As filed with the Securities and Exchange Commission on October 24, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FILE NO. 333-100086
|X| PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FILE NO. 811-21148
[X] AMENDMENT NO. 1
EATON VANCE INSURED NEW YORK
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
AMOUNT BEING OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED PRICE PER UNIT OFFERING REGISTRATION FEES
(1) (1) PRICE(1) (1)(2)
-----------------------------------------------------------------------------------------------------------------
Auction Preferred Shares, 5,700 $25,000 $142,500,000 $13,110
$0.01 par value
=================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) A registration fee of $12,880 was previously paid in connection with the
initial filing.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION, DATED OCTOBER 24, 2002
[EATON VANCE LOGO]
$930,000,000
EATON VANCE INSURED MUNICIPAL BOND FUND
4,740 SHARES, SERIES A
4,740 SHARES, SERIES B
4,740 SHARES, SERIES C
4,740 SHARES, SERIES D
4,740 SHARES, SERIES E
EATON VANCE INSURED EATON VANCE INSURED NEW YORK
CALIFORNIA
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
3,900 SHARES, SERIES A 2,850 SHARES, SERIES A
3,900 SHARES, SERIES B 2,850 SHARES, SERIES B
AUCTION PREFERRED SHARES ("APS")
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------
Each of Eaton Vance Insured Municipal Bond Fund (the "National Fund"), Eaton
Vance Insured California Municipal Bond Fund (the "California Fund") and Eaton
Vance Insured New York Municipal Bond Fund (the "New York Fund") (each a "Fund"
and together the "Funds") is a recently organized, non-diversified, closed-end
management investment company. Each Fund's investment objective is to provide
current income exempt from federal income tax, including alternative minimum
tax, and, in the cases of the California Fund and the New York Fund, certain
relevant state and local taxes (as described below). This income will be earned
by investing primarily in high grade municipal obligations that are insured as
to the timely payment of principal and interest and are not subject to
alternative minimum tax. An investment in a Fund may not be appropriate for all
investors, particularly those that are not subject to federal and, with respect
to the California Fund and the New York Fund, applicable state and local taxes.
There is no assurance that a Fund will achieve its investment objective. See
"Investment Objectives, Policies and Risks" beginning at page 16.
Each Fund's investment adviser is Eaton Vance Management ("Eaton Vance" or
the "Adviser"). Eaton Vance manages 55 different municipal bond funds with
combined assets of about $8.9 billion as of September 30, 2002.
------------------
INVESTING IN APS INVOLVES CERTAIN RISKS, SEE "INVESTMENT OBJECTIVES,
POLICIES AND RISKS -- RISK CONSIDERATIONS."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
Capitalized terms not defined on this cover page are defined in the Glossary
that appears at the end of this Prospectus. The APS are offered at a price per
share of $25,000 subject to a sales load of $ per share.
NATIONAL FUND CALIFORNIA FUND NEW YORK FUND
------------------------ ------------------------ ------------------------
PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL
--------- ------------ --------- ------------ --------- ------------
Public Offering Price........... $25,000 $592,500,000 $25,000 $195,000,000 $25,000 $142,500,000
Sales Load(1)................... $ $ $ $ $ $
Estimated Offering Expenses..... $ $ $ $ $ $
Proceeds to Fund................ $ $ $ $ $ $
---------------
(1) Each Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
The Underwriters are offering the APS subject to various conditions. The
Underwriters expect to deliver the APS in book-entry form, through the
facilities of The Depository Trust Company to purchasers on or about October ,
2002.
------------------
SALOMON SMITH BARNEY UBS WARBURG
A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
WACHOVIA SECURITIES
October , 2002
(continued from the previous page)
Dividends on the APS of each Fund offered hereby will be cumulative from
the Date of Original Issue and payable commencing on the dates specified below
(an "Initial Dividend Payment Date") and, generally, on a weekly basis
thereafter on the days specified below, subject to certain exceptions. The cash
dividend rate (the "Applicable Rate") on the APS for the Initial Dividend Period
on such dates will be the per annum rate specified below:
INITIAL DIVIDEND NORMAL WEEKLY INITIAL
PAYMENT DATE PAYMENT DAY APPLICABLE RATE
---------------- ------------- ---------------
National Fund
Series A.............................. Tuesday
Series B.............................. Wednesday
Series C.............................. Thursday
Series D.............................. Friday
Series E.............................. Monday
California Fund
Series A.............................. Wednesday
Series B.............................. Friday
New York Fund
Series A.............................. Tuesday
Series B.............................. Thursday
The APS will not be registered on any stock exchange or on any automated
quotation system. APS may only be bought or sold through an order at an auction
with or through a broker-dealer that has entered into an agreement with the
auction agent of the applicable Fund, or in a secondary market that may be
maintained by certain broker-dealers. These broker-dealers are not required to
maintain this market and it may not provide you with liquidity. An increase in
the level of interest rates, particularly during any Special Dividend Period
that is a Long Term Dividend Period as discussed in "Description of
APS -- Dividends and Dividend Periods -- General," likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus and the
relevant Fund's Statement of Additional Information and should note that (i) an
Order constitutes an irrevocable commitment to hold, purchase or sell APS based
upon the results of the related Auction, (ii) the Auctions will be conducted
through telephone communications, (iii) settlement for purchases and sales will
be on the Business Day following the Auction and (iv) ownership of APS will be
maintained in book-entry form by or through the Securities Depository. In
certain circumstances, holders of APS may be unable to sell their APS in an
Auction and thus may lack liquidity of investment. The APS only may be
transferred pursuant to a Bid or a Sell Order placed in an Auction through a
Broker-Dealer to the Auction Agent or in the secondary market, if any.
This Prospectus sets forth concisely information you should know before
investing in the APS. Please read and retain this Prospectus for future
reference. A Statement of Additional Information for each Fund dated October ,
2002 has been filed with the SEC and can be obtained without charge by calling
1-800-225-6265 or by writing to the applicable Fund. Tables of contents to the
Statements of Additional Information are located at pages 54 and 55 of this
Prospectus. This Prospectus incorporates by reference the entire Statement of
Additional Information of each Fund. The Statements of Additional Information
are available along with other Fund-related materials at the SEC's internet web
site (http://www.sec.gov). Each Fund's address is The Eaton Vance Building, 255
State Street, Boston, Massachusetts 02109 and its telephone number is
1-800-225-6265.
The APS do not represent a deposit or obligation of, and are not guaranteed
or endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUNDS HAVE NOT AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. NO FUND IS MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 4
Financial Highlights........................................ 10
The Funds................................................... 13
Use of Proceeds............................................. 13
Capitalization.............................................. 14
Portfolio Composition....................................... 15
Investment Objectives, Policies and Risks................... 16
Management of the Funds..................................... 27
Description of APS.......................................... 28
The Auction................................................. 38
Taxes....................................................... 45
Description of Capital Structure............................ 48
Certain Provisions of the Declarations of Trust............. 50
Underwriting................................................ 51
Custodian and Transfer Agent................................ 52
Legal Opinions.............................................. 52
Independent Auditors........................................ 53
Additional Information...................................... 53
National Fund Table of Contents for the Statement of
Additional Information.................................... 54
California Fund Table of Contents for the Statement of
Additional Information.................................... 54
New York Fund Table of Contents for the Statement of
Additional Information.................................... 55
Glossary.................................................... 56
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus, each Fund's
Statement of Additional Information and each Fund's Amended By-Laws attached as
Appendix E to the Fund's Statement of Additional Information. Certain of the
capitalized terms used in this Summary are defined herein and/or in the Glossary
that appears at the end of this Prospectus.
THE FUNDS..................... Each of Eaton Vance Insured Municipal Bond Fund
(the "National Fund"), Eaton Vance Insured
California Municipal Bond Fund (the "California
Fund") and Eaton Vance Insured New York
Municipal Bond Fund (the "New York Fund") (each
a "Fund" and together the "Funds") is a
recently organized, non-diversified, closed-end
management investment company. The National
Fund was organized as a Massachusetts business
trust on July 2, 2002, and the California Fund
and New York Fund each was organized as a
Massachusetts business trust on July 8, 2002.
Each Fund has registered under the Investment
Company Act of 1940, as amended (the "1940
Act"). Each Fund's principal office is located
at The Eaton Vance building, 255 State Street,
Boston, MA 02109, and its telephone number is
1-800-225-6265. Each Fund commenced operations
on August 30, 2002 upon the closing of an
initial public offering of shares of its common
shares of beneficial interest, par value $0.01
per shares ("Common Shares"). The Common Shares
of each Fund are traded on the American Stock
Exchange ("AMEX") under the symbols EIM for the
National Fund, EVM for the California Fund, and
ENX for the New York Fund. In connection with
the initial public offering of each Fund's
Common Shares, the underwriters were granted an
option to purchase additional shares to cover
over-allotments.
Each of the Funds is offering, pursuant to this
Prospectus, preferred shares of beneficial
interest, par value $0.01 per share, which have
been designated Auction Preferred Shares,
Series A, Series B, Series C, Series D and
Series E for the National Fund, and Series A
and Series B for both the California Fund and
the New York Fund (collectively, the "APS").
See "The Funds." Issuance of the APS represents
the leveraging financing contemplated in
connection with the offering of the Common
Shares of each Fund.
The Trustees of each Fund have determined that
for cost savings and other reasons it is
appropriate for the Funds to employ this
combined Prospectus with respect to the
offering of the APS. However, each Fund offers
only its own shares of beneficial interest,
including the APS. All statements made in this
Prospectus by a Fund are intended to apply only
with respect to that Fund and its APS offered
hereby. In approving the use of this combined
Prospectus, the Trustees of each Fund
considered the possibility that a Fund may
become liable for a misstatement or omission in
the Prospectus regarding another Fund.
4
Certain of the capitalized terms used in this
Prospectus are defined in the Glossary that
appears at the end of this Prospectus.
INVESTMENT OBJECTIVES AND
POLICIES...................... Each Fund's investment objective is to provide
current income exempt from federal income tax,
including alternative minimum tax, and, in the
case of the California Fund and the New York
Fund, the particular state and local income
taxes set forth below ("state taxes"):
California Fund California State Personal
Income Tax
New York Fund New York State and New
York City Personal
Income Taxes
Securities will be purchased and sold in an
effort to maintain a competitive yield and to
enhance return based upon the relative value of
the securities available in the marketplace.
There is no assurance that a Fund will achieve
its investment objective.
During normal market conditions, at least 80%
of each Fund's net assets will be invested in
municipal obligations, the interest on which is
exempt from federal income tax, including
alternative minimum tax, and, in the case of
the California Fund and the New York Fund
applicable state taxes ("municipal
obligations"), and that are insured as to
principal and interest payments. Such insurance
will be from insurers having a claims-paying
ability rated Aaa by Moody's Investors Service,
Inc. ("Moody's") or AAA by Standard & Poor's
Ratings Group ("S&P") or Fitch Ratings
("Fitch"). This insurance does not protect the
market value of such obligations or the net
asset value of a Fund. The value of an
obligation will be affected by the credit
standing of its insurer. Each Fund primarily
invests in high grade municipal obligations. At
least 80% of each Fund's net assets will
normally be invested in municipal obligations
rated in the highest category at the time of
investment (which is Aaa by Moody's or AAA by
S&P or Fitch or, if unrated, determined to be
of comparable quality by the Adviser). Up to
20% of each Fund's net assets may be invested
in obligations rated below Aaa or AAA (but not
lower than BBB or Baa) and comparable unrated
obligations and/or municipal obligations that
are uninsured. Accordingly, each Fund does not
intend to invest any of its assets in
obligations rated below investment grade or in
comparable unrated obligations. From time to
time, each Fund may hold obligations that are
unrated but judged to be of comparable quality
by the Adviser. Under normal market conditions,
each Fund expects to be fully invested (at
least 95% of its net assets) in accordance with
its investment objective.
A Fund will not invest in an obligation if the
interest on that obligation is subject to the
federal alternative minimum tax.
Each Fund may purchase and sell various kinds
of financial futures contracts and related
options, including futures contracts and
related options based on various debt
securities and securities indices, as well as
interest rate swaps and forward rate
5
contracts, to seek to hedge against changes in
interest rates or for other risk management
purposes.
INVESTMENT ADVISER AND
ADMINISTRATOR................. Eaton Vance, an indirect wholly-owned
subsidiary of Eaton Vance Corp., is each Fund's
investment adviser and administrator. The
Adviser and certain of its subsidiaries manage
5 national municipal funds, 41 single state
municipal funds, 8 limited maturity municipal
funds and 1 money market municipal fund with
combined assets of about $8.9 billion as of
September 30, 2002. See "Management of the
Funds."
