipal
obligations, while the proceeds of any
preferred share offering will be invested in
longer-term municipal obligations, which
typically have higher yields. To the extent the
income derived from securities purchased with
funds received from leverage exceeds the cost
of leverage, the Fund's return will be greater
than if leverage had not been used. Conversely,
if the income from the securities purchased
with such funds is not sufficient to cover the
cost of leverage, the return to the Fund will
be less than if leverage had not been used, and
therefore the amount available for distribution
to Shareholders as dividends and other
distributions will be reduced. In the latter
case, Eaton Vance in its best judgment may
nevertheless determine to maintain the Fund's
leveraged position if it deems such action to
be appropriate.
In addition, under current federal income tax
law, the Fund is required to allocate a portion
of any net realized capital gains or other
taxable income to holders of preferred shares.
The terms of any preferred shares are expected
to require the Fund to pay to any preferred
shareholders additional dividends intended to
compensate the preferred shareholders for taxes
payable on any capital gains or other taxable
income allocated to the preferred shares. Any
such additional dividends will reduce the
amount available for distribution to the
Shareholders. As discussed under "Management of
the Fund," the fee paid to Eaton Vance will be
calculated on the basis of the Fund's gross
assets, including proceeds from the issuance of
preferred shares, so the fees will
9
be higher when leverage is utilized. See
"Investment Objective, Policies and
Risks -- Use of Leverage and Related Risks."
The Fund currently intends to seek a Aaa/AAA
grade rating on any preferred shares from any
Rating Agency. The Fund may be subject to
investment restrictions of the Rating Agency as
a result. These restrictions may impose asset
coverage or portfolio composition requirements
that are more stringent than those imposed on
the Fund by the Investment Company Act of 1940,
as amended (the "Investment Company Act" or
"1940 Act"). It is not anticipated that these
covenants or guidelines will impede Eaton Vance
in managing the Fund's portfolio in accordance
with its investment objective and policies. See
"Description of Capital Structure -- Preferred
Shares."
Market Price of Shares. The shares of
closed-end investment companies often trade at
a discount from their net asset value, and the
Fund's Shares may likewise trade at a discount
from net asset value. The trading price of the
Fund's Shares may be less than the public
offering price. This risk may be greater for
investors who sell their Shares in a relatively
short period after completion of the public
offering.
Non-Diversification. The Fund has registered
as a "non-diversified" investment company under
the 1940 Act. For federal income tax purposes,
the Fund, with respect to up to 50% of its
total assets, 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 the Fund invests a
relatively high percentage of its assets in
obligations of a limited number of issuers, the
Fund may be more susceptible than a more widely
diversified investment company to any single
economic, political or regulatory occurrence.
Certain Tax Considerations. Distributions of
any taxable net investment income and net
short-term capital gain are taxable as ordinary
income. See "Distributions and Taxes."
Anti-Takeover Provisions. The Fund's Agreement
and Declaration of Trust includes provisions
that could have the effect of limiting the
ability of other persons or entities to acquire
control of the Fund or to change the
composition of its Board. See "Description of
Capital Structure -- Anti-Takeover Provisions
in the Declaration of Trust."
10
FUND EXPENSES
The purpose of the table below is to help you understand all fees and
expenses that you, as a Shareholder, would bear directly or indirectly. The
following table assumes the issuance of preferred shares in an amount equal to
38% of the Fund's gross assets (after their issuance), and shows Fund expenses
as a percentage of net assets attributable to common shares.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Paid by You (as a percentage of offering
price).................................................... 4.50%
Offering Expenses Borne by the Fund......................... 0.20%(1)
Dividend Reinvestment Plan Fees............................. None(2)
ANNUAL EXPENSES
PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES(3)
----------------
Investment Advisory Fee..................................... 1.05%
Other Expenses.............................................. 0.33%
-----
Total Annual Expenses....................................... 1.38%
Fee and Expense Reimbursements (Years 1-5).................. (0.52)%(4)
-----
Total Net Annual Expenses (Years 1-5)....................... 0.86%(4)
=====
(1) Eaton Vance or an affiliate has agreed to bear all offering and
organizational expenses (other than sales load) that exceed $0.03 per Share.
(2) You will be charged a $5.00 service charge and pay brokerage charges if you
direct the plan agent to sell your Shares held in a dividend reinvestment
account.
(3) Stated as percentages of net assets attributable to common shares and
assuming no leverage of the Fund and no Fund borrowings, the Fund's expenses
would be estimated to be as follows:
PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES(4)
----------------
ANNUAL EXPENSES
Investment Advisory Fee............................. 0.65%
Other Expenses...................................... 0.20%
-----
Total Annual Expenses............................... 0.85%
Fees and Expense Reimbursements (Years 1-5)......... (0.32)%(4)
-----
Total Net Annual Expenses (Years 1-5)............... 0.53%(4)
=====
---------------
(4) Eaton Vance has contractually agreed to reimburse the Fund for fees and
expenses in the amount of 0.32% of average weekly gross assets of the Fund
for the first 5 full years of the Fund's operations, 0.24% of average weekly
gross assets of the Fund in year 6, 0.16% in year 7 and 0.08% in year 8.
Without the reimbursement, "Total Net Annual Expenses" would be estimated to
be 1.38% of average weekly net assets (or, assuming no issuance of preferred
shares or borrowing, 0.85% of average weekly net assets) attributable to
common shares.
The expenses shown in the table are based on estimated amounts for the
Fund's first year of operations and assume that the Fund issues approximately
10,000,000 common shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."
11
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in common shares, assuming (1)
total net annual expenses of 0.86% of net assets attributable to common shares
in years 1 through 5, increasing to 1.38% in years 9 and 10 and (2) a 5% annual
return:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS(2)
------ ------- ------- -----------
$53 $71 $91 $170
---------------
(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater or
less than the hypothetical 5% return shown in the example.
(2) Assumes reimbursement of fees and expenses of 0.24% of average weekly gross
assets of the Fund in year 6, 0.16% in year 7 and 0.08% in year 8. Eaton
Vance has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond this time. See footnote 4 above.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER.
12
THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on July 8, 2002, pursuant to a Declaration governed
by the laws of the Commonwealth of Massachusetts and has no operating history.
The Fund's principal office is located at The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109 and its telephone number is 1-800-225-6265.
This Prospectus relates to the initial public offering of the Fund's common
shares of beneficial interest, $0.01 par value (the "Shares"). See
"Underwriting."
USE OF PROCEEDS
The proceeds of this offering of Shares, before deduction of offering
expenses, estimated to be $ (or $ assuming exercise of the
Underwriters' over-allotment option in full), will be invested in accordance
with the Fund's investment objective and policies as soon as practicable, but,
in no event, under normal market conditions, later than three months after the
receipt thereof. Pending such investment, the proceeds may be invested in
high-quality, short-term municipal debt securities. Eaton Vance or an affiliate
has agreed to pay all offering and organizational expenses of the Fund that
exceed $0.03 per Share.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and California personal
income tax. This income will be earned by investing primarily in high grade
municipal obligations (as defined below) that are insured as to the timely
payment of principal and interest. Securities will be purchased and sold in an
effort to maintain a competitive yield and to enhance return based upon the
relative value of the securities available in the marketplace. Investments are
based on Eaton Vance's research and ongoing credit analysis, the underlying
materials for which are generally not available to individual investors.
Eaton Vance seeks to find municipal obligations of high quality that have
been undervalued in the marketplace. Eaton Vance's team of research analysts,
traders and portfolio managers are devoted exclusively to analyzing municipal
securities. The team's goal is to find municipal bonds of high quality that have
been undervalued in the marketplace due to differing dynamics in individual
sectors of the municipal bond market, municipal bond supply, and the structure
of individual bonds, especially in regard to maturities, coupons, and call
dates. Eaton Vance's team of professionals monitors historical and current yield
spreads to find relative value in the marketplace. This research capability is
key to identifying trends that impact the yield-spread relationship of all
bonds, including those in the insured sector.
PRIMARY INVESTMENT POLICIES
General Composition of the Fund. During normal market conditions, at least
80% of the 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 California personal income tax ("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 the Fund. The value
of an obligation will be affected by the credit standing of its insurer. The
Fund primarily invests in high grade municipal obligations. At least 80% of the
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 the Fund's net assets
13
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, the 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, the Fund may hold obligations that are unrated but judged to
be of comparable quality by the Adviser. Under normal market conditions, the
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 the 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.
The Fund has adopted certain fundamental investment restrictions set forth
in the Statement of Additional Information which may not be changed without a
Shareholder vote. Except for such restrictions and the 80% requirement
pertaining to investment in municipal and insured municipal obligations set
forth above, the investment objective and policies of the Fund may be changed by
the Board without Shareholder action.
The 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,
including alternative minimum tax. The municipal obligations in which the Fund
will invest are generally issued by California municipal issuers and pay
interest that is, in the opinion of issuer's counsel (or on the basis of other
reliable authority), exempt from California personal income tax, in addition to
federal income tax, including alternative minimum tax. The 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, including
alternative minimum tax and California personal income tax.
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 obligations in which the 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. The 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 the Fund is required to distribute substantially all of its income
for each taxable year. Thus, the Fund may have to sell other investments to
obtain cash needed to make income distributions.
Municipal Obligation Insurance Generally. Insured municipal 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 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
14
market value of such obligations or the net asset value of the Fund. The Fund
expects initially to emphasize investments in municipal bonds insured under
bond-specific insurance policies (i.e., Original Issue or Secondary Market
Insurance). The Fund may obtain Portfolio Insurance from the insurers described
in Appendix D to the Statement of Additional Information. The Fund, as a
non-fundamental policy that can be changed by the Fund's Board of Trustees (the
"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 the 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 the 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.
The 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 the 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 the Fund ultimately disposes of these municipal
15
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, the 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 the Fund to enhance the value of
the security. The 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 the Fund owns but wishes to sell a municipal
bond that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance for it if, in the Adviser's opinion, the net proceeds
of the Fund's sale of the security, as insured, less the cost of the Secondary
Market Insurance, would exceed the current value of the security. In determining
whether to insure municipal bonds the Fund owns, an insurer will apply its own
standards, which correspond generally to the standards the insurer has
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 the
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 shareholders of
the 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 the 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 the 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 the 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 the 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 the Fund to refuse to insure any additional bonds purchased by
the Fund after the effective date of such notice. The 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 the 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
16
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 the 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. The 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. The 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 Permanent 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.
The Fund generally intends to retain any insured obligations covered by
Portfolio Insurance that are in default or in significant risk of default and to
place a value on the insurance, which ordinarily will be the difference between
the market value of the defaulted bond and the market value of similar bonds of
minimum investment grade (that is, rated "Baa" or "BBB") that are not in
default. In certain circumstances, however, the Adviser may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted bond and either its par value or the market value of
similar bonds that are not in default or in significant risk of default, is more
appropriate. Except as described above for bonds covered by Portfolio Insurance
that are in default or subject to significant risk of default, the Fund will not
place any value on the Portfolio Insurance in valuing the municipal bonds it
holds.
Because each Portfolio Insurance policy will terminate for municipal bonds
sold by the 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, the
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 the Fund is reduced to the extent of the insurance
premiums it pays. Depending upon the characteristics of the municipal bonds held
by the 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 the 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 Shares.
Other Types of Credit Support. The 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
17
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 the foregoing
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. The 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 the Fund agreed to pay for them. The Fund may be required
to maintain a segregated account of liquid assets equal to outstanding purchase
commitments. The Fund may also purchase instruments that give the Fund the
option to purchase a municipal obligation when and if issued.
Futures Transactions. The 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 the Fund's initial investment in these
contracts. The 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 the Fund.
Distributions by the Fund of any gains realized on the Fund's transactions in
futures and options on futures will be taxable. Rating Agency guidelines on any
preferred shares issued by the Fund may limit use of these transactions.
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 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.
18
Investment Company Securities. The 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 the Fund will incur indirectly.
USE OF LEVERAGE AND RELATED RISKS
The Fund expects to use leverage through the issuance of preferred shares.
The Fund initially intends to use leverage of approximately 38% of its gross
assets (including the amount obtained from leverage). The Fund generally will
not use leverage if the Adviser anticipates that it would result in a lower
return to Shareholders for any significant amount of time. The Fund also may
borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise might require untimely dispositions of Fund securities.
Leverage creates risks for holders of the Shares, including the likelihood
of greater volatility of net asset value and market price of the Shares. There
is a risk that fluctuations in the dividend rates on any preferred shares may
adversely affect the return to the holders of the Shares. If the income from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return on the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to Shareholders as
dividends and other distributions will be reduced. The Adviser in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it deems such action to be appropriate in the circumstances. During periods in
which the Fund is using leverage the fees paid to Eaton Vance for investment
advisory services will be higher than if the Fund did not use leverage because
the fees paid will be calculated on the basis of the Fund's gross assets,
including proceeds from the issuance of preferred shares.
Capital raised through leverage will be subject to dividend payments, which
may exceed the income and appreciation on the assets purchased. The issuance of
preferred shares involves offering expenses and other costs and may limit the
Fund's freedom to pay dividends on Shares or to engage in other activities. The
issuance of a class of preferred shares having priority over the Fund's Shares
creates an opportunity for greater return per Share, but at the same time such
leveraging is a speculative technique in that it will increase the Fund's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with offering proceeds exceed the cost of issuing additional classes of
securities (and other Fund expenses), the use of leverage will diminish the
investment performance of the Fund's Shares compared with what it would have
been without leverage.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more Rating Agencies that may issue ratings for any
preferred shares issued by the Fund. These guidelines may impose asset coverage
or Fund composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Adviser from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.
Under the Investment Company Act, the Fund is not permitted to issue
preferred shares unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the Fund's total assets). In addition, the Fund is not permitted to declare any
cash dividend or other distribution on its Shares unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
such liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares, from time to time, to
maintain coverage of any preferred shares of at least 200%. In addition, under
current federal income tax law, the Fund is required to allocate a portion of
any net realized capital gains or other taxable income to holders of preferred
shares. The terms of any preferred shares are expected to require the Fund to
pay to any preferred shareholders additional dividends intended
19
to compensate the preferred shareholders for taxes payable on any capital gains
or other taxable income allocated to the preferred shares. Any such additional
dividends will reduce the amount available for distribution to the Shareholders.
Normally, holders of the Shares will elect five of the Trustees of the Fund and
holders of any preferred shares will elect two. In the event the Fund failed to
pay dividends on its preferred shares for two years, preferred shareholders
would be entitled to elect a majority of the Trustees until the dividends are
paid.
To qualify for federal income taxation as a "regulated investment company,"
the Fund must distribute in each taxable year at least 90% of its net investment
income (including tax-exempt interest and net short-term gain). The Fund also
will be required to distribute annually substantially all of its taxable income
and capital gain net income, if any, to avoid imposition of a nondeductible 4%
federal excise tax. If the Fund is precluded from making distributions on the
Shares because of any applicable asset coverage requirements, the terms of the
preferred shares may provide that any amounts so precluded from being
distributed, but required to be distributed for the Fund to meet the
distribution requirements for qualification as a regulated investment company,
will be paid to the holders of the preferred shares as a special dividend. This
dividend can be expected to decrease the amount that holders of preferred shares
would be entitled to receive upon redemption or liquidation of the shares.
The Fund's willingness to issue new securities for investment purposes, and
the amount the Fund will issue, will depend on many factors, the most important
of which are market conditions and interest rates. Successful use of a
leveraging strategy may depend on the Adviser's ability to predict correctly
interest rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.