THE OFFERING.................. Each Fund is offering an aggregate of the
following number of APS of each Series at a
purchase price of $25,000 per share plus
accumulated dividends, if any, from the Date of
Original Issue:
National Fund California Fund
Series A -- 4,740 Series A -- 3,900
Series B -- 4,740 Series B -- 3,900
Series C -- 4,740 New York Fund
Series D -- 4,740 Series A -- 2,850
Series E -- 4,740 Series B -- 2,850
The APS are being offered by the underwriters
("Underwriters") listed under "Underwriting."
RISK FACTORS SUMMARY.......... Risk is inherent in all investing. Therefore,
before investing in a Fund you should consider
certain risks carefully. The primary risks of
investing in APS shares are:
- If an auction fails you may not be able to
sell some or all of your shares;
- Because of the nature of the market for APS,
you may receive less than the price you paid
for your shares if you sell them outside of
the auction, especially when market interest
rates are rising;
- A rating agency could downgrade APS, which
could affect liquidity;
- A Fund may be forced to redeem your APS to
meet regulatory or rating agency requirements
or may elect to redeem your APS in certain
circumstances;
- In extraordinary circumstances, a Fund may
not earn sufficient income from its
investments to pay dividends;
- If long-term interest rates rise, the value
of a Fund's investment portfolio will
decline, reducing the asset coverage for its
APS;
- If an issuer of a municipal bond in which a
Fund invests is downgraded or defaults, there
may be a negative impact on the income and/or
asset value of the Fund's portfolio;
- Each Fund is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political
or regulatory occurrence; and
6
- The California Fund's and the New York Fund's
policies of investing primarily in municipal
obligations of issuers located in California
and New York, respectively, makes such Funds
more susceptible to adverse economic,
political or regulatory occurrences affecting
those issuers. To the extent that a
particular industry sector represents a
larger portion of a state's total economy,
the greater the impact that a downturn in
such sector is likely to have on the state's
economy.
For additional general risks of investing in
APS of the Funds, see "Investment Objectives,
Policies and Risks -- Risk Considerations."
TRADING MARKET................ APS are not listed on an exchange. Instead, you
may buy or sell APS at an auction that normally
is held weekly by submitting orders to a
broker-dealer that has entered into an
agreement with the auction agent and each Fund
(a "Broker-Dealer"), or to a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in APS
outside of auctions, but may discontinue this
activity at any time. There is no assurance
that a secondary market will provide
shareholders with liquidity. You may transfer
APS outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer.
The table below shows the first auction date
for each series of APS of each Fund and the day
on which each subsequent auction will normally
be held for each such series. The first auction
date for each series of APS of each Fund will
be the business day before the dividend payment
date for the initial dividend period for each
such series. The start date for subsequent
dividend periods normally will be the business
day following the auction date unless the then-
current dividend period is a special dividend
period, or the day that normally would be the
auction date or the first day of the subsequent
dividend period is not a business day.
FIRST AUCTION DATE* SUBSEQUENT AUCTION*
------------------- -------------------
National Fund
Series A..............
Series B..............
Series C..............
Series D..............
Series E..............
California Fund
Series A..............
Series B..............
New York Fund
Series A..............
Series B..............
---------------
* All dates are 2002.
DIVIDENDS AND DIVIDEND
PERIODS....................... The table on the next page shows the dividend
rate for the initial dividend period of the APS
offered in this Prospectus. For subsequent
dividend periods, APS shares will pay dividends
7
based on a rate set at auctions, normally held
weekly. In most instances dividends are also
paid weekly, on the day following the end of
the dividend period. The rate set at auction
will not exceed the Maximum Rate. See "The
Auction -- Auction Procedures."
The table below also shows the date from which
dividends on the APS will accumulate at the
initial rate, the dividend payment date of the
initial dividend period and the day on which
dividends will normally be paid. If dividends
are payable on a Monday or Tuesday and that day
is not a business day, then your dividends will
be paid on the first business day that falls
after that day. If dividends are payable on a
Wednesday, Thursday or Friday and that day is
not a business day, then your dividends will be
paid on the first business day prior to that
day.
Finally the table below shows the numbers of
days of the initial dividend period for the
APS. Subsequent dividend periods generally will
be seven days. The dividend payment date for
special dividend periods of more than 28 days
will be set out in the notice designating a
special dividend period. See "Description of
APS -- Dividends and Dividend Periods."
DIVIDEND
PAYMENT NUMBER
DATE OF DATE FOR SUBSEQUENT OF DAYS
INITIAL ACCUMULATION INITIAL DIVIDEND OF INITIAL
DIVIDEND OF INITIAL DIVIDEND PAYMENT DIVIDEND
RATE RATE* PERIOD* DATE PERIOD
-------- ------------ -------- ---------- ----------
National Fund
Series A..... %
Series B..... %
Series C..... %
Series D..... %
Series E..... %
California Fund
Series A..... %
Series B..... %
New York Fund
Series A..... %
Series B..... %
---------------
* All dates are 2002.
TAXATION...................... Because under normal circumstances each Fund
will invest substantially all of its assets in
municipal bonds that pay interest exempt from
federal income tax, including alternative
minimum tax, and, in the cases of the
California Fund and the New York Fund,
applicable state taxes, the income you receive
will ordinarily be similarly exempt. To the
extent that the California Fund or the New York
Fund invests in obligations of issuers not
located in those respective states, your income
from such Funds may be subject to applicable
state taxes. Taxable income or gain earned by a
Fund will be allocated proportionately to
holders of APS and Common Shares, based on the
percentage of total dividends paid to each
class for that year. Accordingly, certain
specified APS dividends may be subject to
regular federal
8
income tax on income or gains attributed to a
Fund. Each Fund intends to notify shareholders,
before any applicable auction for a dividend
period of 28 days or less, of the amount of any
taxable income and gain for regular federal
income tax purposes only, to be paid for the
period relating to that auction. For longer
periods, a Fund may notify shareholders. In
certain circumstances, a Fund will make
shareholders whole for taxes owing on dividends
paid to shareholders that include taxable
income and gains. See "Taxes."
REDEMPTION.................... Although each Fund will not ordinarily redeem
APS, it may be required to redeem APS if, for
example, the Fund does not meet an asset
coverage ratio required by law or in order to
correct a failure to meet a rating agency
guideline in a timely manner. See "Description
of APS -- Redemption -- Mandatory Redemption."
A Fund voluntarily may redeem APS in certain
circumstances. See "Description of
APS -- Redemption -- Optional Redemption."
LIQUIDATION PREFERENCE........ The liquidation preference of the APS of each
series is $25,000 per share, plus an amount
equal to accumulated but unpaid dividends
(whether or not earned or declared). See
"Description of APS -- Liquidation Rights." In
addition, holders of APS may be entitled to
receive Additional Dividends in the event of
the liquidation of a Fund, as provided herein.
See "Description of APS -- Dividends and
Dividend Periods -- Additional Dividends" and
"Liquidation Rights."
RATING........................ Shares of each series of APS of each Fund will
be issued with a credit quality rating of Aaa
from Moody's and AAA from S&P. Because each
Fund is required to maintain at least one
rating, it must own portfolio securities of
sufficient value with adequate credit quality
to meet the rating agencies' guidelines. See
"Description of APS -- Rating Agency Guidelines
and Asset Coverage."
VOTING RIGHTS................. The 1940 Act requires that the holders of APS
and any other Preferred Shares of a Fund,
voting as a separate class, have the right to
elect at least two Trustees of that Fund at all
times and to elect a majority of the Trustees
at any time when two years' dividends on the
APS or any other Preferred Shares are unpaid.
The holders of APS and any other Preferred
Shares of a Fund will vote as a separate class
on certain other matters as required under each
Fund's Agreement and Declaration of Trust
("Declaration of Trust") and the 1940 Act. See
"Description of APS -- Voting Rights" and
"Certain Provisions of the Declarations of
Trust."
9
FINANCIAL HIGHLIGHTS
Information contained in the tables below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of each Fund from the commencement of the Fund's
investment operations on August 30, 2002 until September 30, 2002. Since each
Fund commenced operations on August 30, 2002, the tables cover approximately
four weeks of operations, during which a substantial portion of the Funds'
assets were invested in high-quality, short-term municipal debt securities.
Accordingly, the information presented may not provide a meaningful picture of
each Fund's operating performances.
NATIONAL FUND
AUGUST 30 -- SEPTEMBER 30, 2002
-------------------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period*..................... $ 14.325
Net Investment Income.................................. 0.040
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... 0.454
--------
Total from Investment Operations..................... 0.494
Common Share Offering Costs............................ (0.009)
--------
Net Asset Value, End of Period......................... $ 14.810
--------
Per Share Market Value, End of Period.................. $ 15.000
--------
Total Investment Return on Net Asset Value+............ 3.39%
--------
Total Investment Return on Market Value+............... 4.71%
--------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $934,619
Ratio of Expenses to Average Net Assets Before
Reimbursement.......................................... 0.78%**
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... 0.46%**
Ratio of Net Investment Income to Average Net Assets
before Reimbursement................................... 2.88%**
Portfolio Turnover Rate................................... 0%
---------------
* Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
** Annualized.
+ Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
10
CALIFORNIA FUND
AUGUST 30 -- SEPTEMBER 30, 2002
-------------------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period*..................... $ 14.325
Net Investment Income.................................. 0.031
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... 0.420
--------
Total from Investment Operations..................... 0.451
Common Share Offering Costs............................ (0.016)
--------
Net Asset Value, End of Period......................... $ 14.760
--------
Per Share Market Value, End of Period.................. $ 15.000
--------
Total Investment Return on Net Asset Value+............ 3.04%
--------
Total Investment Return on Market Value+............... 4.71%
--------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $311,634
Ratio of Expenses to Average Net Assets Before
Reimbursement.......................................... 0.91%**
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... 0.59%**
Ratio of Net Investment Income to Average Net Assets
before Reimbursement................................... 2.22%**
Portfolio Turnover Rate................................... 0%
---------------
* Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
** Annualized.
+ Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
11
NEW YORK FUND
AUGUST 30 -- SEPTEMBER 30, 2002
-------------------------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period*..................... $ 14.325
Net Investment Income.................................. 0.028
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... 0.358
--------
Total from Investment Operations..................... 0.386
Common Share Offering Costs............................ (0.021)
--------
Net Asset Value, End of Period......................... $ 14.690
--------
Per Share Market Value, End of Period.................. $ 15.060
--------
Total Investment Return on Net Asset Value+............ 2.55%
--------
Total Investment Return on Market Value+............... 5.13%
--------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $223,739
Ratio of Expenses to Average Net Assets Before
Reimbursement.......................................... 1.00%**
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... 0.68%**
Ratio of Net Investment Income to Average Net Assets
before Reimbursement................................... 1.94%**
Portfolio Turnover Rate................................... 8%
---------------
* Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
** Annualized.
+ Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share paid
by the shareholder on the first day and a sale at the net asset value on the
last day of the period reported. Total investment return on market value is
calculated assuming a purchase at the offering price of $15.000 less the
sales load of $0.675 per share paid by the shareholder on the first day and a
sale at the current market price on the last day of the period reported.
Total investment return on net asset value and total investment return on
market value are not computed on an annualized basis.
12
THE FUNDS
Each of Eaton Vance Insured Municipal Bond Fund (the "National Fund"),
Eaton Vance Insured California Municipal Bond Fund (the "California Fund") and
Eaton Vance Insured New York Municipal Bond Fund (the "New York Fund") (each a
"Fund" and together the "Funds") is a non-diversified, closed-end management
investment company. The National Fund was organized as a Massachusetts business
trust on July 2, 2002 and the California Fund and the New York Fund were each
organized as a Massachusetts business trust on July 8, 2002. Each Fund has
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund's principal office is The Eaton Vance Building, 255 State
Street, Boston, MA 02109, and its telephone number is 1-800-225-6265.
Each Fund commenced operations on August 30, 2002 upon the closing of an
initial public offering of shares of its common shares of beneficial interest,
$0.01 par value (the "Common Shares"). The proceeds of such offerings were
approximately as follows after the payment of organizational and offering
expenses: National Fund -- $816,244,500; California Fund -- $273,034,500; and
New York Fund -- $196,198,875. In connection with the initial public offering of
each Fund's Common Shares, the underwriters were granted an option to purchase,
at a price of $14.325 per Common Share, the following amounts of additional
Common Shares to cover over-allotments: National Fund -- 8,565,000; California
Fund -- 2,865,000; and New York Fund -- 2,058,750. On September 17, 2002, the
underwriters partially exercised the over-allotment with respect to each Fund
and purchased the following amounts of Common Shares: National
Fund -- 6,000,000; California Fund -- 2,000,000; and New York Fund -- 1,500,000.
On October 11, 2002, the underwriters exercised the remainder of the
over-allotment with respect to each Fund (collectively with the September 17,
2002 partial exercise of the over-allotment, the "Over-allotment Common Shares")
and purchased the following amounts of Common Shares: National
Fund -- 1,500,000; California Fund -- 515,000; and New York Fund -- 430,000.
The Trustees of each Fund have determined that for cost savings and other
reasons it is appropriate for the Funds to employ this combined Prospectus with
respect to the offering of the APS. However, each Fund offers only its own
shares of beneficial interest, including the APS. All statements made in this
Prospectus by a Fund are intended to apply only with respect to that Fund and
its APS offered hereby. In approving the use of this combined Prospectus, the
Trustees of each Fund considered the possibility that a Fund might become liable
for a misstatement or omission in the Prospectus regarding another Fund.
Certain of the capitalized terms used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
USE OF PROCEEDS
The net proceeds of this offering will be approximately as follows after
the payment of the sales load and expected offering costs (not expected to
exceed $100,000 per Fund): National Fund -- $ ; California
Fund -- $ ; and New York Fund -- $ . See "Underwriting."
Each Fund will invest the net proceeds of the offering in accordance with
its investment objective and policies stated below. It is presently anticipated
that each Fund will be able to invest substantially all of the net proceeds in
municipal obligations that meet those investment objectives and policies during
a period estimated not to exceed three months from the completion of the
offering of the APS depending on market conditions and the availability of
appropriate securities. Pending such investment, it is anticipated that the
proceeds will be invested in high quality short-term, tax-exempt securities.
13
CAPITALIZATION
The following table sets forth the unaudited capitalization of each Fund as
of September 30, 2002 as if the Over-allotment Common Shares of each Fund had
been issued on that date and as adjusted to give effect to the issuance of the
APS offered hereby.
ACTUAL AS ADJUSTED
------------ --------------
(UNAUDITED) (UNAUDITED)
NATIONAL FUND
SHAREHOLDERS' EQUITY:
Preferred Shares, par value, $0.01 per share (no shares
issued; 23,700, as adjusted, at $25,000 per share
liquidation preference)................................... -- $ 592,500,000
Common Shares, par value, $0.01 per share (64,606,667 shares
issued and outstanding)................................... $ 646,067 646,067
Capital in excess of par value attributable to Common
Stock..................................................... 924,281,073 924,281,073
Net undistributed investment income......................... 2,359,591 2,359,591
Net accumulated realized gain (loss)........................ 0 0
Net unrealized appreciation on investments.................. 28,816,305 28,816,305
Net Assets.................................................. $956,103,036 $1,548,603,036
============ ==============
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED) (UNAUDITED)
CALIFORNIA FUND
SHAREHOLDERS' EQUITY:
Preferred Shares, par value, $0.01 per share (no shares
issued; 7,800, as adjusted, at $25,000 per share
liquidation preference)................................... -- $195,000,000
Common Shares, par value, $0.01 per share (21,621,667 shares
issued and outstanding)................................... $ 216,217 216,217
Capital in excess of par value attributable to Common
Stock..................................................... 309,207,038 309,207,038
Net undistributed investment income......................... 624,419 624,419
Net accumulated realized gain (loss)........................ 0 0
Net unrealized appreciation on investments.................. 8,962,473 8,962,473
Net Assets.................................................. $319,010,147 $514,010,147
============ ============
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED) (UNAUDITED)
NEW YORK FUND
SHAREHOLDERS' EQUITY:
Preferred Shares, par value, $0.01 per share (no shares
issued; 5,700, as adjusted, at $25,000 per share
liquidation preference)................................... -- $142,500,000
Common Shares, par value, $0.01 per share (15,661,667 shares
issued and outstanding)................................... $ 156,617 156,617
Capital in excess of par value attributable to Common
Stock..................................................... 223,895,735 223,895,735
Net undistributed investment income......................... 399,388 399,388
Net accumulated realized gain (loss)........................ (9,464) (9,464)
Net unrealized appreciation on investments.................. 5,455,182 5,455,182
Net Assets.................................................. $229,897,458 $372,397,458
============ ============
14
PORTFOLIO COMPOSITION
As of September 30, 2002, the following tables indicate the approximate
percentage of each Fund's portfolio invested in long-term and short-term
municipal obligations. Also included in these tables is other information with
respect to the composition of each Fund's investment portfolio as of the same
date.
NATIONAL FUND (93.8% long-term; 5.9% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa AAA 59 $886,705 89.5%
AA Aa AA 6 100,687 10.2%
BBB Baa1 BBB -- --
NR+ NR+ NR+ -- --
VMIG1 A+ -- --
Cash............... -- 2,816 0.3%
-- -------- ----
Total.............. 65 $990,208 100%
== ======== ====
CALIFORNIA FUND (93.7% long-term; 5.6% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa AAA 88 $305,246 93.2%
AA Aa AA 3 20,089 6.1%
BBB Baa1 BBB --
NR+ NR+ NR+ --
VMIG1 A+ --
Cash............... -- 2,324 0.7%
-- -------- ----
Total.............. 91 $327,659 100%
== ======== ====
NEW YORK FUND(81.1% long-term; 13.5% short-term)
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -------
AAA Aaa AAA 43 $203,523 78.8%
AA Aa AA 6 39,342 15.2%
A A A 1 1,556 0.6%
BBB Baa1 BBB
NR+ NR+ NR+
VMIG1 A+
Cash............... -- 14,012 5.4%
-- -------- ----
Total.............. 50 $258,433 100%
== ======== ====
---------------
* Ratings: Using the higher of S&P's, Moody's or Fitch's ratings on a Fund's
municipal obligations. S&P and Fitch rating categories may be modified further
by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B
ratings.
+ Securities that are not rated by S&P, Moody's or Fitch. Such municipal
obligations may be rated by nationally recognized statistical rating
organizations other than S&P or Moody's, or may not be rated by any such
organization. With respect to the percentage of each Fund's assets invested in
such securities, Eaton Vance Management ("Eaton Vance" or the "Adviser")
believes these are of comparable quality to municipal obligations rated
investment grade. This determination is based on the Adviser's own internal
evaluation and does not necessarily reflect how such securities would be rated
by S&P, Moody's or Fitch if they were to rate the securities.
15
INVESTMENT OBJECTIVES, POLICIES AND RISKS
INVESTMENT OBJECTIVES
Each Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and, in the cases of the
California Fund and the New York Fund, the particular state and local income
taxes set forth below ("state taxes"):
California Fund California State Personal Income Tax
New York Fund New York State and New York City Personal Income Taxes
This income will be earned by investing primarily in high grade municipal
obligations (as defined below) that are insured as to the timely payment of
principal and interest. Securities will be purchased and sold in an effort to
maintain a competitive yield and to enhance return based upon the relative value
of the securities available in the marketplace. Investments are based on Eaton
Vance's research and ongoing credit analysis, the underlying materials for which
are generally not available to individual investors.
Eaton Vance seeks to find municipal obligations of high quality that have
been undervalued in the marketplace. Eaton Vance's team of research analysts,
traders and portfolio managers are devoted exclusively to analyzing municipal
securities. The team's goal is to find municipal bonds of high quality that have
been undervalued in the marketplace due to differing dynamics in individual
sectors of the municipal bond market, municipal bond supply, and the structure
of individual bonds, especially in regard to maturities, coupons, and call
dates. Eaton Vance's team of professionals monitors historical and current yield
spreads to find relative value in the marketplace. This research capability is
key to identifying trends that impact the yield-spread relationship of all
bonds, including those in the insured sector.
PRIMARY INVESTMENT POLICIES
General Composition of each Fund. During normal market conditions, at
least 80% of each Fund's net assets will be invested in municipal obligations,
the interest on which is exempt from federal income tax, including alternative
minimum tax, and, in the cases of the California Fund and the New York Fund,
applicable state taxes ("municipal obligations" or "municipal bonds") and that
are insured as to principal and interest payments. Such insurance will be from
insurers having a claims-paying ability rated Aaa by Moody's Investors Service,
Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or Fitch
Ratings ("Fitch"). This insurance does not protect the market value of such
obligations or the net asset value of a Fund. The value of an insured municipal
obligation will be affected by the credit standing of its insurer. Each Fund
primarily invests in high grade municipal obligations. At least 80% of each
Fund's net assets will normally be invested in municipal obligations rated in
the highest category at the time of investment (which is Aaa by Moody's or AAA
by S&P or Fitch or, if unrated, determined to be of comparable quality by the
Adviser). Up to 20% of each Fund's net assets may be invested in obligations
rated below Aaa or AAA (but not lower than BBB or Baa) and comparable unrated
obligations and/or municipal obligations that are uninsured. Accordingly, each
Fund does not intend to invest any of its assets in obligations rated below
investment grade or in comparable unrated obligations. From time to time, each
Fund may hold obligations that are unrated but judged to be of comparable
quality by the Adviser. Under normal market conditions, each Fund expects to be
fully invested (at least 95% of its net assets) in accordance with its
investment objective.
The foregoing credit quality policies apply only at the time a security is
purchased, and each Fund is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue or withdraws its assessment. In determining whether to retain
or sell such a security, Eaton Vance may consider such factors as Eaton Vance's
assessment of the credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any, assigned to such
security by other Rating Agencies.
Each Fund has adopted certain fundamental investment restrictions set forth
in its respective Statement of Additional Information, which may not be changed
without a Shareholder vote. Except for
16
such restrictions and the 80% requirement pertaining to investment in municipal
and insured municipal obligations set forth above, the investment objective and
policies of each Fund may be changed by the Board of Trustees (the "Board")
without Shareholder action.
Each Fund will not invest in an obligation if the interest on that
obligation is subject to the federal alternative minimum tax.
Municipal Obligations. Municipal obligations include bonds, notes and
commercial paper issued by a municipality for a wide variety of both public and
private purposes, the interest on which is, in the opinion of issuer's counsel
(or on the basis of other reliable authority), exempt from federal income tax.
The municipal obligations in which the California Fund and the New York Fund
will invest are generally issued by municipal issuers in those respective states
and pay interest that is, in the opinion of issuer's counsel (or on the basis of
other reliable authority), exempt from applicable state taxes, in addition to
federal income tax, including alternative minimum tax. Each Fund may also invest
in municipal obligations issued by United States territories (such as Puerto
Rico or Guam) the interest on which is exempt from federal income tax and, in
the cases of the California Fund and the New York Fund, applicable state taxes.
Public purpose municipal bonds include general obligation and revenue
bonds. General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
or from the proceeds of a specific revenue source. Some revenue bonds are
payable solely or partly from funds that are subject to annual appropriations by
a state's legislature. Municipal notes include bond anticipation, tax
anticipation and revenue anticipation notes. Bond, tax and revenue anticipation
notes are short-term obligations that will be retired with the proceeds of an
anticipated bond issue, tax revenue or facility revenue, respectively.
Some of the securities in which each Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. A Fund is required to take into account income from zero-coupon bonds
on a current basis, even though it does not receive that income currently in
cash, and such Fund is required to distribute substantially all of its income
for each taxable year. Thus, a Fund may have to sell other investments to obtain
cash needed to make income distributions.
Municipal Obligation Insurance Generally. Insured municipal obligations
held by each Fund will be insured as to their scheduled payment of principal and
interest under (i) an insurance policy obtained by the issuer or underwriter of
the Fund municipal obligation at the time of its original issuance ("Original
Issue Insurance"), (ii) an insurance policy obtained by the Fund or a third
party subsequent to the Fund municipal obligation's original issuance
("Secondary Market Insurance") or (iii) another municipal insurance policy
purchased by the Fund ("Portfolio Insurance"). This insurance does not protect
the market value of such obligations or the net asset value of a Fund. Each Fund
expects initially to emphasize investments in municipal bonds insured under
bond-specific insurance policies (i.e., Original Issue or Secondary Market
Insurance). Each Fund may obtain Portfolio Insurance from the insurers described
in Appendix D to the Statement of Additional Information. Each Fund, as a
non-fundamental policy that can be changed by the Fund's Board, will only obtain
policies of Portfolio Insurance issued by insurers whose claims-paying ability
is rated "Aaa" by Moody's or "AAA" by S&P or Fitch. There is no limit on the
percentage of each Fund's assets that may be invested in municipal bonds insured
by any one insurer.
Municipal bonds covered by Original Issue Insurance or Secondary Market
Insurance are themselves typically assigned a rating of "Aaa" or "AAA", as the
case may be, by virtue of the rating of the "Aaa" or "AAA" claims-paying ability
of the insurer and would generally be assigned a lower rating if the ratings
were based primarily upon the credit characteristics of the issuer without
regard to the insurance feature. By way of contrast, the ratings, if any,
assigned to municipal bonds insured under Portfolio Insurance will be based
primarily upon the credit characteristics of the issuer, without regard to the
insurance feature,
17
and generally will carry a rating that is below "Aaa" or "AAA." While in the
portfolio of a Fund, however, a municipal bond backed by Portfolio Insurance
will effectively be of the same credit quality as a municipal bond issued by an
issuer of comparable credit characteristics that is backed by Original Issue
Insurance or Secondary Market Insurance.