Assuming the utilization of leverage in the amount of 38% of the Fund's
gross assets and an annual dividend rate on preferred shares of 1.85% payable on
such leverage based on market rates as of the date of this Prospectus, the
additional income that the Fund must earn (net of expenses) in order to cover
such dividend payments would be 0.70%. The Fund's actual cost of leverage will
be based on market rates at the time the Fund undertakes a leveraging strategy,
and such actual cost of leverage may be higher or lower than that assumed in the
previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Shares of leverage in the amount of approximately 38% of
the Fund's gross assets, assuming hypothetical annual returns of the Fund's
portfolio of minus 10% to plus 10%. As the table shows, leverage generally
increases the return to Shareholders when portfolio return is positive and
greater than the cost of leverage and decreases the return when the portfolio
return is negative or less than the cost of leverage. The figures appearing in
the table are hypothetical and actual returns may be greater or less than those
appearing in the table.
Assuming Portfolio Return (net of expenses)............ (10)% (5)% 0% 5% 10%
Corresponding Share Return Assuming 38% Leverage....... (17.26)% (9.20)% (1.13)% 6.93% 15.00%
Until the Fund issues preferred shares, the Shares will not be leveraged,
and the risks and special considerations related to leverage described in this
Prospectus will not apply. Such leveraging of the Shares cannot be achieved
until the proceeds resulting from the use of leverage have been invested in
accordance with the Fund's investment objective and policies.
ADDITIONAL RISK CONSIDERATIONS
No Operating History. The Fund is a closed-end investment company with no
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 the Fund would cause
a decline in the net asset value of the Fund, which could adversely affect the
trading price of the Fund's
20
Shares. This risk is usually greater among municipal obligations with longer
maturities or durations. Although the Fund has no policy governing the
maturities or durations of its investments, the Fund expects that it will invest
in a portfolio of longer-term securities. This means that the 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 the
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 the 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, investors' income from
the Fund over time 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, the 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 Shares. Similar risks exist when the 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 bonds in
the Fund's portfolio will decline in price, or fail to pay interest or principal
when due, because the issuer of the bond 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 the Fund's net asset value or dividends.
Securities rated in the fourth highest category are considered investment grade
but they also may have some speculative characteristics.
Changes in the credit quality of the issuers of municipal obligations held
by the 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 the 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.
The 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 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
21
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. California's economy is expected to start to
recover by mid-year 2002.
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. 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 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 Statement of Additional Information for a further discussion of factors
affecting municipal bonds in California.
Sector and Territory Concentration. The 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 the 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 Shares.
Liquidity Risk. At times, a 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 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 the Fund may invest. The Fund has no
22
limitation on the amount of its assets, which may be invested in securities
which are not readily marketable or are subject to restrictions on resale. In
certain situations, the 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 the Fund's portfolio is generally less than for
corporate equities or bonds, and the investment performance of the 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, the 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, the 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 the 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 the Fund. Any such downgrade could
have an adverse impact on the net asset value and market price of the Shares.
See "Primary Investment Policies -- Municipal Obligation Insurance Generally"
above.
In addition, to the extent the Fund employs Portfolio Insurance, the Fund
may be subject to certain restrictions on investments imposed by guidelines of
the insurance companies issuing such Portfolio Insurance. The Fund does not
expect these guidelines to prevent Eaton Vance from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.
Market Price of Shares. The Fund is a closed-end investment company with
no history of operations and is designed primarily for long-term investors and
not as a trading vehicle. The shares of closed-end investment companies often
trade at a discount from their net asset value, and the Shares may likewise
trade at a discount from net asset value. The trading price of the Fund's Shares
may be less than the initial public offering price, creating a risk of loss for
investors purchasing in the initial public offering of the Shares. This market
price risk may be greater for investors who sell their Shares within a
relatively short period after completion of this offering.
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 Shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, preferred shares dividend rates would likely increase, which would
tend to further reduce returns to Shareholders.
Non-Diversification. The 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 the 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.
23
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of the Fund's Board under the laws of The Commonwealth of
Massachusetts and the Investment Company Act.
THE ADVISER
Eaton Vance acts as the Fund's investment adviser under an Investment
Advisory Agreement (the "Advisory Agreement"). The Adviser's principal office is
located at The Eaton Vance Building, 255 State Street, Boston, Massachusetts
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 over $56 billion. Eaton Vance 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
currently manages 4 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 about
$7 billion. Ten of those funds are closed-end and 3 are California funds with
about $428 million in assets.
Under the general supervision of the Fund's Board of Trustees, the Adviser
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. The Adviser will furnish to the 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 the Fund who are members of the Adviser's organization and who render
investment services to the Fund, and will also compensate all other Adviser
personnel who provide research and investment services to the Fund. In return
for these services, facilities and payments, the Fund has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount 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.
Cynthia J. Clemson is the portfolio manager of the 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 a Vice President of Eaton Vance.
The Fund and the Adviser have adopted a Code of Ethics relating to personal
securities transactions. The Code permits Adviser personnel to invest in
securities (including securities that may be purchased or held by the Fund) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Code.
Eaton Vance serves as administrator of the Fund, but currently receives no
compensation for providing administrative services to the Fund. Under the
Administration Agreement with the Fund ("Administration Agreement"), Eaton Vance
is responsible for managing the business affairs of the Fund, subject to the
supervision of the Fund's Board. Eaton Vance will furnish to the Fund all office
facilities, equipment and personnel for administering the affairs of the Fund.
Eaton Vance's administrative services include recordkeeping, preparation and
filing of documents required to comply with federal and state
24
securities laws, supervising the activities of the 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 the Fund's business.
DISTRIBUTIONS AND TAXES
The Fund intends to make monthly distributions of net investment income,
after payment of any dividends on any outstanding preferred shares. The Fund
will distribute annually any net short-term capital gain and any net capital
gain (which is the excess of net long-term capital gain over net short-term
capital loss). Distributions to Shareholders cannot be assured, and the amount
of each monthly distribution is likely to vary. Initial distributions to
Shareholders are expected to be declared approximately 45 days and are expected
to be paid approximately 60 days after the completion of this offering. While
there are any preferred shares outstanding, the Fund might not be permitted to
declare any cash dividend or other distribution on its Shares in certain
circumstances. See "Description of Capital Structure."
FEDERAL INCOME TAX
The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart LLP, counsel to the Fund.
The Fund intends to invest a sufficient portion of its assets in tax-exempt
municipal securities so that it will be permitted to pay "exempt-interest
dividends" (as defined under applicable federal income tax law). Each
distribution of exempt-interest dividends, whether paid in cash or reinvested in
additional Shares, ordinarily will constitute income exempt from regular federal
income tax. 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 regular federal income
tax. Distributions of any taxable net investment income and net short-term
capital gain are taxable as ordinary income. Distributions of the Fund's net
capital gain ("capital gain dividends"), if any, are taxable to Shareholders as
long-term capital gains, regardless of the length of time Shares have been held
by Shareholders. Distributions, if any, in excess of the 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). See below for a
summary of the maximum tax rates applicable to capital gains (including capital
gain dividends). Interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the Shareholder's taxable
year.
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
Selling Shareholders will generally recognize gain or loss in an amount
equal to the difference between the Shareholder's adjusted tax basis in the
Shares and the amount received. If the Shares are held as a capital asset, the
gain or loss will be a capital gain or loss. The maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers is
(i) the same as the maximum ordinary income tax rate for gains recognized on the
sale of capital assets held for one year or less, (ii) 20% for gains recognized
on the sale of capital assets held for more than one year (as well as capital
gain dividends) (10% for individuals in the 10% or 15% tax bracket) or (iii) 18%
for gains on the sale of certain capital assets held more than five (5) years.
Any loss on a disposition of Shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gain dividends received
with respect to those Shares, and will be disallowed to the extent of any
exempt-interest dividends received with respect to those Shares. For purposes of
determining whether Shares have been held for six months or less, the holding
period 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 Shares will be disallowed to
the extent those Shares are replaced by other Shares within a period of 61 days
beginning
25
30 days before and ending 30 days after the date of disposition of the Shares
(which could occur, for example, if the Shareholder is a participant in the Plan
(as defined below)). In that event, the basis of the replacement Shares will be
adjusted to reflect the disallowed loss.
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 the tax-exempt interest
income as exempt-interest dividends to its shareholders, the Fund must and
intends to satisfy certain requirements, including the requirement that, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of obligations the interest on which is exempt from
regular federal income tax under Code Section 103(a). Interest on certain
municipal obligations is treated as a tax preference item for purposes of the
alternative minimum tax. Shareholders of the Fund are required to report
tax-exempt interest on their federal income tax returns.
An investor should be aware that if Shares are purchased shortly before the
record date for any taxable dividend (including a capital gain dividend), the
purchase price likely will reflect the value of the dividend and the investor
then would receive a taxable distribution likely to reduce the trading value of
such Shares, in effect resulting in a taxable return of some of the purchase
price. Taxable distributions to individuals and certain other non-corporate
Shareholders, including those who have not provided their correct taxpayer
identification number and other required certifications, may be subject to
"backup" federal income tax withholding at the rate of 30%.
CALIFORNIA TAXES
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. 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.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), a
Shareholder may elect to have all distributions of dividends (including all
capital gain dividends) automatically reinvested in Shares. Shareholders may
elect to participate in the Plan by completing the Dividend Reinvestment Plan
Application Form. If Shareholders do not participate, such Shareholders will
receive all distributions in cash paid by check mailed directly to them by PFPC
Inc., as dividend paying agent.
PFPC Inc. (the "Plan Agent") serves as agent for the Shareholders in
administering the Plan. Shareholders who elect not to participate in the Plan
will receive all distributions of dividends in cash paid by check mailed
directly to the Shareholder of record (or if the Shares are held in Street or
other nominee name, then to the nominee) by PFPC Inc. as disbursing agent.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date.
26
Shares will be acquired by the Plan Agent or an independent broker-dealer
for the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional previously authorized but
unissued Shares from the Fund ("newly issued Shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the American
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per Share is equal to or less than the market price per Share plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued Shares on behalf of the participants. The number of newly issued Shares
to be credited to each participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per Share on the date the
Shares are issued, provided that the maximum discount from the then current
market price per Share on the date of issuance may not exceed 5%. If on the
dividend payment date the net asset value per Share is greater than the market
value plus estimated brokerage commissions (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent will have up to 30 days after the dividend payment date to invest the
dividend amount in Shares acquired in open-market purchases. If, before the Plan
Agent has completed its open-market purchases, the market price of a Share
exceeds the net asset value per Share, the average per Share purchase price paid
by the Plan Agent may exceed the net asset value of the Fund's Shares, resulting
in the acquisition of fewer Shares than if the dividend had been paid in newly
issued Shares on the dividend payment date. Therefore, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued Shares.
The Plan Agent maintains all Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each Shareholder proxy will include those Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held pursuant
to the Plan in accordance with the instructions of the participants.
In the case of Shareholders such as banks, brokers or nominees that hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholder's name and held for the account of beneficial owners who
participate in the Plan.
There will be no brokerage charges with respect to Shares issued directly
by the Fund as a result of dividends payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in connection
with the reinvestment of dividends.
Shareholders participating in the Plan may receive benefits not available
to Shareholders not participating in the Plan. If the market price (plus
commissions) of the Fund's Shares is above their net asset value, participants
in the Plan will receive Shares of the Fund at less than they could otherwise
purchase them and will have Shares with a cash value greater than the value of
any cash distribution they would have received on their Shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the per Share value
of any cash distribution they would have received on their Shares. However,
there may be insufficient Shares available in the market to make distributions
in Shares at prices below the net asset value. Also, since the Fund does not
redeem its Shares, the price on resale may be more or less than the net asset
value.
Experience under the Plan may indicate that changes are desirable.
Accordingly, upon thirty (30) days notice to Plan participants, the Fund
reserves the right to amend or terminate the Plan.
27
Shareholders will be charged a $5.00 service charge and pay brokerage charges if
such Shareholder directs the Plan Agent to sell Shares held in a dividend
reinvestment account.
All correspondence concerning the Plan should be directed to the Plan Agent
at PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027. Please call
1-800-331-1710 between the hours of 9:00 a.m. and 5:00 p.m. Eastern Standard
Time if you have questions regarding the Plan.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
July 8, 2002 (the "Declaration of Trust"). The Declaration of Trust provides
that the Trustees of the Fund may authorize separate classes of shares of
beneficial interest. The Trustees have authorized an unlimited number of Shares.
The Fund intends to hold annual meetings of Shareholders in compliance with the
requirements of the American Stock Exchange.
Shares. The Declaration of Trust permits the Fund to issue an unlimited
number of full and fractional Shares of beneficial interest, $0.01 par value per
Share. Each Share represents an equal proportionate interest in the assets of
the Fund with each other Share in the Fund. Holders of Shares will be entitled
to the payment of dividends when, as and if declared by the Board. The 1940 Act
or the terms of any borrowings or preferred shares may limit the payment of
dividends to the holders of Shares. Each whole Share shall be entitled to one
vote as to matters on which it is entitled to vote pursuant to the terms of the
Declaration of Trust on file with the SEC. Upon liquidation of the 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 Shares. The Declaration of Trust
provides that Shareholders are not liable for any liabilities of the 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 the Fund as though they were general partners, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.
While there are any borrowings or preferred shares outstanding, the Fund
may not be permitted to declare any cash dividend or other distribution on its
Shares, unless at the time of such declaration, (i) all accrued dividends on
preferred shares or accrued interest on borrowings have been paid and (2) the
value of the 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, the Fund may be 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 may
include an asset coverage test more stringent than under the 1940 Act. This
limitation on the Fund's ability to make distributions on its Shares could in
certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company. The Fund intends,
however, to the extent possible to purchase or redeem preferred shares from time
to time to maintain compliance with such asset coverage requirements and may pay
special dividends to the holders of the preferred shares in certain
circumstances in connection with any such impairment of the Fund's status as a
regulated investment company. See "Investment Objective, Policies and Risks" and
"Distributions and Taxes." Depending on the timing of
28
any such redemption or repayment, the Fund may be required to pay a premium in
addition to the liquidation preference of the preferred shares to the holders
thereof.
The Fund has no present intention of offering additional Shares, except as
described herein. Other offerings of its Shares, if made, will require approval
of the Board. Any additional offering will not be sold at a price per Share
below the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing Shareholders or
with the consent of a majority of the Fund's outstanding Shares. The Shares have
no preemptive rights.
The Fund generally will not issue Share certificates. However, upon written
request to the Fund's transfer agent, a share certificate will be issued for any
or all of the full Shares credited to an investor's account. Share certificates
that have been issued to an investor may be returned at any time.
Repurchase of Shares and Other Discount Measures. Because shares of
closed-end management investment companies frequently trade at a discount to
their net asset values, the Board has determined that from time to time it may
be in the interest of Shareholders for the Fund to take corrective actions. The
Board, in consultation with Eaton Vance, will review at least annually the
possibility of open market repurchases and/or tender offers for the Shares and
will consider such factors as the market price of the Shares, the net asset
value of the Shares, the liquidity of the assets of the Fund, effect on the
Fund's expenses, whether such transactions would impair the Fund's status as a
regulated investment company or result in a failure to comply with applicable
asset coverage requirements, general economic conditions and such other events
or conditions which may have a material effect on the Fund's ability to
consummate such transactions. There are no assurances that the Board will, in
fact, decide to undertake either of these actions or if undertaken, that such
actions will result in the Fund's Shares trading at a price which is equal to or
approximates their net asset value. In recognition of the possibility that the
Shares might trade at a discount to net asset value and that any such discount
may not be in the interest of Shareholders, the Board, in consultation with
Eaton Vance, from time to time may review possible actions to reduce any such
discount.
Preferred Shares. The Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest with preference rights,
including preferred shares (the "Preferred Shares"), having a par value of $0.01
per share, in one or more series, with rights as determined by the Board, by
action of the Board without the approval of the Shareholders.
Under the requirements of the 1940 Act, the Fund must, immediately after
the issuance of any Preferred Shares, have an "asset coverage" of at least 200%.
Asset coverage means the ratio which the value of the total assets of the Fund,
less all liability and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Fund, if any, plus the aggregate liquidation
preference of the Preferred Shares. If the Fund seeks a rating of the Preferred
Shares, asset coverage requirements, in addition to those set forth in the 1940
Act, may be imposed. The liquidation value of the Preferred Shares is expected
to equal their aggregate original purchase price plus redemption premium, if
any, together with any accrued and unpaid dividends thereon (on a cumulative
basis), whether or not earned or declared. The terms of the Preferred Shares,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board (subject to applicable
law and the Fund's Declaration of Trust) if and when it authorizes the Preferred
Shares. The Fund may issue Preferred Shares that provide for the periodic
redetermination of the dividend rate at relatively short intervals through an
auction or remarketing procedure, although the terms of the Preferred Shares may
also enable the Fund to lengthen such intervals. At times, the dividend rate as
redetermined on the Fund's Preferred Shares may approach or exceed the Fund's
return after expenses on the investment of proceeds from the Preferred Shares
and the Fund's leverage structure would result in a lower rate of return to
Shareholders than if the Fund were not so structured.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the terms of any Preferred Shares may entitle the
holders of Preferred Shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative
29
basis) before any distribution of assets is made to holders of Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, the preferred shareholders would not be entitled to any further
participation in any distribution of assets by the Fund.
Holders of Preferred Shares, voting as a class, shall be entitled to elect
two of the Fund's Trustees. Under the 1940 Act, if at any time dividends on the
Preferred Shares are unpaid in an amount equal to two full years' dividends
thereon, the holders of all outstanding Preferred Shares, voting as a class,
will be allowed to elect a majority of the Fund's Trustees until all dividends
in default have been paid or declared and set apart for payment. In addition, if
required by the Rating Agency rating the Preferred Shares or if the Board
determines it to be in the best interests of the Shareholders, issuance of the
Preferred Shares may result in more restrictive provisions than required by the
1940 Act being imposed. In this regard, holders of the Preferred Shares may be
entitled to elect a majority of the Fund's Board in other circumstances, for
example, if one payment on the Preferred Shares is in arrears.
The Fund currently intends to seek a Aaa/AAA grade rating for the Preferred
Shares from any Rating Agency. The Fund intends that, as long as Preferred
Shares are outstanding, the composition of its portfolio will reflect guidelines
established by such Rating Agency. Although, as of the date hereof, no such
Rating Agency has established guidelines relating to the Preferred Shares, based
on previous guidelines established by such Rating Agencies for the securities of
other issuers, the Fund anticipates that the guidelines with respect to the
Preferred Shares will establish a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. Although, at this time, no assurance
can be given as to the nature or extent of the guidelines which may be imposed
in connection with obtaining a rating of the Preferred Shares, the Fund
currently anticipates that such guidelines will include asset coverage
requirements which are more restrictive than those under the 1940 Act,
restrictions on certain portfolio investments and investment practices,
requirements that the Fund maintain a portion of its assets in short-term, high-
quality, fixed-income securities and certain mandatory redemption requirements
relating to the Preferred Shares. No assurance can be given that the guidelines
actually imposed with respect to the Preferred Shares by such Rating Agency will
be more or less restrictive than as described in this Prospectus.
Anti-Takeover Provisions in the Declaration of Trust. The Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Fund or to change the
composition of its Board, and could have the effect of depriving Shareholders 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
the Fund, which attempts could have the effect of increasing the expenses of the
Fund and interfering with the normal operation of the Fund. The Board is divided
into three classes, with the term of one class expiring at each annual meeting
of Shareholders. At each annual meeting, one class of Trustees is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the Board. A Trustee may be removed from office only for cause
by a written instrument signed by the remaining Trustees or by a vote of the
holders of at least 2/3 of the class of shares of the Fund that elected such
Trustee and is entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the 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 shall by resolution have approved a memorandum of
understanding with such holders, in which case normal voting requirements would
be in effect. For purposes of these provisions, a 5%-or-greater holder of a
class of shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any class
of beneficial interest of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than
30
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); or (iv) the sale, lease or exchange to the 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).
The Board has determined that provisions with respect to the Board and the
75% voting requirements described above, which voting requirements are greater
than the minimum requirements under Massachusetts law or the 1940 Act, are in
the best interest of Shareholders generally. Reference should be made to the
Declaration of Trust on file with the SEC for the full text of these provisions.
Conversion to Open-End Fund. The Fund may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Fund's then outstanding Shares and Preferred Shares (if any), each voting
separately as a class, or (ii) more than 50% of the then outstanding Shares and
Preferred Shares (if any), voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Fund could not occur until 90 days after the
shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. The composition of
the Fund's portfolio likely would prohibit the Fund from complying with
regulations of the SEC applicable to open-end investment companies. Accordingly,
conversion likely would require significant changes in the Fund's investment
policies and liquidation of a substantial portion of its relatively illiquid
portfolio. Conversion of the Fund to an open-end investment company also would
require the redemption of any outstanding Preferred Shares and could require the
repayment of borrowings, which would eliminate the leveraged capital structure
of the Fund with respect to the Shares. In the event of conversion, the Shares
would cease to be listed on the American Stock Exchange or other national
securities exchange or market system. The Board believes, however, that the
closed-end structure is desirable, given the Fund's investment objective and
policies. Investors should assume, therefore, that it is unlikely that the Board
would vote to convert the Fund to an open-end investment company. Shareholders
of an open-end investment company may require the company to redeem their shares
at any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of a redemption. The Fund expects to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Fund were converted to an open-end fund, it is likely
that new Shares would be sold at net asset value plus a sales load.
31
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof (the "Underwriting Agreement"), each Underwriter named
below has severally agreed to purchase, and the Fund has agreed to sell to such
Underwriter, the number of Shares set forth opposite the name of such
Underwriter.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Salomon Smith Barney Inc..................................
UBS Warburg LLC...........................................
A.G. Edwards & Sons, Inc. ................................
Prudential Securities Incorporated........................
H&R Block Financial Advisors, Inc. .......................
Quick & Reilly, Inc. A FleetBoston Financial Company......
Raymond James & Associates, Inc. .........................
RBC Dain Rauscher, Inc. ..................................
TD Waterhouse Investor Services, Inc. ....................
Wachovia Securities, Inc. ................................
Wells Fargo Securities, LLC...............................
-------------
Total.............................................
=============
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Shares (other than those
covered by the over-allotment option described below) if they purchase any of
the Shares. The representatives have advised the Fund that the Underwriters do
not intend to confirm any sales to any accounts over which they exercise
discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc., UBS Warburg LLC, A.G.
Edwards & Sons, Inc., Prudential Securities Incorporated, H&R Block Financial
Advisors, Inc., Quick & Reilly, Inc. A FleetBoston Financial Company, Raymond
James & Associates, Inc., RBC Dain Rauscher, Inc., TD Waterhouse Investor
Services, Inc., Wachovia Securities, Inc. and Wells Fargo Securities, LLC are
acting as representatives, propose to offer some of the Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the Shares to certain dealers at the public offering
price less a concession not in excess of $0.45 per Share. The sales load the
Fund will pay of $0.675 per share is equal to 4.5% of the initial offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per Share on sales to certain other dealers. Certain
dealers acting in the capacity of sub-underwriters may receive additional
compensation for acting in such a capacity. If all of the Shares are not sold at
the initial offering price, the representatives may change the public offering
price and other selling terms. Investors must pay for any Shares purchased on or
before , 2002. In connection with this offering, Eaton Vance may
perform clearing services without charge for brokers and dealers for whom it
regularly provides clearing services that are participating in the offering as
members of the selling group.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to additional Shares
at the public offering price less the sales load. The Underwriters may exercise
such option solely for the purpose of covering over allotments, if any, in
connection with this offering. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional Shares approximately proportionate to such Underwriter's
initial purchase commitment.
The Fund and Eaton Vance have agreed that, for a period of 180 days from
the date of this Prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., on behalf of
32
the Underwriters, dispose of or hedge any Shares or any securities convertible
into or exchangeable for Shares. Salomon Smith Barney Inc., in its sole
discretion, may release any of the securities subject to these agreements at any
time without notice.
Prior to the offering, there has been no public market for the Shares.
Consequently, the initial public offering price for the Shares was determined by
negotiation among the Fund, Eaton Vance and the representatives. There can be no
assurance, however, that the price at which the Shares will sell in the public
market after this offering will not be lower than the price at which they are
sold by the Underwriters or that an active trading market in the Shares will
develop and continue after this offering. The Fund has applied for listing on
the American Stock Exchange under the symbol "EVM".
The Fund and Eaton Vance have agreed to indemnify the several Underwriters
or contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
Eaton Vance or an affiliate has agreed to pay offering and organizational
costs (other than sales load) that exceed $0.03 per share.
In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.
In connection with the requirements for listing the Fund's Shares on the
American Stock Exchange, the Underwriters have undertaken to sell lots of 100 or
more Shares to a minimum of 400 beneficial owners in the United States. The
minimum investment requirement is 100 Shares.
Certain Underwriters may make a market in the Shares after trading in the
Shares has commenced on the American Stock Exchange. No Underwriter is, however,
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of the
Underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the Shares as a result of any market-making activities undertaken by
any Underwriter. This Prospectus is to be used by any Underwriter in connection
with the offering and, during the period in which a Prospectus must be
delivered, with offers and sales of the Shares in market-making transactions in
the over-the-counter market at negotiated prices related to prevailing market
prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Shares on the American Stock
Exchange at a level above that which might otherwise prevail in the open market.
A "stabilizing bid" is a bid for or purchase of the Shares on behalf of an
Underwriter for the purpose of fixing or maintaining the price of the Shares. A
"covering transaction" is a bid for or purchase of the Shares on behalf of an
Underwriter to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is a contractual arrangement
whereby if, during a specified period after the issuance of the Shares, the
Underwriters purchase Shares in the open market for the account of the
underwriting syndicate and the Shares purchased can be traced to a particular
Underwriter or member of the selling group, the underwriting syndicate may
require the Underwriter or selling group member in question to purchase the
Shares in question at the cost price to the syndicate or may recover from (or
decline to pay to) the Underwriter or selling group member in question any or
all compensation (including, with respect to a representative, the applicable
syndicate management fee) applicable to the Shares in question. As a result, an
Underwriter or selling group member and, in turn, brokers may lose the fees that
they otherwise would have earned from a sale of the Shares if their customer
resells the Shares while the penalty bid is in effect. The Underwriters are not
required to engage in any of these activities, and any such activities, if
commenced, may be discontinued at any time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of any
Underwriter to the Fund or Eaton Vance if, prior to delivery of and payment for
the Shares, (i) trading in the Shares or securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market or the Nasdaq
Stock Market shall
33
have been suspended or materially limited, (ii) additional material governmental
restrictions not in force on the date of the underwriting agreement have been
imposed upon trading in securities generally or a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities or (iii) any outbreak or material escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, occurs, the effect of which is such
as to make it, in the judgment of the representatives, impracticable or
inadvisable to commence or continue the offering of the Shares at the offering
price to the public set forth on the cover page of the Prospectus or to enforce
contracts for the resale of the Shares by the Underwriters.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
Prior to the public offering of Shares, Eaton Vance purchased Shares from
the Fund in an amount satisfying the net worth requirements of Section 14(a) of
the 1940 Act. As of the date of this Prospectus, Eaton Vance owned 100% of the
outstanding Shares. Eaton Vance may be deemed to control the Fund until such
time as it owns less than 25% of the outstanding Shares which is expected to
occur as of the completion of the offering of Shares.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013. The principal business address of
UBS Warburg LLC, 229 Park Avenue, New York, NY 10171.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA
02116 is the custodian of the Fund and will maintain custody of the securities
and cash of the Fund. IBT maintains the Fund's general ledger and computes net
asset value per share at least weekly. IBT also attends to details in connection
with the sale, exchange, substitution, transfer and other dealings with the
Fund's investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
PFPC Inc., P.O. Box 5123, Westborough, MA 01581-5123 is the transfer agent
and dividend disbursing agent of the Fund.
LEGAL OPINIONS
Certain legal matters in connection with the Shares will be passed upon for
the 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 on the opinions of
O'Melveny & Myers LLP, Los Angeles, California, and Sidley Austin Brown & Wood
LLP, New York, New York.
REPORTS TO STOCKHOLDERS
The Fund will send to Shareholders unaudited semi-annual and audited annual
reports, including a list of investments held.
INDEPENDENT AUDITORS
The Fund will engage an independent auditor to audit the Fund's financial
statements.
34
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund has
filed with the SEC. The complete Registration Statement may be obtained from the
SEC upon payment of the fee prescribed by its rules and regulations. The
Statement of Additional Information can be obtained without charge by calling
1-800-225-6265.
Statements contained in this Prospectus as to the contents of any contract
or other documents referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, each such statement being qualified in all respects by such reference.
35
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
Auditors.................................................... B-21
Independent Auditors' Report................................ B-22
Financial Statements........................................ B-23
Appendix A: Ratings of Municipal Bonds...................... B-24
Appendix B: Tax Equivalent Yield Table...................... B-30
Appendix C: California and U.S. Territory Information....... B-31
Appendix D: Description of Insurers......................... B-43
Appendix E: Performance Related and Comparative
Information............................................... B-
36
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
6,000,000 SHARES
EATON VANCE
INSURED CALIFORNIA MUNICIPAL
BOND FUND
COMMON SHARES
[EATON VANCE LOGO]
------------
PROSPECTUS
, 2002
------------
SALOMON SMITH BARNEY
UBS WARBURG
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
H&R BLOCK FINANCIAL ADVISORS, INC.
QUICK & REILLY, INC.
RAYMOND JAMES
RBC CAPITAL MARKETS
TD WATERHOUSE
WACHOVIA SECURITIES
WELLS FARGO SECURITIES, LLC
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION 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
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
SUBJECT TO COMPLETION - JULY 26, 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
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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
Auditors.................................................... B-21
Independent Auditors' Report................................ B-22
Financial Statements........................................ B-23
Appendix A: Ratings of Municipal Bonds..................... B-24
Appendix B: Tax Equivalent Yield Table..................... B-30
Appendix C: California and U.S. Territory Information...... B-31
Appendix D: Description of Insurers........................ B-43
Appendix E: Performance Related and Comparative
Information............................................... B-46
---------------------
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.
THE INFORMATION IN THIS SAI IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION ("SEC") IS EFFECTIVE. THIS SAI, WHICH IS NOT A
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.
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
B-1
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations. Such payments are usually
subject to annual appropriations by the state or locality. Industrial
development and pollution control bonds, although nominally issued by municipal
authorities, are in most cases revenue bonds and are generally not secured by
the taxing power of the municipality, but are usually secured by the revenues
derived by the authority from payments of the industrial user or users. The Fund
may on occasion acquire revenue bonds which carry warrants or similar rights
covering equity securities. Such warrants or rights may be held indefinitely,
but if exercised, the Fund anticipates that it would, under normal
circumstances, dispose of any equity securities so acquired within a reasonable
period of time.
The obligations of any person or entity to pay the principal of and
interest on a municipal obligation are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a municipal obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
municipal obligations which were not foreseen by the financial and investment
communities. The Fund will take whatever action it considers appropriate in the
event of anticipated financial difficulties, default or bankruptcy of either the
issuer of any municipal obligation or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons or
firms (including affiliates of the Adviser) to evaluate or protect any real
estate, facilities or other assets securing any such obligation or acquired by
the Fund as a result of any such event, and the Fund may also manage (or engage
other persons to manage) or otherwise deal with any real estate, facilities or
other assets so acquired. The Fund anticipates that real estate consulting and
management services may be required with respect to properties securing various
municipal obligations in its portfolio or subsequently acquired by the Fund. The
Fund will incur additional expenditures in taking protective action with respect
to portfolio obligations in default and assets securing such obligations. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage the
assets or have a receiver appointed to collect and disburse pledged revenues
securing the issuer's obligations on such securities, which may increase the
operating expenses and adversely affect the net asset value of the Fund. Any
income derived from the ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code") may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company, the
Fund is subject to certain limitations on its investments and on the nature of
its income.