Each Fund's policy of investing in municipal bonds insured by insurers
whose claims-paying ability is rated "Aaa" or "AAA" applies only at the time of
purchase of a security, and the Fund will not be required to dispose of the
securities in the event Moody's, S&P or Fitch, as the case may be, downgrades
its assessment of the claims-paying ability of a particular insurer or the
credit characteristics of a particular issuer or withdraws its assessment. In
this connection, it should be noted that in the event Moody's, S&P or Fitch (or
all of them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal bonds insured by such insurer, and municipal bonds insured
under Portfolio Insurance issued by such insurer also would be of reduced
quality in the portfolio of the Fund. Moody's, S&P and Fitch continually assess
the claims-paying ability of insurers and the credit characteristics of issuers,
and there can be no assurance that they will not downgrade or withdraw their
assessments subsequent to the time the Fund purchases securities.
The value of municipal bonds covered by Portfolio Insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the municipal bond and a value for the Portfolio
Insurance.
Original Issue Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal bonds by the issuer thereof or a
third party in conjunction with the original issuance of such municipal bonds.
Under this insurance, the insurer unconditionally guarantees to the holder of
the municipal bond the timely payment of principal and interest on such
obligations when and as these payments become due but not paid by the issuer,
except that in the event of the acceleration of the due date of the principal by
reason of mandatory or optional redemption (other than acceleration by reason of
a mandatory sinking fund payment), default or otherwise, the payments guaranteed
may be made in the amounts and at the times as payment of principal would have
been due had there not been any acceleration. The insurer is responsible for
these payments less any amounts received by the holder from any trustee for the
municipal bond issuer or from any other source. Original Issue Insurance does
not guarantee payment on an accelerated basis, the payment of any redemption
premium (except with respect to certain premium payments in the case of certain
small issue industrial development and pollution control municipal bonds), the
value of a Fund's shares, the market value of municipal bonds, or payments of
any tender purchase price upon the tender of the municipal bonds. Original Issue
Insurance also does not insure against nonpayment of principal or interest on
municipal bonds resulting from the insolvency, negligence or any other act or
omission of the trustee or other paying agent for these bonds.
Original Issue Insurance remains in effect as long as the municipal bonds
it covers remain outstanding and the insurer remains in business, regardless of
whether a Fund ultimately disposes of these municipal bonds. Consequently,
Original Issue Insurance may be considered to represent an element of market
value with respect to the municipal bonds so insured, but the exact effect, if
any, of this insurance on the market value cannot be estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of
a municipal bond, each Fund or a third party may, upon the payment of a single
premium, purchase insurance on that security. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance and, as
with Original Issue Insurance, Secondary Market Insurance remains in effect as
long as the municipal bonds it covers remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of these
municipal bonds.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal bond would be to enable a Fund to enhance the value of
the security. A Fund, for example, might seek to purchase a particular municipal
bond and obtain Secondary Market Insurance for it if, in the Adviser's opinion,
the market value of the security, as insured, less the cost of the Secondary
Market Insurance, would exceed the current value of the security without
insurance. Similarly, if a Fund owns but wishes to
18
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 a Fund
and presently held by the Fund. Except as described below, Portfolio Insurance
generally provides the same type of coverage as is provided by Original Issue
Insurance or Secondary Market Insurance. Municipal bonds insured under a
Portfolio Insurance policy would generally not be insured under any other
policy. A municipal bond is eligible for coverage under a policy if it meets
certain requirements of the insurer. Portfolio Insurance is intended to reduce
financial risk, but the cost thereof and compliance with investment restrictions
imposed under the policy will reduce the yield to holders of Common Shares of a
Fund.
If a municipal obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then the security is not required to be additionally
insured under any Portfolio Insurance that a Fund may purchase. All premiums
respecting municipal bonds covered by Original Issue Insurance or Secondary
Market Insurance are paid in advance by the issuer or other party obtaining the
insurance.
Portfolio Insurance policies are effective only as to municipal bonds owned
by and held by a Fund, and do not cover municipal bonds for which the contract
for purchase fails. A "when-issued" municipal obligation will be covered under a
Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal bond.
In determining whether to insure municipal bonds held by each Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal bonds. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as a Fund is in existence, the municipal bonds covered by the
policy continue to be held by the Fund, and the Fund pays the premiums for the
policy. Each insurer will generally reserve the right at any time upon 90 days'
written notice to a Fund to refuse to insure any additional bonds purchased by
the Fund after the effective date of such notice. Each Fund's Board generally
will reserve the right to terminate each policy upon seven days' written notice
to an insurer if it determines that the cost of such policy is not reasonable in
relation to the value of the insurance to the Fund.
Each Portfolio Insurance policy will terminate as to any municipal bond
that has been redeemed from or sold by a Fund on the date of redemption or the
settlement date of sale, and an insurer will not have any liability thereafter
under a policy for any municipal bond, except that if the redemption date or
settlement date occurs after a record date and before the related payment date
for any municipal bond, the policy will terminate for that municipal bond on the
business day immediately following the payment date. Each policy will terminate
as to all municipal bonds covered thereby on the date on which the last of the
covered municipal bonds mature, are redeemed or are sold by the Fund.
One or more Portfolio Insurance policies may provide a Fund, pursuant to an
irrevocable commitment of the insurer, with the option to exercise the right to
obtain permanent insurance ("Permanent Insurance") for a municipal bond that is
sold by the Fund. A Fund would exercise the right to obtain Permanent Insurance
upon payment of a single, predetermined insurance premium payable from the sale
proceeds of the municipal bond. Each Fund expects to exercise the right to
obtain Permanent Insurance for a municipal bond only if, in the Adviser's
opinion, upon the exercise the net proceeds from the sale of the municipal bond,
as insured, would exceed the proceeds from the sale of the security without
insurance.
The Portfolio Insurance premium for each municipal bond is determined based
upon the insurability of each security as of the date of purchase and will not
be increased or decreased for any change in the security's creditworthiness
unless the security is in default as to payment of principal or interest, or
both. If
19
such event occurs, the Permanent Insurance premium will be subject to an
increase predetermined at the date of the Fund's purchase.
Because each Portfolio Insurance policy will terminate for municipal bonds
sold by a Fund on the date of sale, in which event the insurer will be liable
only for those payments of principal and interest that are then due and owing
(unless Permanent Insurance is obtained by the Fund), the provision for this
insurance will not enhance the marketability of the Fund's obligations, whether
or not the obligations are in default or in significant risk of default. On the
other hand, because Original Issue Insurance and Secondary Market Insurance
generally will remain in effect as long as the municipal bonds they cover are
outstanding, these insurance policies may enhance the marketability of these
bonds even when they are in default or in significant risk of default, but the
exact effect, if any, on marketability, cannot be estimated. Accordingly, each
Fund may determine to retain or, alternatively, to sell municipal bonds covered
by Original Issue Insurance or Secondary Market Insurance that are in default or
in significant risk of default.
Premiums for a Portfolio Insurance policy are paid monthly, and are
adjusted for purchases and sales of municipal bonds covered by the policy during
the month. The yield on a Fund is reduced to the extent of the insurance
premiums it pays. Depending upon the characteristics of the municipal bonds held
by a Fund, the annual premium rate for policies of Portfolio Insurance is
estimated to range from 12 to 18 basis points of the value of the municipal
bonds covered under the policy.
Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce a Fund's current yield. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance does not guarantee the market value of the insured
obligation or the net asset value of the Fund's Common Shares.
Other Types of Credit Support. Each Fund may also invest in uninsured
municipal obligations that are secured by an escrow or trust account that
contains securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, that are backed by the full faith and credit of the United
States, and sufficient, in combination with available trustee-held funds, in
amount to ensure the payment of interest on and principal of the secured
obligation ("collateralized obligations"). These collateralized obligations
generally will not be insured and will include, but are not limited to,
municipal bonds that have been advance refunded where the proceeds of the
refunding have been used to buy U.S. Government or U.S. Government agency
securities that are placed in escrow and whose interest or maturing principal
payments, or both, are sufficient to cover the remaining scheduled debt service
on that municipal bond. Collateralized obligations generally are regarded as
having the credit characteristics of the underlying U.S. Government, U.S.
Government agency or instrumentality securities. These obligations will not be
subject to Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
Accordingly, despite the existence of these credit support characteristics,
these obligations will not be considered to be insured obligations for purposes
of the Fund's policy of investing at least 80% of its net assets in insured
obligations. The credit quality of companies that provide such credit
enhancements will affect the value of those securities.
ADDITIONAL INVESTMENT PRACTICES
When-Issued Securities. Each Fund may purchase securities on a
"when-issued" basis, which means that payment and delivery occur on a future
settlement date. The price and yield of such securities are generally fixed on
the date of commitment to purchase. However, the market value of the securities
may fluctuate prior to delivery and upon delivery the securities may be worth
more or less than what a Fund agreed to pay for them. A Fund may be required to
maintain a segregated account of liquid assets equal to outstanding purchase
commitments. Each Fund may also purchase instruments that give the Fund the
option to purchase a municipal obligation when and if issued.
Futures Transactions. Each Fund may purchase and sell various kinds of
financial futures contracts and options thereon to seek to hedge against changes
in interest rates or for other risk management purposes. Futures contracts may
be based on various debt securities and securities indices (such as the
20
Municipal Bond Index traded on the Chicago Board of Trade). Such transactions
involve a risk of loss or depreciation due to unanticipated adverse changes in
securities prices, which may exceed a Fund's initial investment in these
contracts. Each Fund will only purchase or sell futures contracts or related
options in compliance with the rules of the Commodity Futures Trading
Commission. These transactions involve transaction costs. There can be no
assurance that Eaton Vance's use of futures will be advantageous to a Fund.
Distributions by a Fund of any gains realized on the Fund's transactions in
futures and options on futures will be taxable. Rating Agency guidelines on the
APS to be issued by the Fund limit use of these transactions.
Interest Rate Swaps and Forward Rate Contracts. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. Each Fund will only enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Each Fund may also enter forward rate contracts. Under these
contracts, the buyer locks in an interest rate at a future settlement date. If
the interest rate on the settlement date exceeds the lock rate, the buyer pays
the seller the difference between the two rates. If the lock rate exceeds the
interest rate on the settlement date, the seller pays the buyer the difference
between the two rates. Any such gain received by a Fund would be taxable.
If the other party to an interest rate swap or forward rate contract
defaults, a Fund's risk of loss consists of the net amount of payments that the
Fund is contractually entitled to receive. The net amount of the excess, if any,
of each Fund's obligations over its entitlements will be maintained in a
segregated account by the Fund's custodian. Each Fund will not enter into any
interest rate swap or forward rate contract unless the claims-paying ability of
the other party thereto is considered to be investment grade by the Adviser. If
there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market.
Investment Company Securities. Each Fund may purchase common shares of
closed-end investment companies that have a similar investment objective and
policies to the Fund. In addition to providing tax-exempt income, such
securities may provide capital appreciation. Such investments, which may also be
leveraged and subject to the same risks as the Fund, will not exceed 10% of
total assets, and no such company will be affiliated with Eaton Vance. These
companies bear fees and expenses that a Fund will incur indirectly.
Municipal Leases. Each Fund may invest in municipal leases and
participations therein. Municipal leases are obligations in the form of a lease
or installment purchase arrangement which is issued by the state or local
government to acquire equipment and facilities.
RISK CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in APS.
Interest Rate Risk. Each Fund issues APS, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal obligations,
which pay interest based on longer-term yields. Longer-term municipal obligation
yields are typically, although not always, higher than short-term interest
rates. Both long-term and short-term interest rates may fluctuate. If short-term
interest rates rise, APS rates may rise such that the amount of dividends paid
to APS holders exceeds the income from the portfolio securities purchased with
the proceeds from the sale of APS. Because income from each Fund's entire
investment portfolio (not just the portion purchased with the proceeds of the
APS offering) is available to pay APS dividends, however, APS dividend rates
would need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay APS dividends would be jeopardized. If long-term rates
21
rise, the value of each Fund's investment portfolio will decline, reducing the
amount of assets serving as asset coverage for the APS.
Auction Risk. Holders of APS may not be able to sell APS at an Auction if
the auction fails; that is, if there are more APS offered for sale than there
are buyers for those APS. Also, if a hold order is placed at an auction (an
order to retain APS) only at a specified rate, and that bid rate exceeds the
rate set at the Auction, the APS will not be retained. Finally, if you elect to
buy or retain APS without specifying a rate below which you would not wish to
continue to hold those APS, and the auction sets a below market rate, you may
receive a lower rate of return on your APS then the market rate. See
"Description of APS" and "The Auction -- Auction Procedures."