The yields on municipal obligations are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of municipal 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
B-2
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.
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
B-3
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
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
B-4
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
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 intent 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
B-5
associated security; any put acquired for hedging purposes would be valued in
good faith under methods or procedures established by the Trustees of the Fund
after consideration of all relevant factors, including its expiration date, the
price volatility of the associated security, the difference between the market
price of the associated security and the exercise price of the put, the
creditworthiness of the issuer of the put and the market prices of comparable
put options. Interest income generated by certain bonds having put or demand
features may be taxable.
Illiquid Obligations. At times, a substantial portion of the Fund's assets
may be invested in securities as to which the Fund, by itself or together with
other accounts managed by the Adviser and its affiliates, holds a major portion
or all of such securities. Under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer, the Fund
could find it more difficult to sell such securities when the Adviser believes
it advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. Under such circumstances,
it may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.
The secondary market for some municipal obligations issued within a state
(including issues which are privately placed with the Fund) is less liquid than
that for taxable debt obligations or other more widely traded municipal
obligations. No established resale market exists for certain of the municipal
obligations in which the Fund may invest. The market for obligations rated below
investment grade is also likely to be less liquid than the market for higher
rated obligations. As a result, the Fund may be unable to dispose of these
municipal obligations at times when it would otherwise wish to do so at the
prices at which they are valued.
Securities Lending. The Fund may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers.
Distributions by the Fund of any income realized by the Fund from securities
loans will be taxable. If the management of the Fund decides to make securities
loans, it is intended that the value of the securities loaned would not exceed
30% of the Fund's total assets. Securities lending involves risks of delay in
recovery or even loss of rights on the securities loaned if the borrower fails
financially. The Fund has no present intention of engaging in securities
lending.
Futures Contracts and Options on Futures Contracts. A change in the level
of interest rates may affect the value of the securities held by the Fund (or of
securities that the Fund expects to purchase). To hedge against changes in rates
or as a substitute for the purchase of securities, the Fund may enter into (i)
futures contracts for the purchase or sale of debt securities and (ii) futures
contracts on securities indices. All futures contracts entered into by the Fund
are traded on exchanges or boards of trade that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant or brokerage firm which is a member of the relevant
exchange. The Fund may purchase and write call and put options on futures
contracts which are traded on a United States or foreign exchange or board of
trade. The Fund will be required, in connection with transactions in futures
contracts and the 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.
B-6
The Fund will engage in transactions in futures and related options contracts
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a RIC for federal income tax purposes.
Asset Coverage Requirements. Transactions involving when-issued
securities, futures contracts and options (other than options that the Fund has
purchased), interest rate swaps or forward rate contracts may expose the Fund to
an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities or other options or futures contracts, or (2) cash or liquid
securities (such as readily marketable obligations and money market instruments)
with a value sufficient at all times to cover its potential obligations not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for these instruments and, if the guidelines so require, set
aside cash or liquid securities in a segregated account with its custodian in
the prescribed amount. The securities in the segregated account will be marked
to market daily.
Assets used as cover or held in a segregated account maintained by the
custodian cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Fund's assets to segregated accounts or
to cover could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Temporary Investments. Under unusual market conditions, the Fund may
invest temporarily in cash or cash equivalents. Cash equivalents are highly
liquid, short-term securities such as commercial paper, certificates of deposit,
short-term notes and short-term U.S. Government obligations. These securities
may be subject to federal income, state income and/or other taxes.
Portfolio Turnover. The Fund may sell (and later purchase) securities in
anticipation of a market decline (a rise in interest rates) or purchase (and
later sell) securities in anticipation of a market rise (a decline in interest
rates). In addition, a security may be sold and another purchased at
approximately the same time to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
Yield disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, such as
changes in the overall demand for or supply of various types of municipal
obligations or changes in the investment objectives of investors. Such trading
may be expected to increase the portfolio turnover rate, which 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
B-7
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 of 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.
For purposes of construing restriction (8), securities of the U.S.
Government, its agencies, or instrumentalities are not considered to represent
industries. Municipal obligations backed by the credit of a governmental entity
are also not considered to represent industries. However, municipal obligations
backed only by the assets and revenues of non-governmental users may for this
purpose be deemed to be issued by such non-governmental users. The foregoing 25%
limitation would apply to these issuers. 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.
B-8
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 and trustee of Eaton Vance.
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL COMPLEX
WITH THE LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER
NAME AND AGE FUND SERVICE PAST FIVE YEARS TRUSTEE(1) DIRECTORSHIPS HELD
------------ -------------- ------------- ---------------------------- ----------- ------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee Since 7/25/02 President and Chief 179 None
DOB: 11/28/59 3 Years Executive Officer of
National Financial Partners
(financial services company)
(since April 1999).
President and Chief
Operating Officer of John A.
Levin & Co. (registered
investment adviser) (July
1997 to April 1999) and a
Director of Baker, Fentress
& Company which owns John A.
Levin & Co. (July 1997 to
April 1999). Formerly,
Executive Vice President of
Smith Barney Mutual Funds
(July 1994 to June 1997).
James B. Hawkes Vice President Since 7/8/02 Chairman, President and 179 Director of EVC,
DOB: 11/9/41 and Trustee 3 Years Chief Executive Officer of EV and EVD
BMR, Eaton Vance and their
corporate parent and
[Trustee (EVC and Eaton
Vance, Inc. ("EV")); Vice
President of EVD. President
or officer of 172 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 Since 7/25/02 President of Dwight 179 Trustee/Director
DOB: 3/26/31 3 Years Partners, Inc. (a corporate of the Royce Funds
relations and communications (mutual funds)
company).
Samuel L. Hayes, III Trustee Since 7/25/02 Jacob H. Schiff Professor of 179 Director of
DOB: 2/23/35 3 Years Investment Banking Emeritus, Tiffany & Co.
Harvard University Graduate (specialty
School of Business retailer) and
Administration. Telect, Inc.
(telecommunication
services company)
B-9
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL COMPLEX
WITH THE LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER
NAME AND AGE FUND SERVICE PAST FIVE YEARS TRUSTEE(1) DIRECTORSHIPS HELD
------------ -------------- ------------- ---------------------------- ----------- ------------------
Norton H. Reamer Trustee Since 7/25/02 President, Unicorn 179 None
DOB: 9/21/35 3 Years Corporation (an investment
and financial advisory
services company) (since
September 2000). Chairman,
Hellman, Jordan Management
Co., Inc. (an investment
management company) (since
November 2000). Advisory
Director of Berkshire
Capital Corporation
(investment banking firm)
(since June 2002). Formerly
Chairman of the Board,
United Asset Management
Corporation (a holding
company owning institutional
investment management firms)
and Chairman, President and
Director, UAM Funds (mutual
funds).
Lynn A. Stout Trustee Since 7/25/02 Professor of Law, University 179 None
DOB: 9/14/56 3 Years of California at Los Angeles
School of Law (since July
2001). Formerly, Professor
of Law, Georgetown
University Law Center.
---------------
(1) Includes both master and feeder funds in master-feeder structure.
(2) Class I Trustee whose term expires in 2003.
(3) Class II Trustee whose term expires in 2004.
(4) Class III Trustee whose term expires in 2005.
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.
B-10
The Nominating Committee of the Board of Trustees of the Fund is comprised
of the Trustees who are not "interested persons" of the Fund as that term is
defined under the 1940 Act ("noninterested Trustees"). The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is comprised of noninterested Trustees of the Fund. The Trustees will,
when a vacancy exists or is anticipated, consider any nominee for Trustee
recommended by a shareholder if such recommendation is submitted to the Trustees
in writing and contains sufficient background information concerning the
individual to enable a proper judgment to be made as to such individual's
qualifications.
Messrs. Dwight (Chairman), Hayes and Reamer are members of the Audit
Committee of the Board of Trustees of the Fund. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection and
performance of the independent accountants, and reviewing matters relative to
accounting and auditing practices and procedures, accounting records, and the
internal accounting controls, of the Fund, and certain service providers.
Messrs. Dwight, Hayes and Reamer and Ms. Stout are members of the Special
Committee of the Board of Trustees of the Fund. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Fund, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Fund.
As of the date of this SAI, the Committees had not held any meetings.
In reviewing the approval of the investment advisory agreement between the
Fund and the investment adviser, the Special Committee considered, among other
things, the following:
- A report comparing the fees and expenses of the Fund to a peer group of
funds;
- Information on the investment performance (in the case of a renewal), the
relevant peer group(s) of funds and appropriate indices;
- Sales and redemption data in respect of the Fund (in the case of a
renewal);
- The economic outlook and the general investment outlook in the relevant
investment markets;
- Eaton Vance's results and financial condition and the overall
organization of the investment adviser;
- Arrangements regarding the distribution of Fund shares;
- The procedures used to determine the fair value of the Fund's assets;
- The allocation of brokerage, including allocations to soft dollar
brokerage and allocations to firms that sell Eaton Vance fund shares;
- Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;
- The resources devoted to Eaton Vance's compliance efforts undertaken on
behalf of the funds it manages and the record of compliance with the
investment policies and restrictions and with policies on personal
securities transactions;
- The quality nature, cost and character of the administrative and other
non-investment management services provided by Eaton Vance and its
affiliates;
B-11
- Investment management staffing;
- Operating expenses (including transfer agency expenses) to be paid to
third parties; and
- Information to be provided to investors, including Fund's shareholders.
In addition to the factors mentioned above, the Special Committee also
reviewed the level of the investment adviser's profits in respect of the
management of the Eaton Vance funds, including the Fund. The Special Committee
considered the profits realized by Eaton Vance and its affiliates in connection
with the operation of the Fund. The Special Committee also considered Eaton
Vance's profit margins in comparison with available industry data.
The Special Committee 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
Special Committee. In assessing the information provided by Eaton Vance and its
affiliates, the Special Committee 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 Special Committee
concluded that the approval of the investment advisory agreement(s), including
the fee structure (described herein) is in the interests of shareholders.
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
B-12
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).
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
B-13
statements and other expenses of shareholders' meetings; insurance premiums;
printing and mailing expenses; interest, taxes and corporate fees; legal and
accounting expenses; compensation and expenses of Trustees not affiliated with
Eaton Vance; expenses of conducting repurchase offers for the purpose of
repurchasing Fund shares; and investment advisory and administration fees. The
Fund will also bear expenses incurred in connection with any litigation in which
the Fund is a party and any legal obligation to indemnify its officers and
Trustees with respect thereto, to the extent not covered by insurance.
The Investment Advisory Agreement continues in effect to March 31, 2004 and
from year to year so long as such continuance is approved at least annually (i)
by the vote of a majority of the noninterested Trustees of the Fund or of the
Adviser cast in person at a meeting specifically called for the purpose of
voting on such approval and (ii) by the Board of Trustees of the Fund or by vote
of a majority of the outstanding interests of the Fund. The Fund's
Administration Agreement continues in effect from year to year so long as such
continuance is approved at least annually by the vote of a majority of the
Fund's Trustees. Each agreement may be terminated at any time without penalty on
sixty (60) days' written notice by the Trustees of the Fund or Eaton Vance, as
applicable, or by vote of the majority of the outstanding shares of the Fund.
Each agreement will terminate automatically in the event of its assignment. Each
agreement provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties to the Fund under
such agreements on the part of Eaton Vance, Eaton Vance shall not be liable to
the Fund for any loss incurred, to the extent not covered by insurance.
Eaton Vance is a business trust organized under Massachusetts law. Eaton
Vance, Inc. ("EV") serves as trustee of Eaton Vance. EV is a subsidiary of Eaton
Vance Corporation ("EVC"), a Maryland corporation and publicly-held holding
company. EVC through its subsidiaries and affiliates engages primarily in
investment management, administration and marketing activities. The Directors of
EVC are James B. Hawkes, John G. L. Cabot, Thomas E. Faust, Jr., Leo I. Higdon,
Jr., John M. Nelson, Vincent M. O'Reilly and Ralph Z. Sorenson. All shares of
the outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the
Voting Trustees of which are Messrs. James B. Hawkes, Thomas E. Faust, Jr.,
Jeffrey P. Beale, Alan R. Dynner, Thomas J. Fetter, Scott H. Page, Duncan W.
Richardson, William M. Steul, Payson F. Swaffield, Michael W. Weilheimer and
Wharton P. Whitaker (all of whom are officers of Eaton Vance). The Voting
Trustees have unrestricted voting rights for the 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 Codes of
Ethics governing personal securities transactions. Under the Codes, 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.
B-14
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.
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
B-15
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
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.
B-16
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.
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
B-17
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.
B-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.
B-19
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, foreign investors,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local, and, where applicable,
foreign tax consequences of investing in the Fund.
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 following discussion of California tax matters
is based on the advice of Sidley Austin Brown & Wood LLP, special tax counsel
for the Fund. 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.
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
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.
B-20
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.
AUDITORS
, Boston, Massachusetts, are the independent
accountants for the Fund, providing audit services, tax return preparation, and
assistance and consultation with respect to the preparation of filings with the
SEC.
B-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
, 20 and the related statement of operations for the one day period
ended , 20 . These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 financial statements referred to above presents
fairly, in all material respects, the financial position of Eaton Vance Insured
California Municipal Bond Fund as of , 20 , and the results of its
operations for the stated period, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
, 20
B-22
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
, 20
ASSETS:
Cash...................................................... $
Deferred initial offering expenses
Total assets.............................................. $
------
LIABILITIES:
Initial offering expenses accrued......................... $
------
Total liabilities......................................... $
------
Net assets applicable to common shares of
beneficial interest issued and outstanding................ $
======
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $15.00
======
NOTE TO FINANCIAL STATEMENT
Eaton Vance Insured California Municipal Bond Fund was formed under an
Agreement and Declaration of Trust dated July 8, 2002 and has been inactive
since that date except for matters relating to its organization and registration
as an investment company under the Investment Company Act of 1940 and the sale
of shares of its beneficial interest to Eaton Vance Management, the Fund's
administrator. The initial offering and organizational expenses, including
federal and state registration and qualification fees, will be deducted from net
proceeds, and will not exceed $0.03 per share, as Eaton Vance Management or an
affiliate will pay any such expenses in excess of $0.03 per share. The initial
offering expenses reflected above assume the initial sale of shares.
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
FOR THE ONE DAY , 20
INCOME:..................................................... $
EXPENSES:
Organization expenses....................................... $
Total Expenses......................................... $
Preliminary reduction of expenses........................... $
Net expenses........................................... $
Net investment loss......................................... $
NOTE OF FINANCIAL STATEMENT
B-23
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.
B-24
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its municipal bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
MUNICIPAL SHORT-TERM OBLIGATIONS
MIG/VMIG RATINGS U.S. SHORT-TERM RATINGS: In municipal debt issuance,
there are three rating categories for short-term obligations that are considered
investment grade. These ratings are designated as Moody's Investment Grade (MIG)
and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality
are designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned. The first element represents Moody's evaluation of the
degree of risk associated with scheduled principal and interest payments. The
second element represents Moody's evaluation of the degree of risk associated
with the demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated
as VMIG. When either the long- or short- term aspect of a VRDO is not rated,
that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations
will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt
instruments in this category in this category may lack sufficient margins of
protection.
B-25
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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.
B-26
P: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Deposit Insurance Corp. and interest is adequately
collateralized. In the case of certificates of deposit, the letter "L" indicates
that the deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MUNICIPAL NOTES
S&P note ratings reflect the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH RATINGS
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
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
B-27
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified that
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these bonds, and
'D' represents the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a credit
within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the 'F-1+' and 'F-1' categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
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.