Secondary Market Risk. It may not be possible to sell APS between auctions
or it may only be possible to sell them for a price of less than $25,000 per
share plus any accumulated dividends. If a Fund has designated a Special
Dividend Period (a dividend period of more than 7 days), changes in interest
rates could affect the price of APS sold in the secondary market. Broker-dealers
may maintain a secondary trading market in the APS outside of Auctions; however,
they have no obligation to do so and there can be no assurance that a secondary
market for the APS will develop or, if it does develop, that it will provide
holders with a liquid trading market (i.e., trading will depend on the presence
of willing buyers and sellers and the trading price is subject to variables to
be determined at the time of the trade by the broker-dealers). The APS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the APS, and a selling shareholder may sell APS between Auctions at a
price per share of less than $25,000. Accrued APS dividends, however, should at
least partially compensate for the increased market interest rate.
Ratings and Asset Coverage Risk. While Moody's and S&P assign a rating of
"Aaa" and "AAA," respectively, to the APS, the ratings do not eliminate or
necessarily mitigate the risks of investing in APS. A Rating Agency could
downgrade APS, which may make APS less liquid at an Auction or in the secondary
market, although the downgrade would probably result in higher dividend rates.
If a rating agency downgrades APS of a Fund, the Fund will alter its portfolio
or redeem APS. Each Fund may voluntarily redeem APS under certain circumstances.
See "Description of APS -- Rating Agency Guidelines and Asset Coverage" for a
description of the asset maintenance tests each Fund must meet.
Income Risk. The income investors receive from a Fund is based primarily
on the interest it earns from its investments, which can vary widely over the
short- and long-term. If long-term interest rates drop, a Fund's income
available over time to make dividend payments with respect to APS could drop as
well if the Fund purchases securities with lower interest coupons.
Call and Other Reinvestment Risks. If interest rates fall, it is possible
that issuers of callable bonds with high interest coupons will "call" (or
prepay) their bonds before their maturity date. If a call were exercised by the
issuer during a period of declining interest rates, a Fund is likely to replace
such called security with a lower yielding security. If that were to happen, it
could decrease the Fund's dividends and possibly could affect the market price
of Common Shares. Similar risks exist when a Fund invests the proceeds from
matured or traded municipal obligations at market interest rates that are below
the Fund's current earnings rate.
Credit Risk. Credit risk is the risk that one or more municipal
obligations in a Fund's portfolio will decline in price, or fail to pay interest
or principal when due, because the issuer of the obligation experiences a
decline in its financial status. In general, lower rated municipal bonds carry a
greater degree of risk that the issuer will lose its ability to make interest
and principal payments, which could have a negative impact on a Fund's net asset
value or dividends. Securities rated in the fourth highest category are
considered investment grade but they also may have some speculative
characteristics.
Changes in the credit quality of the issuers of municipal obligations held
by a Fund will affect the principal value of (and possibly the income earned on)
such obligations. In addition, the value of such securities are affected by
changes in general economic conditions and business conditions affecting the
22
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of a Fund's investments. The amount of
information about the financial condition of an issuer of municipal obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
If rating agencies lower their ratings of municipal obligations in a Fund's
portfolio, the value of those municipal obligations could decline, which could
jeopardize the rating agencies' ratings of the APS. Because the primary source
of income for each Fund is the interest and principal payments on the municipal
obligations in which it invests, any default by an issuer of a municipal
obligation could have a negative impact on a Fund's ability to pay dividends on
the APS and could result in the redemption of some or all of the APS.
Each Fund may invest in municipal leases and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation.
California Concentration. As described above, the California Fund will
invest substantially all of its net assets in municipal obligations that are
exempt from California personal income tax. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
municipal obligations. The information set forth below and the related
information in the Statement of Additional Information is derived from sources
that are generally available to investors. The information is intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of California. It should
be noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
California's economy is the largest among the 50 states and one of the
largest in the world. The State has a diversified economy with major sectors in
manufacturing, agriculture, services, tourism, international trade and
construction. The State has a population of about 35 million, which has been
growing at a 1-2% annual rate for several decades. Gross domestic product of
goods and services in the State exceeds $1 trillion. Personal income was
estimated at $1,114 billion in 2001. 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 downturn in the high technology
section. The aftermath of the September 11, 2001 terrorist attacks has hurt
tourism-based areas. But the recovery has been slow so far, and unemployment
continues to rise.
The State received significant tax revenues in recent years, derived from
the strong economy and stock market through 2000. Capital gains and stock
options income represented almost a quarter of General Fund revenue in the
2000-2001 fiscal year. The slowing economy and depressed stock market in 2001
will result in significantly reduced revenues in fiscal year 2001-2002, compared
both to the prior year and to earlier forecasts. Since January 2002, the revenue
situation has deteriorated further. The May Revision to the 2002 Governor's
Budget projects a combined budget gap for 2001-2002 and 2002-2003 of $23.6
billion. The 2002-2003 Budget Act (the "2002 Budget Act") was signed by the
Governor on September 5, 2002. The 2002 Budget Act closes the $23.6 billion
shortfall for fiscal year 2002-2003 through a combination of program reductions,
loans, fund shifts, accelerations and transfers and modest tax changes. The
State Legislative Analyst (the "Legislative Analyst"), fiscal experts and
political leaders in the State acknowledge that the 2002 Budget Act left a large
gap between the expected level of tax and other continuing revenues and
projected expenditures under current programs for future years, referred to as a
"structural deficit." The Legislative Analyst has estimated the structural
deficit for the 2003-2004
23
fiscal year to be in the range of at least $10 billion, with similar deficits
for several further years, absent corrective action. 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 currently 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 California 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 California 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 California Fund to pay interest on or principal of
the municipal obligations. This information has not been independently verified.
See the California Fund's Statement of Additional Information for a further
discussion of factors affecting municipal bonds in California.
New York Concentration. As described above, the New York Fund will invest
substantially all of its net assets in municipal obligations that are exempt
from New York State ("State") and New York City ("City") personal income taxes.
The New York Fund is therefore susceptible to political, economic or regulatory
factors affecting issuers of State and City municipal obligations. The
information set forth below and the related information in the Statement of
Additional Information is derived from sources that are generally available to
investors. The information is intended to give a recent historical description
and is not intended to indicate future or continuing trends in the financial or
other positions of the State and the City. It should be noted that the
creditworthiness of obligations issued by local New York issuers may be
unrelated to the creditworthiness of obligations issued by the State and the
City, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
The events of September 11, 2001 had a significant impact upon the State
economy generally and more directly on that of the City. The City and State
expect, based on actions of the U.S. Congress and the President, that they will
be fully reimbursed for the cost to recover from clean up and repair the
consequences of the World Trade Center attack. However, prior to September 11,
the nation's and the State's economies had been weakening and the loss of
approximately one hundred thousand jobs in the City as a direct result of
September 11 will produce material budgetary pressures including increases to
later year budget gaps for the City and reductions to State surpluses. The State
has not quantified the impact of expected reductions in receipts and increased
expenditures for unemployment and economic revitalization resulting from
September 11. The City's Financial Plan for Fiscal Years 2002-2006 released by
the Mayor of the City on June 26, 2002 (the "City Financial Plan"), projects
revenues and expenditures for the 2002 and 2003 fiscal years, balanced in
accordance with GAAP, and projects gaps of $3.7 billion, $4.2 billion, and $4.6
billion for fiscal years 2004 through 2006, respectively.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State's economy grew more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence, as
urban centers lost the more affluent to suburbs and people and business migrated
to the South and West. However, since 1999, prior to the impact of September 11,
the growth of the State's economy has equaled or exceeded national trends. The
State has for many years had a very high state and local tax burden relative to
other states. The burden of state and local taxation, in combination with the
24
many other causes of regional economic dislocation, has contributed to the
decisions of some businesses and individuals to relocate outside, or to not
locate within, the State and remains an impediment to growth and job creation.
The State's and the City's economies remain more reliant on the securities
industry than is the national economy. As a result, the downturn in that
industry prior to September 11 resulted in adverse changes in wage and
employment levels.
The State ended its 2001-2002 fiscal year on March 31, 2002 in balance on a
cash basis, with a reported closing balance in the General Fund of $1.03
billion. The State adopted the debt service portion of the State budget for the
2002-2003 fiscal year on March 26, 2002. The State Legislature adopted the
remainder of the budget for the State's 2002-2003 fiscal year on May 16, 2002,
and the State released a revised State Financial Plan on May 22, 2002 and its
first quarterly Financial Plan update on July 12, 2002. There were no changes to
the State Financial Plan projections in the update. The revised State Financial
Plan projects balance on a cash basis for the 2002-2003 fiscal year. General
Fund disbursements, including transfers to other funds are projected to total
$40.22 billion for 2002-2003. The projected General Fund closing balance is $716
million. The State Financial Plan accompanying the Governor's 2002-2003 amended
Executive Budget projected General Fund budget gaps of $2.8 billion in the 2003-
2004 fiscal year and $3.3 billion in the 2004-2005 fiscal year. The State has
noted that there are significant risk factors that could result in a reduction
in economic activity statewide such a greater job losses, weaker financial
markets and smaller bonus payments by Wall Street firms.
New York City's expense and capital budgets were adopted on June 21, 2002.
The City has outlined a gap-closing program for fiscal years 2004 through 2006
to eliminate the $3.7 billion, $4.2 billion and $4.6 billion projected budget
gaps for the 2004 through 2006 fiscal years, respectively. This program, which
is not specified in detail, assumes for the 2004 through 2006 fiscal years,
respectively, additional agency programs to reduce expenditures or increase
revenues by $2.4 billion and $2.5 billion; initiatives requiring State and
Federal action of $625 million in each year; increased State education aid of
$425 million in each fiscal year; savings from transportation policy
innovations, including congestion pricing and E-Z Pass initiatives of $100
million, $500 million and $800 million in fiscal years 2004 through 2006
respectively; savings from management and procurement efficiencies of $50
million, $75 million and $100 million in fiscal years 2004 through 2006,
respectively; savings from restructuring sanitation resources of $50 million,
$75 million and $100 million in fiscal years 2004 through 2006 respectively;
savings from tort reform through local law of $25 million, $50 million, and $75
million in fiscal years 2004 through 2006 respectively; and increased revenues
of $60 million in each year from the sale of Taxi Medallions.
The City depends on aid from the State and federal governments to both
enable the City to balance its budget and to meet its cash requirements. The
City Financial Plan provides for an additional $800 million in State and federal
aid in fiscal year 2003 alone. If State or federal aid for fiscal year 2003 or
thereafter is less than the level projected in the Mayor's proposal, projected
savings may be negatively impacted and the Mayor may be required to proposes
significant additional spending reductions or tax increases to balance the
City's budget. If the State, the State agencies, the City, other municipalities
or school districts were to suffer serious financial difficulties jeopardizing
their respective access to the public credit markets, or increasing the risk of
default, the market price of municipal bonds issued by such entities could be
adversely affected.
As of May 23, 2002, Moody's rated the City's outstanding general obligation
bonds A2, Standard and Poor's rated such bonds A and Fitch rated such bonds A+.
Such ratings reflect only the view of Moody's, Standard and Poor's and Fitch,
from which an explanation of the significance of such ratings may be obtained.
There is no assurance that such ratings will continue for any given periods of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of City bonds and could increase the City's borrowing costs. See "Factors
Pertaining to New York" in the Statement of Additional Information for more
information about New York.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal obligations and
does not purport to be a complete or exhaustive
25
description of all adverse conditions to which issuers of New York municipal
obligations held by the New York Fund are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not with the control of the issuers of New York municipal obligations,
could affect or could have an adverse impact on the financial condition of the
issuers. The New York Fund is unable to predict whether or to what extent such
factors or other factors may affect the issuers of New York municipal
obligations, the market value or marketability of New York municipal obligations
or the ability of the respective issuers of the New York municipal obligations
acquired by the New York Fund to pay interest on or principal of the municipal
obligations. This information has not been independently verified. See the New
York Fund's Statement of Additional Information for a further discussion of
factors affecting municipal obligations in New York.
Sector and Territory Concentration. Each Fund may invest 25% or more of
its total assets in municipal obligations of issuers located in the same U.S.
territory or in municipal obligations in the same economic sector, including,
without limitation, the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a territory's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals as well as obligations of the education and
transportation sectors. This may make a Fund more susceptible to adverse
economic, political, or regulatory occurrences affecting a particular territory
or economic sector. For example, health care related issuers are susceptible to
Medicaid reimbursement policies, and national and state health care legislation.
Liquidity Risk. At times, a portion of each Fund's assets may be invested
in securities as to which the Fund, by itself or together with other accounts
managed by Eaton Vance and its affiliates, holds a major portion of all of such
securities. The secondary market for some municipal obligations is less liquid
than that for taxable debt obligations or other more widely traded municipal
obligations. No established resale market exists for certain of the municipal
obligations in which each Fund may invest. Each Fund has no limitation on the
amount of its assets, which may be invested in securities that are not readily
marketable or are subject to restrictions on resale. In certain situations, a
Fund could find it more difficult to sell such securities at desirable times
and/or prices.