B-28
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's] 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.
B-29
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 [land] 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
$ 21,504 - $ 27,950 $ 43,007 - $ 46,700 15.0% 6.00% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$ 27,951 - $ 29,850 $ 46,701 - $ 59,700 27.0% 6.00% 31.38% 5.83% 6.56% 7.29% 8.02% 8.74% 9.47% 10.20%
$ 29,851 - $ 37,725 $ 59,701 - $ 75,450 27.0% 8.00% 32.84% 5.96% 6.70% 7.44% 8.19% 8.93% 9.68% 10.42%
$ 37,726 - $ 67,700 $ 75,451 - $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 [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.
B-30
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
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances
improved significantly starting in 1995. After several years of very strong
growth, the State's financial condition started to worsen since the start of
2001, with the combination of a mild economic recession and a dramatic decline
in revenue from capital gains and stock option activity resulting from the
decline in stock market levels since mid-2000. The ratings of certain related
debt of other issuers for which California has an outstanding lease purchase,
guarantee or other contractual obligation (such as for state-insured hospital
bonds) are generally linked directly to California's rating. Should the
financial condition of California deteriorate further, its credit ratings could
be reduced, and the market value and marketability of all outstanding notes and
bonds issued by California, its public authorities or local governments could be
adversely affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of about 35 million represents
about 12 1/2% of the total United States population and grew by 26% in the
1980s, more than double the national rate. Population growth slowed to less than
1% annually in 1994 and 1995, but rose to almost 2% in the final years of the
1990's. The bulk of population growth in the State is due to births and foreign
immigration.
Total personal income in the State, at an estimated $1,095 billion in 2000,
accounts for almost 13% of all personal income in the nation. Total employment
is over 16 million, the majority of which is in the service, trade and
manufacturing sectors.
Following a severe recession in the early 1990's, California began a period
of strong growth in 1994 in virtually all sectors, particularly in high
technology manufacturing and services, including computer software and other
services, entertainment, tourism, and construction, and also with very strong
growth in exports. The California economy outpaced the nation during this
period. By the end of 2000, unemployment in the State had dropped in half from
the recession to under 5%, its lowest level in three decades. The strongest
growth in a decade occurred in 1999 and 2000, but in 2001 the State finally
showed the impact of the nationwide economic slowdown, coupled with a cyclical
downturn in the high technology sector (including Internet-related businesses)
and entered a mild recession, with unemployment rising above 6%. International
trade also slowed since the start of 2001 reflecting weakness in overseas
economies (particularly in Asia). The terrorist attacks on September 11, 2001
resulted in a further, temporary economic decline tourism-based areas, but this
effect appears to have ended by the spring of 2002. Modest job growth appears to
have begun by early 2002 and California's economy is expected to
B-31
continue a mild recovery in 2002 and 2003. The recession, combined particularly
with the decline in the stock markets since mid-2000, will result in much weaker
State revenues than previously projected, as discussed further below under
"Recent Financial Results."
Widely publicized difficulties in California's energy supplies had been
seen in early 2001 to pose some risks to the economy, but during the summer
there were no electricity blackouts or shortages of natural gas. Although energy
prices have risen from the levels of two years ago, they have now appeared to
stabilize. Energy difficulties are mitigated by the fact that California's
economy is very energy-efficient. U.S. Department of Energy statistics for 1999
revealed that California ranked 50th of the 50 states in energy expenditures as
a percentage of state domestic product.
RECENT DEVELOPMENTS REGARDING ENERGY
From mid-2000 through early 2001, the State faced occasional shortages of
electricity and dramatic increases in the spot market price for electricity, as
a result of many complex factors deriving generally from a deregulation plan
implemented in 1997. The three major investor-owned utilities in the State
("IOUs") purchased electricity to meet their needs above their own generating
capacity and contracted supplies at fluctuating short-term and spot market
rates, which rose sharply, while the retail prices they could charge their
residential and small business customers were capped at specified levels under
the deregulation plan. By early January, 2001, the two largest IOUs had
exhausted their cash reserves and could no longer purchase electricity in the
spot market.
The Governor declared a state of emergency under State law on January 17,
2001, and ordered the State's Department of Water Resources ("DWR") to begin
purchasing electricity for resale to retail end use customers, to fill the gap
in supplies resulting from the inability of the IOUs to continue to purchase
power. The DWR also started to enter into long-term power supply contracts to
reduce reliance on short-term and spot markets. DWR's purchases were initially
funded primarily by unsecured, interest-bearing loans from the State's General
Fund ("State Loans"). DWR is also receiving repayment from a portion of retail
end use customers' payments, remitted through the IOUs, but these amounts will
cover only a small portion of the power purchase costs. Effective June 26, 2001,
the DWR entered into an Interim Loan Agreement with several banks totaling $4.1
billion ("Interim Loans"), which moneys are being used since that date to fund
power purchases. The Interim Loans are repayable only from end use customer
payments or other debt sales, and are not an obligation of the State General
Fund. As of January 31, 2002, DWR had committed approximately $12.6 billion for
power purchases, funded from $6.1 billion in net State Loans, $3.7 billion in
customer payments and a net $2.7 billion from the Interim Loans ($1.4 billion of
Interim Loan proceeds remain available to fund future power purchases).
The State Loans, the Interim Loans and the balance of energy purchase
costs, are intended to be funded from the issuance of an estimated $11 billion
of DWR revenue bonds authorized by legislation. Issuance of the bonds depends on
adoption and final legal review of several orders by the California Public
Utilities Commission ("CPUC"). In February, 2002 the CPUC adopted an order
implementing DWR's "revenue requirement" to be collected from customer rates;
the procedure used by DWR to calculate its revenue requirement was, however,
challenged in a court proceeding. The CPUC also approved a "rate agreement" with
the DWR governing the imposition of consumer rates necessary to repay the bond
issue and DWR's other power purchase costs. While the CPUC had raised customer
rates significantly in 2001 (average of 40%), final calculation of the DWR's
revenue requirement to repay bonds and meet its other obligations may require
additional rate actions. CPUC also approved an order eliminating the right of
retail customers to contract directly with generators for energy.
A final schedule for issuance of the revenue bonds will depend on review of
legal challenges to these CPUC orders and related matters. The DWR revenue bonds
will be repaid from a dedicated revenue stream derived from customer payments;
they will not be backed in any way by the faith and credit or taxing power of
the State. Pending issuance of the DWR revenue bonds, DWR projects it will have
enough funds available from existing resources and customer revenues to continue
its power purchases and repay its obligations (including principal payments on
the Interim Loans which began in April 2002).
B-32
On April 6, 2001, the largest IOU, Pacific Gas & Electric Company, filed
for voluntary protection under the federal Bankruptcy Code. Its bankruptcy
proceeding remained far from resolution by May, 2002. The second-largest IOU,
Southern California Edison Company ("SCE") also defaulted on various obligations
in early 2001. In October, 2001, SCE announced the settlement of a lawsuit with
the CPUC over the rates which SCE could charge its customers. CPUC implemented
this settlement by allowing SCE to collect rates from its customers at current
levels for up to three years to repay its prior debts. Based on this agreement,
SCE used accumulated cash and proceeds of a new credit agreement to repay
substantially all of its prior defaulted debts in March, 2002.
The State is intensifying programs for energy conservation, load management
and improved energy efficiency in government, businesses and homes. Approval for
construction of new power generating facilities, especially smaller and
"peaking" power facilities, has been accelerated. A number of new power plants
have been completed and new larger power plants are under construction and in
permitting phase, and will come on line in 2002 and 2003. As noted, the State
has entered into a number of longer term power supply contracts, thereby
reducing the risks of reliance on the spot markets. The combination of these
elements has substantially lowered wholesale electricity costs.
Despite fears of significant disruptions during the summer of 2001, the
combination of cooler weather, significant conservation efforts, absence of
major unplanned power plant outages, and completion of several new power plants
permitted the State to avoid any blackouts since early May, and spot market
power costs have decreased significantly, lessening the cost of the DWR power
purchase program. Natural gas prices have also decreased.
A number of lawsuits are pending dealing with many aspects of the energy
situation in California, including disputes over the rates which the CPUC may
charge retail customers, financial responsibility for purchases of power by the
IOUs, obligations and rights of independent power producers holding power sales
contracts with the IOUs, and various antitrust, fraud and refund claims against
energy suppliers.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
Limitation on Property Taxes. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits the rate of ad valorem
property taxes to 1% of full cash value of real property and generally restricts
the reassessment of property to 2% per year, except upon new construction or
change of ownership (subject to a number of exemptions). Taxing entities may,
however, raise ad valorem taxes above the 1% limit to pay debt service on
voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits were filed challenging the acquisition-based assessment system
of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax."
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote.
B-33
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a local government upon a parcel or upon a person as an incident of property
ownership, including a user fee or charge for a property related service." All
new and existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which generate revenues
exceeding the funds required to provide the property related service or are used
for unrelated purposes. There are new notice, hearing and protest procedures for
levying or increasing property related fees and charges, and, except for fees or
charges for sewer, water and refuse collection services (or fees for electrical
and gas service, which are not treated as "property related" for purposes of
Article XIIID), no property related fee or charge may be imposed or increased
without majority approval by the property owners subject to the fee or charge
or, at the option of the local agency, two-thirds voter approval by the
electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations.
Appropriations Limits. The State and its local governments are subject to
an annual appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations to
comply with mandates of courts or the federal government, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations made
in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
in the early 1990's because of the recession, few governments have been
operating near their spending limits, but this condition may change over time.
Local governments may by voter approval exceed their spending limits for up to
four years. Because of extraordinary revenue receipts in fiscal year 1999-2000,
State appropriations were estimated to be about $975 million above the limit.
However, since the State was $2.1 billion below its limit in fiscal year
2000-01, resulting in no excess over the two-year period, no refunds were made.
Fiscal year 1999-2000 was the only year since the late 1980's when State
appropriations were above the limit. The State Department of Finance estimates
the State will be about
B-34
$14.5 billion below its appropriation limit in fiscal year 2001-02 and $6.3
billion under the limit in 2002-03.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal obligations or on the ability of the
State or local governments to pay debt service on such California municipal
obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of January
1, 2002, the State had outstanding approximately $23.9 billion of long-term
general obligation bonds, plus $724 million of general obligation commercial
paper and $6.2 billion of lease-purchase debt supported by the State General
Fund. The State also had about $13.2 billion of authorized and unissued
long-term general obligation bonds and lease-purchase debt. The State sold $1.8
billion of general obligation bonds to repay outstanding commercial paper notes
in February and April, 2002, and sold $187,705,000 of new lease purchase bonds
in February, 2002. In fiscal year 2000-01, debt service on general obligation
bonds and lease purchase debt was approximately 3.8% of General Fund revenues.
State voters approved $2.8 billion of new general bond authorizations on the
ballot in March, 2002. At least $15 billion in new bond authorizations will be
on the ballot in November, 2002.
RECENT FINANCIAL RESULTS
The principal sources of General Fund tax revenues in 2000-01 were the
California personal income tax (59 percent of total tax revenues), the sales tax
(28 percent), corporation taxes (9 percent), and the gross premium tax on
insurance (2 percent). Preliminary estimates for 2000-01 indicate that almost
25% of total General Fund tax revenue was derived from capital gains
realizations and stock option income. While these sources have been
extraordinarily strong in the past few years, they are particularly volatile. In
preparing the 2001-02 budget, the State took account of the recent drop in stock
market levels and reduced its estimated receipts from these revenues as compared
to the prior year. However, with continued weak stock market levels into early
2002 it is now clear that revenue from capital gains and stock options will fall
below projections. Indeed, the Administration now projects that this source of
revenue will drop from 25% of all General Fund revenues in 2000-01 to 11% in
2001-02 and 9% in 2002-03; this represents the bulk of the total General Fund
revenue shortfall in these two fiscal years.
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 35 percent).
Recent Budgets. The State suffered a severe economic recession from
1990-94 during which the State experienced substantial revenue shortfalls and
accumulated a budget deficit of about $2.8 billion.
B-35
With the economic recovery which began in 1994, the State's financial condition
improved markedly in the years from fiscal year 1995-96 onward, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken in
earlier years.
The economy grew strongly during the second half of the 1990's, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98, $1.7
billion in 1998-99, $8.2 billion in 1999-2000 and $4.1 billion in 2000-01) than
were initially planned when the budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and to
make up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. In 1998-99 through 2000-01, new spending programs were also enacted,
particularly for education, new capital outlay projects were funded from current
receipts, and significant tax reductions were enacted. The accumulated budget
deficit from the recession years was finally eliminated. The Department of
Finance estimates that the State's budget reserve (the SFEU) totaled $8.7
billion at June 30, 2000 and $6.3 billion at June 30, 2001. However, the SFEU
balance at June 30, 2001 includes as an asset the $6.1 billion loan to the DWR
for power purchases (see "Recent Developments Regarding Energy" above), and the
General Fund's available cash at that date was considerably less.
The growth in General Fund revenues since the end of the recession resulted
in significant increases in State funding for local school districts under
Proposition 98. From the recession level of about $4,200 per pupil, annual State
funding has increased to over $6,700 per pupil in fiscal year 2000-01. A
significant amount of the new moneys have been directed to specific educational
reforms, including reduction of class sizes in many grade levels. The improved
budget condition also allowed annual increases in support for higher education
in the State, permitting increased enrollment and reduction of student fees.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid. Generally, health and
welfare costs have been contained even during the recent period of economic
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000 and additional increases in 2000-01.
One of the most important elements of recent Budget Acts was agreement on
substantial tax cuts. The largest of these was a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting on January 1, 1999, the VLF was reduced by 25 percent, which
was increased to a 35% reduction effective January 1, 2000 and a 67.5% reduction
effective January 1, 2001. Under pre-existing law, VLF funds are automatically
transferred to cities and counties, so the new legislation provided for the
General Fund to make up the reductions. The full 67.5% percent VLF cut will be
offset by about $2.6 billion in General Fund money in fiscal year 2000-01, and
$3.6 billion for fiscal year 2001-02. (The Administration is proposing a
one-year reversal of the VLF cut above 25% in calendar 2003 to save about $2.4
billion.) Other tax cuts included an increase in the dependent credit exemption
for personal income tax filers, restoration of a renter's tax credit for
taxpayers, and a variety of business tax relief measures. Finally, because the
SFEU balance was more than 4% of General Fund revenues for two consecutive
years, the State reduced its sales tax by 0.25% for one year, starting January
1, 2001 (pursuant to an existing statutory formula). This will result in about
$1.15 billion in lower revenues during calendar year 2001. The 0.25% rate was
restored as of January 1, 2002.
FISCAL YEAR 2001-02 BUDGET.
The 2001-02 Budget Act (the "2001 Budget Act") was signed on July 26, 2001.
The 2001 Budget Act included $78.8 billion in General Fund expenditures, a
reduction of $1.3 billion from the previous year. General Fund revenues in
fiscal year 2001-02 were projected to drop to $75.1 billion, a decline of almost
4 percent from the prior year, reflecting the economic slowdown and the sharp
drop in capital gains and stock option revenue. The excess of expenditures over
revenues is to be funded by using a part of the
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budget reserve from the prior year, and assumes that the General Fund will be
repaid in full for advances made to purchase energy (see "Recent Developments
Regarding Energy" above). The Governor vetoed about $500 million of General Fund
expenditures from the 2001 Budget Act as adopted by the Legislature, to leave an
estimated budget reserve in the SFEU at June 30, 2002 of $2.6 billion. The 2001
Budget Act also included expenditures of $21.3 billion from Special Funds and
$3.2 billion from bond funds.
When the Governor released his proposed budget for 2002-03 in January 2002
(the "2002-03 Governor's Budget"), the Administration estimated that the major
tax revenues (personal income, corporate and sales) would be more than $5
billion lower in 2001-02 than projected when the 2001 Budget Act was signed. The
Administration projected the need to close a $12.5 billion budget gap for the
two fiscal years 2001-02 and 2002-03. As a first part of his plan to close this
gap, the Governor froze about $2.3 billion of spending for 2001-02 in November
2001; the Legislature ratified these actions in late January 2002.
The State sold a record $5.7 billion in revenue anticipation notes ("RANs")
for the 2001-02 fiscal year, to offset cash flow shortfalls during the fiscal
year, as part of the State's normal, annual cash management program. The State's
cash position has been adversely affected by the $6.1 billion advances made by
the General Fund to pay for electricity purchases in the first half of 2001. In
late April, 2002, the State Controller indicated that cash flow projections for
the balance of the fiscal year, in light of weak revenues, indicated the need
for the State to borrow additional moneys in the short-term note markets in
order to pay the RANs when they mature on June 28, 2002, as well as other State
obligations in June, July and August 2002, given the fact that the DWR revenue
bonds will not be sold in time to replenish the General Fund by the end of June.
The Controller proposed the issuance of up to $7.5 billion of "revenue
anticipation warrants" in June, 2002. The need for any additional cash flow
borrowing will likely depend on how quickly the DWR revenue bonds are sold (see
"Recent Developments Regarding Energy" above).
One of the major disputes which delayed passage of the 2001 Budget Act past
the July 1 start of the fiscal year related to tax provisions. Under existing
law, since the budget reserve was expected to fall below 4% in 2001-02, the
0.25% reduction in the State sales tax which went into effect on January 1, 2001
was scheduled to be reversed on January 1, 2002, providing over $500 million of
revenues for the 2001-02 fiscal year. A compromise was reached which allows the
0.25% sales tax reinstatement to occur in 2002, but reduces the "trigger" for
sales tax reductions in future years to a 3% budget reserve test from the
present 4%. Certain other tax relief measures for senior citizens and rural and
agricultural areas were included in the Budget Act, totaling about $122 million.
The 2001 Budget Act provides full funding for K-14 education, and certain
additional funding for low-performing schools, child care and other programs.
Funding for higher education was increased, but less than in previous years. No
fee increases for higher education will be imposed. Health care, social services
and prisons are funded for all expected caseload and inflation increases.
ASSISTANCE TO LOCAL GOVERNMENTS WAS REDUCED FROM THE PREVIOUS YEAR.
The 2001 Budget Act was able to sustain the reduced revenues without major
program reductions because a large part of the 2000-01 Budget Act was for
one-time spending, which did not have to be continued. The Budget Act has much
less one-time spending for capital outlay. The 2001 Budget Act also extends for
two years the six-year transportation funding program implemented in 2000-01,
and uses a total of $2.3 billion of those funds for General Fund purposes in
2001-02 and 2002-03, to be repaid in 2006-08. The shortfall in funding will be
made up by temporary loans from other transportation accounts, so that it is not
expected any projects will be delayed. Part of a compromise to permit this
deferral was agreement to place a constitutional amendment on the next statewide
ballot to permanently dedicate all sales taxes on gasoline and related fuels to
transportation programs.
In anticipation of reduced revenues in the 2001-02 fiscal year, the
Governor in October, 2001 announced a hiring freeze for State agencies, and
requested State agencies to find up to 10% in cost reductions in the current
year. He also asked State agencies to prepare budget proposals for the 2002-03
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fiscal year with up to a 15% cut from current levels. However, this cut would
not apply to public safety or K-12 education programs.
PROPOSED 2002-03 BUDGET
When the 2002-03 Governor's Budget was released in January, 2002, it
projected a $12.5 billion gap for the period through June 30, 2003. The
Administration's May Revision of the Governor's Budget, issued May 14, 2002 (the
"May Revision"), reported that as a result of continuing economic weakness,
particularly in the stock markets, revenues in the second part of the 2001-02
fiscal year fell substantially below projections. Personal income tax receipts
are projected at $4.5 billion, or 11%, below the Governor's Budget estimate;
total receipts will be down about $3.3 billion, or 4.3%. Personal income tax
receipts for 2002-03 were projected to be $5.5 billion, or 13%, below the
Governor's Budget estimate. Sales and corporations taxes are projected to be a
little higher than earlier estimates, reflecting improved economic conditions
and corporate profits. The May Revision concluded that, with the combination of
lower revenues and certain increased expenditure requirements, the budget gap
had risen to about $23.6 billion. The Administration proposed, in the May
Revision, to close this gap with the following major actions:
1. Expenditure reductions of about $7.6 billion. About $2.3 billion
of these reductions, for the 2001-02 fiscal year, have already been
approved by the Legislature. The largest part of the reductions fall on
health, welfare and human services programs, but virtually all programs
other than education and public safety would be affected to some extent.
2. Funding shifts from the General Fund to other sources, including
bond funds and special funds, and deferral of expenditures to future years,
totaling $3.6 billion.
3. Anticipated increases in federal funding for health and human
services programs, security/bioterrorism and other areas totaling $1.1
billion.
4. Interfund loans, accelerations and transfers totaling $3.0
billion.
5. Various revenue increases totaling $3.9 billion, including
deferral of net operating loss carryforwards for corporations, an increase
in the cigarette tax, federal tax conformity legislation, and temporary
suspension of the vehicle license fee reduction.
6. Sale of bonds secured by future payments from the tobacco
litigation settlement, to generate $4.5 billion in current receipts.
All of these proposals are subject to negotiations with the Legislature
and, in some cases, action by other bodies, such as the federal government.
There is no assurance which of these actions will be finally implemented, or the
total budget savings which will result.
The 2002-03 Governor's Budget, as updated by the May Revision, proposed an
austere spending plan for the next fiscal year, based on successful
implementation of the various actions to close the budget gap. Spending for K-12
schools would be increased by a small amount, with full cost of living increases
included, so that at least the minimum Proposition 98 guaranty would be funded.
Most other areas of government would receive some program or funding reductions,
although caseload increases, where appropriate, will be funded. The Governor
proposed some reductions in existing grants to local governments, and counties,
in particular, may have to make up for some of the reductions in state funding
for health and human services. The Governor did not propose any large-scale
funding shifts adverse to local government, as occurred in the early 1990's.
Final action on the 2002-03 Budget Act will occur in the summer following final
negotiations between the Governor and the Legislature.
Although the State's strong economy has produced record revenues to the
State government in recent years, the State's budget faces several years of
significant constraints due to weaker economic conditions, and it continues to
be marked by mandated spending on education, a large prison population, and
social needs of a growing population with many immigrants. These factors which
limit State spending growth also put pressure on local governments. There can be
no assurances that, if economic conditions weaken, or other factors intercede,
the State will not experience budget gaps in the future.
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BOND RATING
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, through the end of 2000, the three major rating agencies raised
their ratings of California's general obligation bonds as high as "AA" from
Standard & Poor's, "Aa2" from Moody's and "AA" from Fitch. As of May 1, 2002,
Standard & Poor's had reduced California's senior ratings to "A+" and Moody's
had reduced its ratings to "A1" and both agencies maintained the State's credit
ratings on watch with negative implications. As of that date, Fitch had placed
California's ratings on watch with negative implications.
There can be no assurance that current ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. If the State eventually loses any of these cases, the final
remedies may not have to be implemented in one year.
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.
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,
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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
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
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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.
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
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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.
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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
B-43
Insurance or Secondary Market Insurance will generally be greater than the
market value of an otherwise comparable defaulted obligation covered by
Portfolio Insurance.
The Fund may also invest in obligations that are secured by an escrow or
trust account which contains securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, that are backed by the full faith
and credit of the United States, and sufficient in amount to ensure the payment
of interest on and principal of the secured California obligation
("collateralized obligations"). Collateralized obligations generally are
regarded as having the credit characteristics of the underlying U.S. Government,
agency or instrumentality securities. These obligations will not be subject to
Issue Insurance, Secondary Market Insurance or Portfolio Insurance. Accordingly,
despite the existence of these credit support characteristics, these obligations
will not be considered to be insured obligations for purposes of the Fund's
policy of investing at least 80% of its net assets in insured obligations.
Principal Insurers. Currently, Municipal Bond Investors Assurance
Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"), AMBAC
Indemnity Corporation ("AMBAC"), ACA, Radian Asset Assurance ("Radian"), XL
Capital Assurance ("XL Capital"), CDC IXIS Financial Guaranty North America,
Inc. ("CIFG NA"), and Financial Security Assurance Corp., together with its
affiliated insurance companies -- Financial Security Assurance International
Inc. and Financial Security Assurance of Oklahoma, Inc. (collectively, "FSA"),
are considered to have a high claims-paying ability and, therefore, are eligible
insurers for the Fund's obligations. Additional insurers may be added without
further notification. The following information concerning these eligible
insurers is based upon information provided by such insurers or information
filed with certain state insurance regulators. Neither the Fund has
independently verified such information and make no representations as to the
accuracy and adequacy of such information or as to the absence of material
adverse changes subsequent to the date thereof.
MBIA is a monoline financial guaranty insurance company created from an
unincorporated association (the Municipal Bond Insurance Association), through
which its members wrote municipal bond insurance on a several and joint-basis
through 1986. On January 5, 1990, MBIA acquired all of the outstanding stock of
Bond Investors Group, Inc., the parent of Bond Investors Guaranty Insurance
Company ("BIG"), which has subsequently changed its name to MBIA Insurance Corp.
of Illinois. Through a reinsurance agreement, BIG ceded all of its net insured
risks, as well as its related unearned premium and contingency reserves, to
MBIA. MBIA issues municipal bond insurance policies guarantying the timely
payment of principal and interest on new municipal bond issues and leasing
obligations of municipal entities, secondary market insurance of such
instruments and insurance on such instruments held in unit investment trusts and
mutual funds. As of December 31, 2001, MBIA had total assets of approximately
$16.12 billion and qualified statutory capital of approximately $4.8 billion.
MBIA has a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's.
Financial Guaranty Insurance Corporation, a wholly owned subsidiary of FGIC
Corporation, which is a wholly owned subsidiary of General Electric Capital
Corporation, is an insurer of municipal securities, including new issues,
securities held in unit investment trusts and mutual funds, and those traded on
secondary markets. The investors in FGIC Corporation are not obligated to pay
the debts of or claims against FGIC. As of December 31, 2000, FGIC had total
assets of approximately $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,
B-44
though a loss coverage agreement with ACE American Insurance Co., (rated A). ACA
insures primarily in the municipal and CDO market and acts as the
manager/originator of CDO issues.
Radian is a wholly owned subsidiary of Radian Group Inc. Radian is rated AA
by S&P and Fitch and provides financial guaranty insurance and reinsurance for
debt and asset backed securities. Radian was formerly known as Asset Guarantee
Company and was purchased by Radian Group for $518 million in February 2001. As
of December 31, 2001, Radian had assets of $381 million and statutory capital of
$169.8 million.
XL Capital is a new AAA rated financial guarantor and a wholly owned
subsidiary of property casualty insurer XL Capital Ltd. XL Capital began
transactions in January of 2001 and is rated AAA / Aaa by Moody's and S&P
respectively. It is currently capitalized with $100 million and cedes 90% of its
exposure to XL Financial Assurance a Bermuda based subsidiary of XL Capital Ltd.
XL Financial Assurance has $274 million in hard capital and $100 million in stop
loss protection. Beyond this XL Financial Assurance further guarantees 100% of
XL Capital exposure with $2.7 billion in shareholders equity. XL Capital has $88
million in assets and through its parent and subsidiary agreements XL Capital
has $1 billion in qualified statutory capital.
CIFG NA is a new financial Guarantor rated AAA from Fitch, Moody's and S&P.
CIFG NA is a subsidiary of CDC IXIS Financial Guaranty ("CIFG") which is a
subsidiary of CIFG Holding, which is in turn owned by parent company CDC IXIS.
CDC IXIS is a French domiciled corporation with a broad spectrum of insurance
related businesses. CIFG recently entered the bond insurance business with two
companies, CIFG Europe and CIFG NA. CIFG is capitalized with $280 million in
cash, with CIFG NA holding $100 million in cash. CDC IXIS backs the two entities
with $220 million 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.
B-45
[EATON VANCE LOGO]
APPENDIX E
EATON VANCE
INSURED [PHOTO OF BRIDGE]
MUNICIPAL BOND FUNDS
INSURED NATIONAL (EIM*)
INSURED CALIFORNIA (EVM*)
INSURED NEW YORK (ENX*)
(*) AMEX symbol applied for
AT LEAST 80% AAA-RATED & INSURED 100% EXEMPT FROM AMT
- Attractive Monthly Income Exempt from
Federal Income Tax, Federal Alternative
Minimum Tax and, Where Applicable, State and
Local Taxes
- Quality Of Professionally Managed, 100%
Investment-Grade Portfolios
- At Least 80% of Assets Invested in
Obligations AAA-Rated and Insured as to
Timely Payment of Interest and Principal
- Emphasis on Current Yield and on Seeking
Undervalued Securities to Enhance Total
Return
- Quality Diversifier with Potential for
Reducing Overall Portfolio Risk
- American Stock Exchange Listing Provides
Daily Liquidity
Initial Public Offering
August 2002
--------------------------------------------------------------------------------
WHY INVEST IN AN EATON VANCE
INSURED MUNICIPAL BOND FUND NOW?
--------------------------------------------------------------------------------
================================================================================
1
INSURED MUNICIPALS REPRESENT UNCOMMON VALUE IN THE CURRENT MARKET ENVIRONMENT
-----------------------------------------------------------------------------
Over the past 10 years, insured municipal bond yields have averaged
approximately 90% of yields on 30-year U.S. Treasury bonds. At June 30, 2002, a
representative tax-exempt insured municipal bond was yielding more than 95% of
the taxable yield of a 30-Year U.S. Treasury bond. With such exceptional
tax-free yields available, why pay taxes on your investment earnings?
Source: Municipal Market Advisors. The chart compares the yield of a 30-year,
AAA-rated general obligation insured municipal bond with that of a 30-year U.S.
Treasury bond. Unlike the Funds, these bonds carry no management fees, account
charges or other expenses. U.S. Treasury bonds offer a government guarantee as
to timely payment of interest and repayment of principal on maturity; income is
tax-exempt at the state and local level. Insured municipal bonds are not
guaranteed by the U.S. Government. In addition to general obligation bonds,
insured municipal obligations can include revenue bonds. Past performance is no
guarantee of future results.
YIELD RELATIONSHIP OF 30-YEAR GENERAL OBLIGATION
INSURED MUNICIPAL BOND TO 30-YEAR TREASURY BOND
Current: 95.6%
Average: 90.1%
[LINE GRAPH]
Date Yield %
Jun-92 82.9
81.9
85.1
86.7
87.3
84.3
85.3
86.2
82.6
86.7
83.7
83.8
84.7
86.8
90.3
88.9
90.5
88.9
85.2
86.5
87.1
90.3
86.7
84.1
85.4
Jun-94 84.6
84.6
83.9
84.8
87.5
85.7
83.1
82.7
83.0
84.6
87.2
92.1
89.2
90.2
91.5
90.8
89.6
89.9
89.7
86.6
87.8
86.1
86.6
85.6
Jun-96 83.9
82.9
82.4
85.1
86.6
84.3
83.9
83.1
83.1
83.1
81.8
82.6
83.3
82.9
84.2
87.1
87.6
87.0
88.4
87.8
88.5
89.9
89.3
92.2
Jun-98 90.9
95.8
98.8
97.9
98.4
99.2
97.6
91.4
91.5
91.7
90.9
91.5
90.8
94.6
96.4
97.9
95.5
93.8
95.2
98.4
99.7
99.5
100.5
99.2
Jun-00 99.1
99.3
97.6
97.8
98.9
96.5
96.0
99.2
96.7
94.1
93.6
93.0
93.5
94.4
96.1
103.3
98.1
98.0
96.1
94.7
93.6
94.6
94.1
Jun-02 95.6
================================================================================
2
ATTRACTIVE TAXABLE EQUIVALENT YIELDS
------------------------------------
- By investing in an Eaton Vance Insured Municipal Bond Fund, your after-tax
income can be higher because the income paid is largely free of regular
federal income tax and 100% exempt from federal alternative minimum tax.