Municipal Bond Market Risk. Investing in the municipal bond market
involves certain risks. The amount of public information available about the
municipal obligations in each Fund's portfolio is generally less than for
corporate equities or bonds, and the investment performance of each Fund may
therefore be more dependent on the analytical abilities of Eaton Vance than if
the Fund were a stock fund or taxable bond fund.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, each Fund could experience delays in collecting principal and
interest to which it is entitled. To enforce its rights in the event of default
in the payment of interest or repayment of principal, or both, each Fund may
take possession of and manage the assets securing the issuer's obligations on
such securities, which may increase the Fund's operating expenses. Any income
derived from a Fund's ownership or operation of such assets may not be
tax-exempt.
Municipal Bond Insurance. In the event Moody's, S&P or Fitch (or all of
them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal obligations insured by such insurer, and municipal
obligations insured under Portfolio Insurance issued by such insurer also would
be of reduced quality in the portfolio of a Fund. See "Primary Investment
Policies -- Municipal Obligation Insurance Generally" above.
In addition, to the extent each Fund employs Portfolio Insurance, each Fund
may be subject to certain restrictions on investments imposed by guidelines of
the insurance companies issuing such Portfolio
26
Insurance. Each Fund does not expect these guidelines to prevent Eaton Vance
from managing each Fund's portfolio in accordance with the Fund's investment
objective and policies.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the APS and
distributions thereon can decline. In an inflationary period, however, it is
expected that, through the Auction process, APS dividend rates would increase,
tending to offset the risk.
Non-Diversification. Each Fund has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent a Fund invests a relatively high percentage of
its assets in obligations of a limited number of issuers, the Fund will be more
susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
MANAGEMENT OF THE FUNDS
BOARDS OF TRUSTEES
The management of each Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of each Fund's Board of Trustees under the laws of The
Commonwealth of Massachusetts and the 1940 Act.
THE ADVISER
Eaton Vance acts as each Fund's investment adviser under an Investment
Advisory Agreement ("Advisory Agreement"). The Adviser's principal office is
located at The Eaton Vance Building, 255 State Street, Boston, MA 02109. Eaton
Vance, its affiliates and predecessor companies have been managing assets of
individuals and institutions since 1924 and of investment companies since 1931.
Eaton Vance (or its affiliates) currently serves as the investment adviser to
investment companies and various individual and institutional clients with
combined assets under management of approximately $53 billion as of September
30, 2002. Eaton Vance is an indirect, wholly-owned subsidiary of Eaton Vance
Corp., a publicly held holding company, which through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities.
Eaton Vance employs 25 personnel in its municipal bond department,
including five portfolio managers, three traders and nine credit analysts. Eaton
Vance was one of the first advisory firms to manage a registered municipal bond
investment company, and has done so continuously since 1978. Eaton Vance and
certain of its subsidiaries currently manage 5 national municipal investment
companies, 41 single state municipal investment companies, 8 limited maturity
municipal investment companies and 1 money market municipal investment company,
with assets of about $8.9 billion as of September 30, 2002.
Under the general supervision of each Fund's Board of Trustees, the Adviser
will carry out the investment and reinvestment of the assets of each Fund, will
furnish continuously an investment program with respect to each Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to each Fund investment
advice and office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser will compensate all Trustees and officers
of each Fund who are members of the Adviser's organization and who render
investment services to each Fund, and will also compensate all other Adviser
personnel who provide research and investment services to each Fund. In return
for these services, facilities and payments, each Fund has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of
0.65% of the average weekly gross assets of each Fund. Gross assets of each Fund
shall be calculated by deducting accrued liabilities of each Fund not including
the amount of any Preferred Shares outstanding.
27
Cynthia J. Clemson is the portfolio manager of the California Fund and is
responsible for day-to-day management of the California Fund's investments. Ms.
Clemson also manages other Eaton Vance portfolios, has been an Eaton Vance
portfolio manager for more than 5 years and is Vice President of Eaton Vance.
Thomas J. Fetter is the portfolio manager of the National Fund and the New
York Fund and is responsible for day-to-day management of each Fund's
investments. Mr. Fetter also manages other Eaton Vance portfolios, has been an
Eaton Vance portfolio manager for more than 5 years and is Vice President of
Eaton Vance.
Each Fund and the Adviser have adopted Codes of Ethics relating to personal
securities transactions. The Codes permit Adviser personnel to invest in
securities (including securities that may be purchased or held by a Fund) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
Eaton Vance serves as administrator of each Fund, but currently receives no
compensation for providing administrative services to the Funds. Under the
Administration Agreement with each Fund (each an "Administration Agreement"),
Eaton Vance is responsible for managing the business affairs of each Fund,
subject to the supervision of each Fund's Board of Trustees. Eaton Vance will
furnish to each Fund all office facilities, equipment and personnel for
administering the affairs of each Fund. Eaton Vance's administrative services
include recordkeeping, preparation and filing of documents required to comply
with federal and state securities laws, supervising the activities of each
Fund's custodian and transfer agent, providing assistance in connection with the
Trustees' and shareholders' meetings, providing service in connection with any
repurchase offers and other administrative services necessary to conduct each
Fund's business.
DESCRIPTION OF APS
The following is a brief description of the terms of the APS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to each Fund's Declaration of Trust and Amended
By-Laws, including the provisions thereof establishing the APS. Each Fund's
Declaration of Trust and the form of Amended By-Laws establishing the terms of
the APS have been filed as exhibits to or incorporated by reference in the
Registration Statement of which this Prospectus is a part. The Amended By-Laws
may be found in Appendix E to each Fund's Statement of Additional Information.
GENERAL
Each Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including Preferred
Shares, having a par value of $0.01 per share, in one or more series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the Shareholders. Each Fund's Amended By-Laws
currently authorize the number of shares of APS of each series set forth below
in "Description of Capital Structure." The APS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared). See "Description of
APS -- Liquidation Rights."
The APS of each series will rank on parity with shares of any other series
of APS and with shares of other series of Preferred Shares of each Fund, as to
the payment of dividends and the distribution of assets upon liquidation. All
shares of APS carry one vote per share on all matters on which such shares are
entitled to be voted. APS, when issued, will be fully paid and, subject to
matters discussed in "Certain Provisions of the Declaration of Trust,"
non-assessable and have no preemptive, conversion or cumulative voting rights.
The APS will not be convertible into Common Shares or other capital stock of a
Fund, and the holders thereof will have no preemptive, or cumulative voting
rights.
28
DIVIDENDS AND DIVIDEND PERIODS
General. After the Initial Dividend Period, each Subsequent Dividend
period for the APS will generally consist of seven days (a "7-day Dividend
Period"); provided, however, that prior to any Auction, a Fund may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period as discussed below. The holders of the APS of
a Fund will be entitled to receive, when, as and if declared by that Fund's
Board of Trustees, out of funds legally available therefor, cumulative cash
dividends on their APS, at the Applicable Rate determined as set forth below
under "Determination of Dividend Rate," payable on the dates set forth below.
Dividends on the APS of a Fund so declared and payable shall be paid (i) in
preference to and in priority over any dividends declared and payable on that
Fund's Common Shares and (ii) to the extent permitted under the Code and
available, out of the net tax-exempt income earned on that Fund's investments.
Dividends on the APS, to the extent that they are derived from municipal
obligations, generally will be exempt from federal income tax though some or all
of those dividends may be a tax preference item for purposes of the federal
alternative minimum tax ("Preference Item"), and relevant state taxes. See
"Taxes."
Dividends on the APS will accumulate from the date on which a Fund
originally issues the APS (the "Date of Original Issue") and will be payable on
the APS on the dates described below. Dividends on the APS with respect to the
Initial Dividend Period shall be payable on the Initial Dividend Payment Date.
Following the Initial Dividend Payment Date, dividends on the APS will be
payable, at the option of each Fund, either (i) with respect to any 7-Day
Dividend Period and any Short Term Dividend Period of 28 or fewer days, on the
day next succeeding the last day thereof or (ii) with respect to any Short Term
Dividend Period of more than 28 days and with respect to any Long Term Dividend
Period, monthly on the first Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being referred to herein as a "Normal Dividend Payment Date"), except that
if such Normal Dividend Payment Date is not a Business Day, the Dividend Payment
Date shall be the first Business Day next succeeding such Normal Dividend
Payment Date. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such exceptions, will occur on the
next following originally scheduled date. If for any reason a Dividend Payment
Date cannot be fixed as described above, then the Board of Trustees shall fix
the Dividend Payment Date. The Board of Trustees by resolution prior to
authorization of a dividend by the Board of Trustees may change a Dividend
Payment Date if such change does not adversely affect the contract rights of the
holders of APS set forth in the Amended By-Laws. The Initial Dividend Period,
7-Day Dividend Periods and Special Dividend Periods are hereinafter sometimes
referred to as "Dividend Periods." Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, each Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Funds do not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the APS, which holder is
expected to be the nominee of the Securities Depository. See "The
Auction -- General -- Securities Depository." The Securities Depository will
credit the accounts of the Agent Members of the Existing Holders in accordance
with the Securities Depository's normal procedures which provide for payment in
same-day funds. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such Existing Holder in accordance with the instructions of such Existing
Holder. Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment made on the APS first
shall be credited against the earliest declared but unpaid dividends accumulated
with respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends except as
described under "Additional Dividends" and "Non-
29
Payment Period; Late Charge" below. No interest will be payable in respect of
any dividend payment or payments on the APS which may be in arrears.
The amount of cash dividends per share of APS payable (if declared) on the
Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend
Payment Date of each Short Term Dividend Period shall be computed by multiplying
the Applicable Rate for such Dividend Period by a fraction, the numerator of
which will be the number of days in such Dividend Period or part thereof that
such share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
During any Long Term Dividend Period, the amount of cash dividends per share of
APS payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 360, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent.
Notification of Dividend Period. With respect to each Dividend Period that
is a Special Dividend Period, each Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for the APS will be a number of days
(other than seven), evenly divisible by seven, and not fewer than seven nor more
than 364 in the case of a Short Term Dividend Period or one whole year or more
but not greater than five years in the case of a Long Term Dividend Period,
specified in such notice, provided that a Fund may not give a Request for
Special Dividend Period of greater than 28 days (and any such request shall be
null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for the APS and, in the case of a
Long Term Dividend Period, shall be given on or prior to the second Business Day
but not more than 28 days prior to an Auction Date for the APS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealers jointly shall
determine whether, given the factors set forth below, it is advisable that a
Fund issue a Notice of Special Dividend Period as contemplated by such Request
for Special Dividend Period and the Optional Redemption Price of the APS during
such Special Dividend Period and the Specific Redemption Provisions and shall
give each Fund and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination, the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the APS, (iv) industry and financial conditions which
may affect the APS, (v) the investment objective of a Fund and (vi) the Dividend
Periods and dividend rates at which current and potential beneficial holders of
the APS would remain or become beneficial holders.
If the Broker-Dealers shall not give a Fund and the Auction Agent a
Response by such second Business Day or if the Response states that given the
factors set forth above it is not advisable that the Fund give a Notice of
Special Dividend Period for the APS, the Fund may not give a Notice of Special
Dividend Period in respect of such Request for Special Dividend Period. In the
event the Response indicates that it is advisable that a Fund give a Notice of
Special Dividend Period for the APS, the Fund, by no later than the second
Business Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. Each Fund also shall provide a copy of such Notice of
Special Dividend Period to S&P & Moody's. A Fund shall not give a Notice of
Special Dividend Period, and, if such Notice of Special Dividend Period shall
have been given already, shall give telephonic and written notice of its
revocation (a
30
"Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the
Securities Depository on or prior to the Business Day prior to the relevant
Auction Date if (x) either the 1940 Act APS Asset Coverage is not satisfied or
the Fund shall fail to maintain Moody's Eligible Assets and S&P Eligible Assets
with an aggregate Discounted Value at least equal to the APS Basic Maintenance
Amount, on each of the two Valuation Dates immediately preceding the Business
Day prior to the relevant Auction Date on an actual basis and on a pro forma
basis giving effect to the proposed Special Dividend Period (using as a pro
forma dividend rate with respect to such Special Dividend Period the dividend
rate which the Broker-Dealers shall advise a Fund is an approximately equal rate
for securities similar to the APS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the related Auction
Date or (z) the Broker-Dealers jointly advise a Fund that, after consideration
of the factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. Each Fund also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If a Fund is prohibited from giving a Notice of
Special Dividend Period as a result of the factors enumerated in clause (x), (y)
or (z) above or if the Fund gives a Notice of Revocation with respect to a
Notice of Special Dividend Period, the next succeeding Dividend Period for that
series will be a 7-Day Dividend Period. In addition, in the event Sufficient
Clearing Bids are not made in any Auction or an Auction is not held for any
reason, the next succeeding Dividend Period will be a 7-Day Dividend Period, and
the Fund may not again give a Notice of Special Dividend Period (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a 7-Day Dividend Period.