For State Funds, income is largely free of state and local taxes, too, for
residents of the applicable state. Depending on your tax bracket, a
tax-free investment can make a significant difference, and it can be
especially important for people in higher brackets.
- For example, the current yield from a 30-year insured municipal bond is
5.27%, which is equivalent to an 8.58% taxable yield. The current yield
from a taxable 30-year U.S. Treasury Bond is 5.51%.
Consult your tax advisor.
Source: Municipal Market Advisors. As of 6/30/02. Based on maximum federal
income tax rate of 38.6%. The current yield of a 30-year insured municipal
bond is not indicative of the yield of any of the Eaton Vance Insured
Municipal Bond Funds. Past performance is no guarantee of future results.
DETERMINE YOUR TAX-FREE ADVANTAGE
--------------------------------------------------------------------------------
NATIONAL (EIM*)
--------------------------------------------------------------------------------
In A tax-free yield of
tax 5.50% 5.75% 6.00% 6.25% 6.50%
bracket... equals a taxable investment yielding...
15.00% 6.47% 6.76% 7.06% 7.35% 7.65%
27.00 7.53 7.88 8.22 8.56 8.90
30.00 7.86 8.21 8.57 8.93 9.29
35.00 8.46 8.85 9.23 9.62 10.00
38.60 8.96 9.36 9.77 10.18 10.59
--------------------------------------------------------------------------------
DOUBLE TAX FREE FOR RESIDENTS OF CALIFORNIA(1) (EVM*)
--------------------------------------------------------------------------------
In A tax-free yield of
tax 5.50% 5.75% 6.00% 6.25% 6.50%
bracket... equals a taxable investment yielding...
22.91% 7.13% 7.46% 7.78% 8.11% 8.43%
33.79 8.31 8.68 9.06 9.44 9.82
36.51 8.66 9.06 9.45 9.84 10.24
41.05 9.33 9.75 10.18 10.60 11.03
44.31 9.88 10.33 10.77 11.22 11.67
--------------------------------------------------------------------------------
DOUBLE TAX FREE FOR RESIDENTS OF
NEW YORK(2) (ENX*)
--------------------------------------------------------------------------------
In A tax-free yield of
tax 5.50% 5.75% 6.00% 6.25% 6.50%
bracket... equals a taxable investment yielding...
20.82% 6.95% 7.26% 7.58% 7.89% 8.21%
32.00 8.09 8.46 8.82 9.19 9.56
34.80 8.43 8.82 9.20 9.59 9.97
39.45 9.08 9.50 9.91 10.32 10.74
42.81 9.62 10.05 10.49 10.93 11.36
--------------------------------------------------------------------------------
TRIPLE TAX FREE FOR RESIDENTS OF
N.Y. CITY(3) (ENX*)
--------------------------------------------------------------------------------
In A tax-free yield of
tax 5.50% 5.75% 6.00% 6.25% 6.50%
bracket... equals a taxable investment yielding...
23.87% 7.22% 7.55% 7.88% 8.21% 8.54%
34.66 8.42 8.80 9.18 9.57 9.95
37.35 8.78 9.18 9.58 9.98 10.37
41.82 9.45 9.88 10.31 10.74 11.17
45.05 10.01 10.46 10.92 11.37 11.83
(*) AMEX symbol applied for.
The tax brackets shown are based on 2002 federal and state income tax rates.
Actual tax brackets may be higher due to the phaseout of personal exemptions and
limitations on the deductibility of itemized deductions over certain ranges of
income. The tables assume deductibility of state taxes on the federal return.
Your actual bracket will vary, depending on your income, exemptions and
deductions. Consult your tax advisor. Tax-free yields shown are for illustration
purposes only and are not meant to represent or predict actual results of an
investment in any of the Eaton Vance Insured Municipal Bond Funds. The lower
your combined federal and state tax rate, the less you can take advantage of
tax-free investing, which can be seen by comparing the taxable equivalent yields
at a given tax-free yield level for different tax brackets. The tables do not
take into account the effects of capital gains taxes. In addition, the Funds may
invest in securities that are not exempt from federal or state income taxes,
although they do not intend to do so to a significant degree. Source: Eaton
Vance.
(1) Combined tax brackets are based on 2002 federal income tax rates and the
highest 2002 California state tax rate applicable to each bracket.
(2) Combined tax brackets are based on 2002 federal income tax rates and the
highest 2002 New York state tax rate applicable to each bracket.
(3) Combined tax brackets are based on 2002 federal income tax rates and the
highest 2002 New York state and New York City tax rates applicable to each
bracket, plus the New York City surcharge.
--------------------------------------------------------------------------------
INSURED MUNICIPAL BOND YIELDS ARE OVER 95%* OF THOSE FROM LONG-TERM TREASURIES.
WHY PAY TAXES?
(*) At 6/30/02
--------------------------------------------------------------------------------
KEY FEATURES
- ATTRACTIVE TAX-EXEMPT MONTHLY INCOME-EACH EATON VANCE INSURED MUNICIPAL
BOND FUND IS DESIGNED TO PROVIDE INCOME FREE FROM REGULAR FEDERAL INCOME
TAX, FEDERAL ALTERNATIVE MINIMUM TAX AND, FOR STATE FUNDS, STATE AND LOCAL
TAXES FOR RESIDENTS OF THAT STATE.
- QUALITY OF PROFESSIONALLY MANAGED, INVESTMENT-GRADE PORTFOLIOS-EACH FUND
INVESTS AT LEAST 80% OF ITS ASSETS IN MUNICIPAL OBLIGATIONS OF THE HIGHEST
INVESTMENT-GRADE (Aaa/AAA).
- PREDOMINANTLY INSURED-EACH FUND INVESTS AT LEAST 80% OF ITS ASSETS IN
MUNICIPAL OBLIGATIONS INSURED AS TO THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL.
- EMPHASIS ON CURRENT YIELD AND VALUE INVESTING MAY MEAN ENHANCED TOTAL
RETURN - TO ENHANCE PERFORMANCE, THE FUNDS SEEK MUNICIPAL BONDS THAT ARE
UNDERVALUED IN THE MARKETPLACE AND WHICH MAY OFFER THE POTENTIAL FOR HIGHER
TOTAL RETURNS. THERE IS NO ASSURANCE THE FUNDS' OBJECTIVES WILL BE
ATTAINED.
- PREMIER ADVISER-EATON VANCE HAS BEEN MANAGING MUNICIPAL BOND FUNDS SINCE
1978.
- DAILY LIQUIDITY - THE FUNDS EXPECT TO BE LISTED ON THE AMERICAN STOCK
EXCHANGE.
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
Investment-Grade Portfolios 100% Exempt From Federal Alternative Minimum Tax
--------------------------------------------------------------------------------
Airports - Schools - Roadways - Bridges - Medical Facilities
OBJECTIVE: The Eaton Vance Insured Municipal Bond Funds are newly organized
closed-end investment companies that seek to provide current income exempt from
regular federal income tax, federal alternative minimum tax and, for state
funds, state and local taxes.* They invest primarily in the highest quality
municipal bonds which are insured as to the payment of interest and principal.
Municipal bonds are debt obligations issued by or on behalf of the states,
territories and possessions of the U.S. and District of Columbia and their
political subdivisions, agencies, or instrumentalities, the interest on which is
exempt from regular federal income tax and, where applicable, state and local
taxes. These securities are used to finance public projects, like building
schools, highways, hospitals and bridges. By investing in municipal bonds, you
invest in our nation's future and in a better quality of life.
(*) A portion of each Eaton Vance Insured Municipal Bond Fund's income may be
subject to federal income and/or state and local taxes. Investors in New
York and California who purchase the appropriate State Fund for their state
of residency will receive income exempt from both federal and respective
state and, where applicable, local taxes. Distributions of any taxable net
investment income and net short-term capital gains are taxable as ordinary
income.
INVESTMENT APPROACH
-------------------
- Under normal market conditions, at least 80% of each Fund's assets will be
invested in municipal debt obligations insured** as to principal and
interest payments by insurers having claims-paying ability rated Aaa/AAA.
- At least 80% of assets will be invested in municipal securities of the
highest investment grade at the time of investment (i.e., rated Aaa by
Moody's Investor Service, Inc., or AAA by either Standard & Poor's Ratings
Group or by Fitch Rating) or, if unrated, determined by Eaton Vance to be
of comparable quality. The Funds' investments in unrated obligations will
be more dependent on the expertise and analytical abilities of Eaton Vance
than investments in rated obligations.
[PHOTO OF OVERPASS]
- Up to 20% of each Fund's assets will be invested in investment-grade
municipal obligations (i.e., rated below Aaa/AAA, but no lower than Baa/BBB
by Moody's, Standard & Poor's or Fitch) and unrated municipal obligations
considered to be of comparable quality by Eaton Vance and/or municipal
obligations that are uninsured.
(**) Insurance does not protect the market value of such obligations or the net
asset value of the Fund.
ADVANTAGES OF A PROFESSIONALLY MANAGED MUNICIPAL FUND
-----------------------------------------------------
Beyond providing ready access to a broad market of securities, professionally
managed funds, like the Eaton Vance Funds, offer investors many attractive
advantages over purchasing individual insured municipal bonds, including monthly
income, diversification by different issuers and daily liquidity.
Perhaps more important are the advantages of active management by dedicated
municipal bond specialists who concentrate full time on seeking opportunities in
the municipal bond market.
[PHOTO OF AIRPLANE]
Investors should be aware that individual bonds, when held to maturity, offer
both a fixed principal value and rate of return. Conversely, a bond fund does
not offer a fixed rate of return and shares, when sold, may be worth more or
less than their original cost.
VALUE INVESTING
---------------
Eaton Vance has one of the strongest teams of research analysts, traders and
portfolio managers in the industry devoted exclusively to analyzing municipal
securities, including insured municipal bonds. 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. The Eaton Vance team of
professionals constantly monitors historical and current yield spreads to find
relative value in the marketplace.
This research capability is key to identifying trends which impact the
yield-spread relationships of all bonds, including those in the insured sector.
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUNDS
Investment-Grade Portfolios 100% Exempt From Federal Alternative Minimum Tax
--------------------------------------------------------------------------------
Airports - Schools - Roadways - Bridges - Medical Facilities
--------------------------------------------------------------------------------
A MANAGED FUND OR BONDS?
--------------------------------------------------------------------------------
COMPARE THESE FEATURES
Managed Individual
Tax-Free Municipal
Fund Bonds
-------------------------------------------------------------------------------
MONTHLY INCOME / NO
--------------------------------------------------------------------------------
PROFESSIONAL MANAGEMENT / NO
--------------------------------------------------------------------------------
IN-DEPTH MARKET ANALYSIS / NO
--------------------------------------------------------------------------------
LIQUIDITY / NOT ALWAYS
--------------------------------------------------------------------------------
DIVERSIFICATION AMONG DIFFERENT ISSUERS* / NO
--------------------------------------------------------------------------------
FREE DIVIDEND & CAPITAL GAIN REINVESTMENT / NO
--------------------------------------------------------------------------------
POTENTIAL FOR INCREASED INCOME THROUGH LEVERAGE / NO
--------------------------------------------------------------------------------
LOW-COST ACCESS / NO
--------------------------------------------------------------------------------
Investors should be aware that individual bonds, when held to maturity, offer
both a fixed principal value and rate of return. Conversely, a bond fund does
not offer a fixed rate of return and shares, when sold, may be worth more or
less than their original cost.
(*) The Eaton Vance Insured Municipal Bond Funds are "non-diversified" for
purposes of the Investment Company Act of 1940. See Risks.
THE CLOSED-END FUND ADVANTAGE
-----------------------------
Closed-end funds have greater flexibility than open-end funds, including the
ability to remain more fully invested and to use financial leverage. The ability
to borrow at short-term tax-exempt rates and invest at generally higher
long-term tax-exempt rates enables closed-end funds, like the Eaton Vance
Insured Municipal Bond Funds, to offer investors enhanced yield potential over
other municipal investments. Investors searching for yield may find the Funds'
taxable-equivalent yield potential compelling. In addition, the Funds'
closed-end structure is a benefit because it protects the Funds from the
continuous inflow and outflow of assets that can complicate portfolio
management.
[PHOTO OF FREEWAY]
HIGHER YIELD POTENTIAL
----------------------
Each Fund expects to utilize financial leverage by issuing preferred stock (on
which the Fund will pay a generally lower short-term tax-exempt yield) and
investing the proceeds at typically higher long-term tax-exempt yields.
Each Fund intends to utilize financial leverage initially of up to approximately
38% of its total assets (including the amount obtained through leverage). Each
may also utilize other transactions, such as purchasing when-issued securities
and futures contracts, which may have the effect of leverage.
Although the Funds' leveraged capital structure offers the opportunity for
increased current income, it also involves risks. See Risks.
AMERICAN STOCK EXCHANGE LISTING
-------------------------------
To provide daily liquidity, the Funds have applied for listing of their shares
on the AMEX. (See proposed symbols on the taxable equivalent yield tables.) The
shares of closed-end funds frequently trade at a discount to net asset value.
This risk may be greater for investors selling their shares shortly after
completion of the public offering. See Risks.
EXPERIENCED PORTFOLIO MANAGEMENT
--------------------------------
Eaton Vance was one of the first municipal bond fund managers, having managed
such funds since 1978. Eaton Vance's 22-person municipal bond team includes five
portfolio managers, three traders and nine credit specialists, who are
responsible for managing approximately $7 billion in municipal securities.*
Eaton Vance has one of the strongest teams of research analysts in the industry
devoted exclusively to analyzing municipal securities. With 41 open-end and 10
closed-end municipal bond funds under supervision, the team has experience
managing a wide range of municipal securities. The emphasis on research and
continuing credit analysis on each portfolio holding enables Eaton Vance's
portfolio managers to take advantage of yield and capital appreciation
opportunities generated through investment research.
PREMIER INVESTMENT ADVISER
--------------------------
Eaton Vance Management, a subsidiary of Eaton Vance Corp., is the Funds'
investment adviser. Eaton Vance, its affiliates and predecessor companies have
been managing assets of individuals and institutions since 1924 and managing
investment companies since 1931. Eaton Vance and it affiliates currently have
over $56 billion* in assets under management.
(*) At 6/30/02
--------------------------------------------------------------------------------
WHY INVEST IN AN EATON VANCE
INSURED MUNICIPAL BOND FUND NOW?
--------------------------------------------------------------------------------
================================================================================
3
HIGH-QUALITY INSURED PORTFOLIOS
-------------------------------
Each Eaton Vance Insured Municipal Bond Fund invests 100% of its assets in
investment-grade municipal securities. At least 80% of assets are invested in
municipal obligations of the highest investment grade (Aaa/AAA) and insured as
to the timely payment of interest and principal. Insurance does not protect the
market value of such obligations or the net asset value of the Fund.
As rated by Moody's Investors Service, Inc., Standard & Poor's Ratings Group or
by Fitch Rating or, if unrated, determined by Eaton Vance to be of comparable
quality.
================================================================================
4
AVOID THE ALTERNATIVE MINIMUM TAX
---------------------------------
The federal alternative minimum tax (AMT) was originally devised to reduce
certain deductions for high-income taxpayers and to make everyone with
significant income pay some federal income tax. Because it is not indexed for
inflation, over time, the AMT has affected more and more taxpayers. As a result,
an insured municipal bond portfolio 100% exempt from AMT may hold significant
appeal to a rising number of filers who are, or may be, subject to the AMT.