Determination of Dividend Rate. The dividend rate on the APS during the
period from and including the Date of Original Issue for the APS to but
excluding the Initial Dividend Payment Date for the APS (the "Initial Dividend
Period") will be the rate per annum set forth on the inside cover page hereof.
Commencing on the Initial Dividend Payment Date for the APS, the Applicable Rate
on the APS for each Subsequent Dividend Period, which Subsequent Dividend Period
shall be a period commencing on and including a Dividend Payment Date and ending
on and including the calendar day prior to the next Dividend Payment Date (or
last Dividend Payment Date in a Dividend Period if there is more than one
Dividend Payment Date), shall be equal to the rate per annum that results from
the Auction with respect to such Subsequent Dividend Period. The Initial
Dividend Period and Subsequent Dividend Period for the APS is referred to herein
as a "Dividend Period." Cash dividends shall be calculated as set forth above
under "Dividends -- General."
Non-Payment Period; Late Charge. A Non-Payment Period will commence if a
Fund fails to (i) declare, prior to the close of business on the second Business
Day preceding any Dividend Payment Date, for payment on or (to the extent
permitted as described below) within three Business Days after such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the full amount
of any dividend on the APS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares (if declared) payable on such
Dividend Payment Date or (B) on any redemption date for the APS called for
redemption, the Mandatory Redemption Price per share of such APS or, in the case
of an optional redemption, the Optional Redemption Price per share. Such Non-
Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid cash dividends and unpaid redemption prices shall have been so
deposited or otherwise shall have been made available to the applicable holders
in same-day funds, provided that a Non-Payment Period for the APS will not end
unless a Fund shall have given at least five days' but no more than 30 days'
written notice of such deposit or availability to the Auction Agent, the
Securities Depository and all holders of the APS of such series. Notwithstanding
the foregoing, the failure by a Fund to deposit funds as provided for by clauses
(ii) (A) or (ii) (B) above within three Business Days after any Dividend Payment
Date or redemption date, as the case may be, in each case to the extent
contemplated below, shall not constitute a "Non-Payment Period." The Applicable
Rate for
31
each Dividend Period for the APS of any series, commencing during a Non-Payment
Period, will be equal to the Non-Payment Period Rate; and each Dividend Period
commencing after the first day of, and during, a Non-Payment Period shall be a
3-Day Dividend Period. Any dividend on the APS due on any Dividend Payment Date
for such shares (if, prior to the close of business on the second Business Day
preceding such Dividend Payment Date, a Fund has declared such dividend payable
on such Dividend Payment Date to the persons who held such shares as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to such shares not paid to such persons
when due may be paid to such persons in the same form of funds by 12:00 noon,
New York City time, on any of the first three Business Days after such Dividend
Payment Date or due date, as the case may be, provided that such amount is
accompanied by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. In the case of a
willful failure of a Fund to pay a dividend on a Dividend Payment Date or to
redeem any APS on the date set for such redemption, the preceding sentence shall
not apply and the Applicable Rate for the Dividend Period commencing during the
Non-Payment Period resulting from such failure shall be the Non-Payment Period
Rate. For the purposes of the foregoing, payment to a person in same-day funds
on any Business Day at any time will be considered equivalent to payment to that
person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, New York City
time, on any Business Day shall be considered to have been made instead in the
same form of funds and to the same person before 12:00 noon, New York City time,
on the next Business Day. The Non-Payment Period Rate initially will be 200% of
the applicable Reference Rate (or 275% of such rate if a Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on the APS), provided that the Board of
Trustees of a Fund shall have the authority to adjust, modify, alter or change
from time to time the initial Non-Payment Period Rate if the Board of Trustees
of the Fund determines and Moody's and S&P (or any Substitute Rating Agency in
lieu of Moody's or S&P in the event such party shall not rate the APS) advises
the Fund in writing that such adjustment, modification, alteration or change
will not adversely affect its then-current rating on the APS.
Restrictions on Dividends and Other Payments. Under the 1940 Act, a Fund
may not declare dividends or make other distributions on Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding APS would be less than
200% (or such other percentage as in the future may be required by law). Each
Fund estimates that, based on the composition of its portfolio at October 18,
2002, asset coverage with respect to the APS would be at least 252% immediately
after the issuance of the APS offered hereby. Under the Code, each Fund must,
among other things, distribute each year at least 90% of the sum of its net
tax-exempt income and investment company taxable income in order to maintain its
qualification for tax treatment as a regulated investment company. The foregoing
limitations on dividends, other distributions and purchases in certain
circumstances may impair a Fund's ability to maintain such qualification. See
"Taxes."
Upon any failure to pay dividends on the APS for two years or more, the
holders of the APS will acquire certain additional voting rights. See "Voting
Rights" below.
For so long as any APS are outstanding, a Fund will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other stock, if any, ranking junior to the APS as
to dividends or upon liquidation) in respect of Common Shares or any other stock
of the Fund ranking junior to or on a parity with the APS as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any Common Shares or shares of any other such junior stock
(except by conversion into or exchange for stock of the Fund ranking junior to
APS as to dividends and upon liquidation) or any such parity stock (except by
conversion into or exchange for stock of the Fund ranking junior to or on a
parity with APS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Fund would have Moody's Eligible Assets and S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount,
32
and the 1940 Act APS Asset Coverage (see "Asset Maintenance" and "Redemption"
below) would be satisfied, (B) full cumulative dividends on the APS due on or
prior to the date of the transaction have been declared and paid or shall have
been declared and sufficient funds for the payment thereof deposited with the
Auction Agent, (C) any Additional Dividend required to be paid on or before the
date of such declaration or payment has been paid and (D) the Fund has redeemed
the full number of APS required to be redeemed by any provision for mandatory
redemption contained in the Amended By-Laws.
Additional Dividends. If a Fund retroactively allocates any net capital
gains or other taxable income to the APS without having given advance notice
thereof to the Auction Agent as described below under "The Auction -- Auction
Procedures -- Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" solely by reason of the fact that such
an allocation results from (i) the redemption of all or a portion of the
outstanding APS, (ii) the liquidation of the Fund or (iii) a debt obligation
believed to be a Municipal Obligation proving to be an obligation subject to
federal income tax and/or a relevant state tax (the amount of any of such
allocations referred to herein as a "Retroactive Taxable Allocation"). The Fund,
within 90 days (and generally within 60 days) after the end of the Fund's fiscal
year for which a Retroactive Taxable Allocation is made, will provide notice
thereof to the Auction Agent and to each holder of APS (initially Cede & Co. as
nominee of the Securities Depository) during such fiscal year at such holder's
address as the same appears or last appeared on the stock books of the Fund.
Each such Fund, within 30 days after such notice is given to the Auction Agent,
will pay to the Auction Agent (who then will distribute to such holders of the
APS), out of funds legally available therefor, an amount equal to the aggregate
Additional Dividend (as defined below) with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question. See
"Taxes."
An "Additional Dividend" means a payment to a present or former holder of
the APS of an amount that would cause (i) the dollar amount of such holder's
dividends received on the APS with respect to the fiscal year in question
(including the Additional Dividend) less the federal income tax and applicable
state tax attributable to the aggregate of (x) the Retroactive Taxable
Allocations made to such holder with respect to the fiscal year in question and
(y) the Additional Dividend (to the extent taxable) to equal (ii) the dollar
amount of such holder's dividends received on the APS with respect to the fiscal
year in question (excluding the Additional Dividend) if there had been no
Retroactive Taxable Allocations. An Additional Dividend shall be calculated (i)
without consideration being given to the time value of money; (ii) assuming that
none of the dividends received from a Fund is a Preference Item; and (iii)
assuming that each Retroactive Taxable Allocation would be taxable to each
holder of APS at the maximum combined marginal federal and relevant state income
tax rate (including any surtax) applicable to the taxable character of the
distribution (i.e., ordinary income or net capital gain) in the hands of an
individual or a corporation, whichever is greater (disregarding the effect of
any other state and local taxes and the phase out of, or provisions limiting,
personal exemptions, itemized deductions, or the benefit of lower tax brackets).
Although each Fund generally intends to designate any Additional Dividend as an
"exempt-interest" dividend to the extent permitted by applicable law, it is
possible that all or a portion of any Additional Dividend will be taxable to the
recipient thereof. See "Taxes -- Tax Treatment of Additional Dividends." A Fund
will not pay a further Additional Dividend with respect to any taxable portion
of an Additional Dividend.
If a Fund does not give advance notice of the amount of taxable income to
be included in a dividend on the APS in the related Auction, as described below
under "The Auction -- Auction Procedures -- Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends," the
Fund may include such taxable income in a dividend on the APS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date.
REDEMPTION
Mandatory Redemption. Each Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, the APS
to the extent permitted under the 1940 Act and Massachusetts law, on a date
fixed by the Board of Trustees, if the Fund fails to maintain
33
Moody's Eligible Assets and S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount or to satisfy
the 1940 Act APS Asset Coverage and such failure is not cured on or before the
APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. "Mandatory Redemption Price"
of APS means $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
In addition, holders of APS may be entitled to receive Additional Dividends in
the event of redemption of such APS to the extent provided herein. See
"Description of APS -- Dividends and Dividend Periods -- Additional Dividends."
Any such redemption will be limited to the lesser number of APS necessary to
restore the Discounted Value or the 1940 Act APS Asset Coverage, as the case may
be, or the maximum number that can be redeemed with funds legally available
under the Declaration of Trust and applicable law.
Optional Redemption. To the extent permitted under the 1940 Act and under
Massachusetts law, upon giving a Notice of Redemption, as provided below, each
Fund, at its option, may redeem the APS, in whole or in part, out of funds
legally available therefor, at the Optional Redemption Price per share on any
Dividend Payment Date; provided that no APS may be redeemed at the option of the
Fund during (a) the Initial Dividend Period with respect to the APS or (b) a
Non-Call Period to which such share is subject. "Optional Redemption Price"
means $25,000 per share of APS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption
and excluding Additional Dividends plus any applicable redemption premium, if
any, attributable to the designation of a Premium Call Period. In addition,
holders of APS may be entitled to receive Additional Dividends in the event of
redemption of such APS to the extent provided herein. See "Description of
APS -- Dividends and Dividend Periods -- Additional Dividends." Each Fund has
the authority to redeem the APS for any reason and may redeem all or part of the
outstanding APS if it anticipates that the Fund's leveraged capital structure
will result in a lower rate of return to holders of Common Shares for any
significant period of time than that obtainable if the Common Shares were
unleveraged.
Notwithstanding the provisions for redemption described above, no APS shall
be subject to optional redemption (i) unless all dividends in arrears on all
remaining outstanding APS, and all capital stock of a Fund ranking on a parity
with the APS with respect to the payment of dividends or upon liquidation, have
been or are being contemporaneously paid or declared and set aside for payment
and (ii) if redemption thereof would result in a Fund's failure to maintain
Moody's Eligible Assets and S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding APS of such series pursuant to a successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding APS of such series.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of a Fund, whether
voluntary or involuntary, the holders of APS will be entitled to receive, out of
the assets of the Fund available for distribution to shareholders, before any
distribution or payment is made upon any Common Shares or any other shares of
beneficial interest of the Fund ranking junior in right of payment upon
liquidation of APS, $25,000 per share together with the amount of any dividends
accumulated but unpaid (whether or not earned or declared) thereon to the date
of distribution, and after such payment the holders of APS will be entitled to
no other payments except for any Additional Dividends. If such assets of a Fund
shall be insufficient to make the full liquidation payment on outstanding APS
and liquidation payments on any other outstanding class or series of Preferred
Shares of the Fund ranking on a parity with the APS as to payment upon
liquidation, then such assets will be distributed among the holders of APS and
the holders of shares of such other class or series ratably in proportion to the
respective preferential amounts to which they are entitled. After payment of the
full amount of liquidation distribution to which they are entitled, the holders
of APS will not be entitled to any further participation in any distribution of
assets by a Fund except for any Additional Dividends. A consolidation, merger or
share exchange of a Fund with or into any other entity or entities or a sale,
whether for cash, shares of stock, securities or properties, of all or
substantially
34
all or any part of the assets of the Fund shall not be deemed or construed to be
a liquidation, dissolution or winding up of the Fund.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
Each Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Amended By-Laws. These requirements are
summarized below.