THE IMPACT OF THE ALTERNATIVE MINIMUM TAX (AMT)
YEAR RETURNS FILED TAX PAID
(MILLIONS) (BILLIONS OF NOMINAL $)
1990 0.1 $0.8
--------------------------------------------------------------------------------
2001 1.5 $6.4
--------------------------------------------------------------------------------
2010 17.0 $38.2
--------------------------------------------------------------------------------
Sources: For historical data, Internal Revenue Service, Statistics of Income
Bulletin, various issues, and Economic Report of the President (2001); for
projections, Congressional Budget Office (2001); Rebelein and Tempalski (2001)
(AMT numbers); Zaffino (2000) (individual income tax total). Figures for 2001
and 2010 are projections.
================================================================================
5
THE CLOSED-END STRUCTURE PROVIDES AN EFFECTIVE
----------------------------------------------
WAY OF INVESTING IN MUNICIPAL BONDS
-----------------------------------
Closed-end funds can remain fully invested, are not subject to inflows and
outflows of assets and can utilize a leveraged capital structure, which provides
greater flexibility in portfolio management than open-end mutual funds,
resulting in the potential for enhanced returns.
Sources: Thomson Wealth Management; Lipper Inc. Returns are as of 6/30/02.
Closed-end fund returns are based on the market returns of approximately 90
national leveraged and non-leveraged closed-end municipal funds. Open-end fund
returns are based on the NAV returns of 48 national, non-leveraged, open-end,
insured front-load funds. Past performance is no guarantee of future results. It
is not possible to invest directly in an index or average. Unlike the Funds,
indices carry no management fees, account charges or other expenses. The Eaton
Vance Insured Municipal Bond Funds will not seek to match the composition or
performance of any such indices or averages. Performance of the various indices
or averages should not be viewed as indicative of any of the Eaton Vance Insured
Municipal Bond Funds. Total return is affected by changes in current yield, net
asset value and market performance.
AVERAGE ANNUAL TOTAL RETURNS
[BAR GRAPH]
THOMSON LIPPER OPEN-END
CLOSE-END MUNICIPAL INSURED MUNICIPAL DEBT
NATIONAL INDEX FUNDS AVERAGE
1 Year 7.32 5.87
3 Years 6.60 5.55
5 Years 6.14 5.13
10 Years 7.01 5.91
================================================================================
6
PORTFOLIO DIVERSIFIER WITH POTENTIAL FOR REDUCING RISK
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Historically, when stocks have declined, insured municipal bonds have often gone
up in value. Adding an insured municipal bond fund to an overall portfolio may
help lower overall investment risk.
Source: Lipper Inc. Returns are as of 6/30/02. Insured municipal bond returns
are those of the Lehman Brothers Insured Municipal Bond Index, an unmanaged
index that is a broad measure of performance of insured, investment-grade
municipal bonds with maturities of at least one year. The S&P 500 Composite
Index is an unmanaged index of 500 common stocks commonly used as a measure of
U.S. stock market performance. It is not possible to invest directly in an
index. Unlike the Funds, indices carry no management fees, account charges or
other expenses. The Eaton Vance Insured Municipal Bond Funds will not seek to
match the composition or performance of any such indices. Performance of an
index should not be viewed as indicative of that of any of the Eaton Vance
Insured Municipal Bond Funds. Past performance is no guarantee of future
results.
AVERAGE ANNUAL TOTAL RETURNS
[BAR GRAPH]
LEHMAN BROTHER INSURED S&P 500
MUNICIPAL BOND INDEX COMPOSITE INDEX
1 Year 7.19 -17.98
3 Years 6.93 -9.17
5 Years 6.45 3.67
10 Years 6.87 11.42
Shares of the Eaton Vance Insured Municipal Bond Funds are not insured by the
FDIC and are not deposits or other obligations of, or guaranteed by,
any depository institution. Shares are subject to investment
risks, including possible loss of principal invested.
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RISKS
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Before investing, consult your investment representative about how the Funds
differ from other investment companies regarding credit risk, liquidity, charges
and expenses, and other issues of importance. Please read the prospectus
carefully, especially Investment Objective, Policies and Risks.
No Operating History-Each Fund is a closed-end investment company with no
operating history. Each is designed for long-term investors, not as a
trading vehicle.
Interest Rate and Market Risk-Prices of municipal obligations tend to fall as
interest rates rise. Securities with longer maturities or durations 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 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 (other things being equal) to invest in a
portfolio of longer-term securities, which means it will be subject to
greater market risk than a fund investing solely in shorter-term
securities. Market risk is often greater among certain types of debt
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 securities, it may be subject to greater
market risk than a fund investing only in current interest paying
securities.
Income Risk-Income investors receive is based primarily on interest each Fund
earns from its investments, which can vary widely over the short and long
term. If long-term interest rates drop, investors' income from the Fund
over time could drop as well if the Fund purchases securities with lower
interest coupons.
Call Risk-If interest rates fall, issuers of callable bonds with high coupons
may call (prepay) their bonds before maturity. During declining interest
rates, each Fund is likely to replace a called security with a
lower-yielding one, decreasing the Fund's dividends and possibly affecting
the market price of Shares. Similar risks exist when the Fund invests the
proceeds from matured or traded municipal obligations at market interest
rates that are below the Fund's current earning's rate.
Credit Risk-Credit risk is the risk that one or more municipal bonds in a Fund's
portfolio will decline in price, or fail to pay interest or principal when
due, because the issuer of the bond experiences a decline in its financial
status.
Liquidity Risk-Each Fund may invest in securities for which there is no readily
available trading market or which are otherwise illiquid. The Fund may not
be able to readily dispose of such securities at prices approximating those
at which it could sell such securities if they were more widely traded. As
a result of such illiquidity, the Fund may have to sell other investments
or engage in borrowing to meet its obligations. Limited liquidity could
affect the market price of the securities, thereby adversely affecting the
Fund's net asset value and ability to make dividend distributions.
Municipal Bond Market-Certain obligations in which the Funds will invest will
not be registered with the Securities and Exchange Commission or any state
securities commission and generally will not be listed on any national
securities exchange. Therefore, the amount of public information available
about portfolio securities will be limited, and the performance of the
Funds is more dependent on the analytical abilities of Eaton Vance than
would be so for an investment company investing primarily in registered or
exchange-listed securities.
Effects of Leverage-The use of leverage through issuance of preferred shares by
each Fund creates an opportunity for increased net income, but, at the same
time, creates special risks. There can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. Each
Fund intends to use leverage to provide the holders of Shares with a
potentially higher return. Leverage creates risks for holders of Shares,
including the likelihood of greater volatility of net asset value and
market price of the Shares and the risk that fluctuations in dividend rates
on any preferred shares may affect the return to Shareholders. It is
anticipated that preferred share dividends will be based on the yields of
short-term municipal obligations, while the proceeds of any preferred share
offering will be invested in longer-term municipal obligations, which
typically have higher yields. To the extent the income derived from
securities purchased with funds received from leverage exceeds the cost of
leverage, a Fund's return will be greater than if leverage had not been
used. Conversely, if the income from the securities purchased with such
funds is not sufficient to cover the cost of leverage, the return to a Fund
will be less than if leverage had not been used, and therefore the amount
available for distribution to Shareholders as dividends and other
distributions will be reduced. In the latter case, Eaton Vance in its best
judgment may nevertheless determine to maintain the Fund's leveraged
position if it deems such action to be appropriate.
In addition, under current federal income tax law, each Fund is required to
allocate a portion of any net realized capital gains or other taxable
income to holders of preferred shares. The terms of any preferred shares
are expected to require the Fund to pay to any preferred shareholders
additional dividends intended to compensate the preferred shareholders for
taxes payable on any capital gains or other taxable income allocated to the
preferred shares. Any such additional dividends will reduce the amount
available for distribution to the Shareholders. The fee paid to Eaton Vance
will be calculated on the basis of the Fund's gross assets, including
proceeds from the issuance of preferred shares, so the fees will be higher
when leverage is utilized.
Each Fund currently intends to seek an investment grade rating on any
preferred shares from a rating agency. The Fund may be subject to
investment restrictions of the rating agency as a result. These
restrictions may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed on the Fund by the
Investment Company Act of 1940, as amended. It is not anticipated that
these covenants or guidelines will impede Eaton Vance in managing each
Fund's portfolio in accordance with its investment objective and policies.
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 bonds insured by such insurer, and municipal
bonds insured under Portfolio Insurance issued by such insurer also would
be of reduced quality in the Fund's portfolio. Any such downgrade could
have an adverse impact on the net asset value and market price of a Fund's
Shares. In addition, to the extent a Fund employs Portfolio Insurance, the
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 the Fund's portfolio in accordance with the Fund's investment
objective and policies.
Insurance relates specifically to the payment of interest and principal on
the bonds in the Funds' portfolios and not to the market value of those
bonds or the share prices of the Funds, which will fluctuate with the
market and, at the time of sale, may be worth more or less than the
original investment. No representation is made as to any insurer's ability
to meet its commitments.
Concentration-The National Fund may invest 25% or more of its total assets in
municipal obligations of issuers located in the same state (or in a U.S.
Territory) or in the same economic sector, such as revenue obligations of
health care facilities, hospitals or airports. This may make the Fund more
susceptible to adverse economic, political or regulatory occurrences
affecting a particular state, territory or economic sector.
Each State Insured Municipal Bond Fund primarily invests in municipal
obligations of issuers located in its relevant state and may invest 25% or
more of its total assets in municipal obligations of issuers located in the
same U.S. territory or in the same economic sector, such as revenue
obligations of health care facilities, hospitals or airports. This may make
a Fund more susceptible to adverse economic, political or regulatory
occurrences affecting that respective state, a particular territory or
economic sector.
Anti-Takeover Provisions-Each Fund's Declaration of Trust includes provisions
that could have the effect of limiting the ability of other persons or
entities to acquire control of such Fund or to change the composition of
its Board of Trustees.
Additional Investment Practices-The Funds may use investment practices that
involve special considerations, including purchasing futures contracts and
shares of other closed-end funds. This may result in the Fund earning
taxable income or gains.
Market Price of Shares-Shares of closed-end investment companies often trade at
a discount from their net asset value, and the Funds' shares may likewise
trade at a discount. The trading price of each Fund's shares may be less
than the public offering price. This risk may be greater for investors who
sell their shares in a relatively short period after completion of the
public offering.
Non-Diversification-With respect to up to 50% of its assets, each Fund 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 that a
relatively high percentage of assets is invested in obligations of a
limited number of issuers, each Fund may be more susceptible than a more
widely diversified investment company to any single economic, political or
regulatory occurrence.
The information contained herein and in each preliminary prospectus is
incomplete and may be changed. We may not sell these securities until each of
the registration statements filed with the Securities and Exchange Commission is
effective. This document is not an offer to sell these securities and is not
soliciting offers to buy each of these securities in any state where the offer
or sale is not permitted. This is not an offering, which may only be made by a
final prospectus. The final prospectus for each Fund should be read carefully
before you invest or send money. The Funds involve a number of risks, including
the risk of leverage, trading discount and default. The Funds may differ from
other investment companies in terms of credit risk, liquidity, charges and
expenses, and other important issues.
Consult the preliminary prospectus for each Eaton Vance Insured Municipal Bond
Fund for more complete information, including risk considerations, charges and
expenses. Preliminary prospectuses are available on request from your financial
advisor, or you may obtain a copy from each Fund by calling 1-800-225-6265.
(C) Eaton Vance - The Eaton Vance Building - 255 State Street -
Boston, MA 02109 - www.eatonvance.com
Salomon Smith Barney Inc.
WHY BUY BONDS?
-Positive Economic Environment --Interest rate outlook remains neutral
--Economic growth in the US is moderate --Inflation, which is key to bond
market performance, is benign, and the current outlook is excellent because of
productivity gains, low wage pressures and continuing competitiveness within
industry.
-Attractive Yields --Bond yields in general are attractive relative to
those from short-term, income-producing vehicles.
-Opportunity for Reallocation--With the fall-off in the stock market
many portfolios need to diversify against risk by shifting some assets to
income-producing investments.
-Favorable Demographics - The aging baby boom generation is hitting its
peak earning years, and many boomers should be looking to shelter investment
income.
1403-7/02 CE-IMBFCB
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 5123
Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
------------------------------------
------------------------------------
Boston, MA
----------------------
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Not applicable.
(2) Exhibits:
(a) Agreement and Declaration of Trust dated July 8, 2002 is
incorporated herein by reference to the Registrant's initial
Registration 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) By-Laws are incorporated herein by reference to the Trust's
Initial Common Shares Registration Statement.
(c) Not applicable.
(d) Form of Specimen Certificate for Common Shares of Beneficial
Interest incorporated herein by reference to the Trust's Initial
Common Shares Registration Statement.
(e) Dividend Reinvestment Plan filed herewith.
(f) Not applicable.
(g) Investment Advisory Agreement dated July 25, 2002 filed herewith.
(h) (1) Form of Underwriting Agreement to be filed by amendment.
(2) Form of Master Agreement Among Underwriters to be filed by
amendment.
(3) Form of Master Selected Dealers Agreement to be filed by
amendment.
(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 filed herewith.
(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 filed herewith.
(2) Transfer Agency and Services Agreement dated December 21,
1998 filed herewith.
(3) Administration Agreement dated July 25, 2002 filed
herewith.
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP to be filed by
amendment.
(m) Not applicable.
(n) Consent of Independent Auditors to be filed by amendment.
(o) Not applicable.
(p) Letter Agreement with Eaton Vance Management to be filed by
amendment.
(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, some of which
will be borne by the Adviser, are as follows:
Registration and Filing Fees........................................ $
Listing Fees........................................................
National Association of Securities Dealers, Inc. 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 July 26, 2002 of
each class of securities of the Registrant:
Number of
Title of Class Record Holders
-------------- --------------
Common Shares of Beneficial Interest,
par value $0.01 per share............................... 0
Item 29. Indemnification
The Registrant's By-Laws filed in the Trust's Initial Common Shares
Registration Statement contain and the 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
2
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
3
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.
4
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance Insured
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.
5
SIGNATURES
Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Boston and the Commonwealth of
Massachusetts, on the 26th day of July 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
Pre-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas J. Fetter* President and Principal July 26, 2002
----------------------------- Executive Officer
Thomas J. Fetter
/s/ James L. O'Connor* Treasurer and Principal Financial July 26, 2002
----------------------------- and Accounting Officer
James L. O'Connor
/s/ Jessica M. Bibliowicz* Trustee July 26, 2002
-----------------------------
Jessica M. Bibliowicz
/s/ Donald R. Dwight* Trustee July 26, 2002
-----------------------------
Donald R. Dwight
/s/ James B. Hawkes* Trustee July 26, 2002
-----------------------------
James B. Hawkes
/s/ Samuel L. Hayes, III* Trustee July 26, 2002
-----------------------------
Samuel L. Hayes, III
/s/ Norton H. Reamer* Trustee July 26, 2002
-----------------------------
Norton H. Reamer
6
/s/ Lynn A. Stout* Trustee July 26, 2002
-----------------------------
Lynn A. Stout
* By: /s/ Alan R. Dynner
------------------------------------
Alan R. Dynner (As attorney-in-fact)
7
INDEX TO EXHIBITS
(e) Form of Dividend Reinvestment Plan filed herewith.
(g) Investment Advisory Agreement dated July 25, 2002 filed herewith.
(j) (1) Master Custodian Agreement with Investors Bank & Trust Company
dated July 25, 2002 filed herewith.
(k) (1) Amendment to the Transfer Agency and Services Agreement dated
July 25, 2002 filed herewith.
(k) (2) Transfer Agency and Services Agreement dated December 21, 1998
filed herewith.
(k) (3) Administration Agreement dated July 25, 2002 filed herewith.
(s) Power of Attorney filed herewith.
8