1940 Act APS Asset Coverage. Each Fund will be required under the Amended
By-Laws to maintain, with respect to the APS, as of the last Business Day of
each month in which any APS are outstanding, asset coverage of at least 200%
with respect to senior securities which are beneficial interests in the Fund,
including the APS (or such other asset coverage as in the future may be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are beneficial interests of a closed-end investment company as
a condition of paying dividends on its common stock) ("1940 Act APS Asset
Coverage"). If a Fund fails to maintain 1940 Act APS Asset Coverage and such
failure is not cured as of the last Business Day of the following month (the
"1940 Act Cure Date"), the Fund will be required under certain circumstances to
redeem certain of the APS. See "Redemption" below.
The 1940 Act APS Asset Coverage immediately following the issuance of APS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the APS) computed using each Fund's net assets as of
October 18, 2002 and assuming the Over-allotment Common Shares and the APS had
been issued as of such date will be as follows:
NATIONAL FUND
Value of Fund assets less liabilities not 1,492,969,131
constituting senior securities $
------------------------------------------------- = -------------- = 252%
Senior securities representing indebtedness plus $ 592,500,000
liquidation value of APS
CALIFORNIA FUND
Value of Fund assets less liabilities not 492,840,911
constituting senior securities $
------------------------------------------------- = ------------ = 253%
Senior securities representing indebtedness plus $195,000,000
liquidation value of APS
NEW YORK FUND
Value of Fund assets less liabilities not 361,764,174
constituting senior securities $
------------------------------------------------- = ------------ = 254%
Senior securities representing indebtedness plus $142,500,000
liquidation value of APS
APS Basic Maintenance Amount. Each Fund intends that, so long as APS are
outstanding, the composition of its portfolio will reflect guidelines
established by Moody's and S&P in connection with the Fund's receipt of a rating
for such shares on or prior to their Date of Original Issue of at least Aaa from
Moody's and AAA from S&P. Moody's and S&P, each of which is a Rating Agency,
separately issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and S&P in connection with issuances of asset-backed and
similar securities, including debt obligations and variable rate Preferred
Shares, generally on a case-by-case basis through discussions with the issuers
of these securities. The guidelines are designed to ensure that assets
underlying outstanding debt or Preferred Shares will be varied sufficiently and
will be of sufficient quality and amount to justify investment grade ratings.
The guidelines do not have the force of law but have been adopted by each Fund
in order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for APS, which ratings generally are relied upon by
institutional investors in purchasing such securities. The guidelines provide a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
1940 Act.
35
Each Fund intends to maintain a Discounted Value for its portfolio at least
equal to the APS Basic Maintenance Amount. Moody's and S&P each have established
separate guidelines for determining Discounted Value. These guidelines define
eligible portfolio assets (respectively, "Moody's Eligible Assets" and "S&P
Eligible Assets"). To the extent any particular portfolio holding does not
satisfy these guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value of that Fund's portfolio assets.
The Moody's and S&P guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of each Fund's portfolio. The Amount of
such assets included in the portfolio of a Fund at any time may vary depending
upon the rating, diversification and other characteristics of eligible assets
included in the portfolio, although it is not anticipated in the normal course
of business the value of such assets will exceed 20% of a Fund's total assets.
The APS basic maintenance amount includes the sum of (a) the aggregate
liquidation preference of APS then outstanding and (b) certain accrued and
projected payment obligations of a Fund.
Upon any failure to maintain the required aggregate Discounted Value, each
Fund will seek to alter the composition of its portfolio to retain a Discounted
Value at least equal to the APS Basic Maintenance Amount on or prior to the APS
Basic Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the APS will be subject
to mandatory redemption. See "Description of APS -- Redemption." The APS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
APS then outstanding and (ii) certain accrued and projected payment obligations
of a Fund.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the APS, at any time, may change or withdraw any such
rating. As set forth in the Amended By-Laws, each Fund's Board of Trustees,
without shareholder approval, may modify certain definitions or restrictions
that have been adopted by each Fund pursuant to the rating agency guidelines,
provided the Board of Trustees has obtained written confirmation from Moody's or
S&P, or both, as appropriate, that any such change would not impair the ratings
then assigned by Moody's and S&P to the APS.
As recently described by Moody's and S&P, a Preferred Shares rating is an
assessment of the capacity and willingness of an issuer to pay Preferred Shares
obligations. The ratings on the APS are not recommendations to purchase, hold or
sell APS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of APS will be able to sell
such shares in an Auction. The ratings are based on current information
furnished to Moody's and S&P by each Fund and the Adviser and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
Common Shares have not been rated by a Rating Agency.
A Rating Agency's guidelines will apply to a Fund's APS only so long as
such agency is rating such shares. Each Fund will pay certain fees to each
Rating Agency that rates the Fund's APS.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS of each Fund will be entitled to one
vote per share on each matter submitted to a vote of shareholders and will vote
together with holders of Common Shares and other Preferred Shares of that Fund
as a single class.
In connection with the election of each Fund's Trustees, holders of the APS
and any other Preferred Shares, voting as a separate class, shall be entitled at
all times to elect two of the Fund's Trustees, and the remaining Trustees will
be elected by holders of Common Shares and APS and any other Preferred Shares,
voting together as a single class. In addition, if at any time dividends on
outstanding APS shall be
36
unpaid in an amount equal to at least two full years' dividends thereon or if at
any time holders of any shares of Preferred Shares are entitled, together with
the holders of APS, to elect a majority of the Trustees of the Fund under the
1940 Act, then the number of Trustees constituting the Board of Trustees
automatically shall be increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of APS and any other Preferred
Shares as described above, would constitute a majority of the Board of Trustees
as so increased by such smallest number, and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Trustees are to be elected, the holders of the APS
and any other Preferred Shares, voting as a separate class, will be entitled to
elect the smallest number of additional Trustees that, together with the two
Trustees which such holders in any event will be entitled to elect, constitutes
a majority of the total number of Trustees of the Fund as so increased. The
terms of office of the persons who are Trustees at the time of that election
will continue. If a Fund thereafter shall pay, or declare and set apart for
payment in full, all dividends payable on all outstanding APS and any other
Preferred Shares for all past Dividend Periods, the additional voting rights of
the holders of APS and any other Preferred Shares as described above shall
cease, and the terms of office of all of the additional Trustees elected by the
holders of APS and any other Preferred Shares (but not of the Trustees with
respect to whose election the holders of Common Shares were entitled to vote or
the two Trustees the holders of APS and any other Preferred Shares have the
right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding APS and any other Preferred Shares, voting as a separate
class, will be required to (i) authorize, create or issue any class or series of
stock ranking prior to the APS or any other series of Preferred Shares with
respect to the payment of dividends or the distribution of assets on
liquidation; provided, however, that no vote is required to authorize the
issuance of another class of Preferred Shares which are substantially identical
in all respects to the APS or (ii) amend, alter or repeal the provisions of the
Declaration of Trust or the Amended By-Laws, whether by merger, consolidation or
otherwise, so as to adversely affect any of the contract rights expressly set
forth in the Declaration of Trust or the Amended By-Laws of holders of APS or
any other Preferred Shares. To the extent permitted under the 1940 Act, in the
event shares of more than one series of APS are outstanding, a Fund shall not
approve any of the actions set forth in clause (i) or (ii) which adversely
affects the contract rights expressly set forth in the Declaration of Trust of a
holder of shares of a series of APS differently than those of a holder of shares
of any other series of APS without the affirmative vote of at least a majority
of votes entitled to be cast by holders of APS of each series adversely affected
and outstanding at such time (each such adversely affected series voting
separately as a class). Each Board of Trustees, however, without shareholder
approval, may amend, alter or repeal any or all of the various rating agency
guidelines described herein in the event a Fund receives confirmation from the
rating agencies that any such amendment, alteration or repeal would not impair
the ratings then assigned to the APS. Unless a higher percentage is provided for
under "Certain Provisions in the Declaration of Trust," the affirmative vote of
a majority of the votes entitled to be cast by holders of outstanding APS and
any other Preferred Shares, voting as a separate class, will be required to
approve any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions described
as fundamental policies under "Investment Objectives and Policies." The class
vote of holders of APS and any other Preferred Shares described above in each
case will be in addition to a separate vote of the requisite percentage of
Common Shares and APS and any other Preferred Shares, voting together as a
single class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to the APS if, at or prior
to the time when the act with respect to which such vote otherwise would be
required shall be effected, such shares shall have been (i) redeemed or (ii)
called for redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
37
THE AUCTION
GENERAL
Holders of the APS will be entitled to receive cumulative cash dividends on
their shares when, as and if declared by the Board of Trustees of each Fund, out
of the funds legally available therefor, on the Initial Dividend Payment Date
with respect to the Initial Dividend Period and, thereafter, on each Dividend
Payment Date with respect to a Subsequent Dividend Period (generally a period of
seven days subject to certain exceptions set forth under "Description of
APS -- Dividends and Dividend Periods -- General") at the rate per annum equal
to the Applicable Rate for each such Dividend Period.
The provisions of the Amended By-Laws establishing the terms of the APS
offered hereby will provide that the Applicable Rate for each Dividend Period
after the Initial Dividend Period therefor will be equal to the rate per annum
that the Auction Agent advises has resulted on the Business Day preceding the
first day of such Dividend Period due to implementation of the auction
procedures set forth in the Amended By-Laws (the "Auction Procedures") in which
persons determine to hold or offer to purchase or sell the APS. The Amended
Bylaws, which contain the Auction Procedures, are attached as Appendix E to each
Fund's Statement of Additional Information. Each periodic operation of such
procedures with respect to the APS is referred to hereinafter as an "Auction."
If, however, a Fund should fail to pay or duly provide for the full amount of
any dividend on or the redemption price of the APS called for redemption, the
Applicable Rate for the APS will be determined as set forth under "Description
of APS -- Dividends and Dividend Periods -- Determination of Dividend Rate."
Auction Agent Agreement. Each Fund will enter into an agreement (the
"Auction Agent Agreement") with Deutsche Bank Trust Company ("Deutsche Bank" and
together with any successor bank or trust company or other entity entering into
a similar agreement with a Fund, the "Auction Agent"), which provides, among
other things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the APS. Each Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
a Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, a Fund will use its best efforts to
enter into an agreement with a successor Auction Agent containing substantially
the same terms and conditions as the Auction Agent Agreement. Each Fund may
terminate the Auction Agent Agreement, provided that prior to such termination
the Fund shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
In addition to serving as the Auction Agent, Deutsche Bank will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS. The Auction Agent, however, will serve merely as the agent of each
Fund, acting in accordance with each Fund's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with Salomon
Smith Barney Inc., UBS Warburg LLC, A.G. Edwards & Sons, Inc., Prudential
Securities Incorporated and Wachovia Securities, Inc. and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more other
broker-dealers (collectively, the "Broker-Dealers") selected by each Fund, which
provide for the participation of such Broker-Dealers in Auctions. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Salomon Smith Barney Inc. and may not be terminated
without the prior written consent of a Fund, which consent may not be
unreasonably withheld.
The Auction Agent after each Auction will pay a service charge from funds
provided by each Fund to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for
38
any Special Dividend Period shall be determined by mutual consent of a Fund and
any such Broker-Dealer or Broker-Dealers and shall be based upon a selling
concession that would be applicable to an underwriting of fixed or variable rate
preferred shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the Dividend Period with respect to such
Auction. For the purposes of the preceding sentence, the APS will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have
been made by Beneficial Owners that were acquired by such Beneficial Owners
through such Broker-Dealer or (ii) the subject of the following Orders submitted
by such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted
in such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders
in Auctions for its own account, unless a Fund notifies all Broker-Dealers that
they no longer may do so; provided that Broker-Dealers may continue to submit
Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own
account in any Auction of APS, it may have knowledge of Orders placed through it
in that Auction and therefore have an advantage over other Bidders, but such
Broker-Dealer would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the APS. One or
more registered certificates for all of the shares of each series of APS
initially will be registered in the name of Cede & Co., as nominee of the
Securities Depository. The certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
the APS contained in the Amended By-Laws. Cede & Co. initially will be the
holder of record of all APS, and Beneficial Owners will not be entitled to
receive certificates representing their ownership interest in such shares. The
Securities Depository will maintain lists of its participants and will maintain
the positions (ownership interests) of the APS held by each Agent Member,
whether as the Beneficial Owner thereof for its own account or as nominee for
the Beneficial Owner thereof. Payments made by each Fund to holders of APS will
be duly made by making payments to the nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Amended By-Laws set
forth in Appendix E to each Fund's Statement of Additional Information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
the APS offered hereby for each Dividend Period for such shares (other than the
Initial Dividend Period therefor) will be held on the last Business Day
preceding the first day of such Dividend Period, which first day is also the
Dividend Payment Date for the preceding Dividend Period (the date of each
Auction being referred to herein as an "Auction Date"). Auctions for the APS for
Dividend Periods after the Initial Dividend Period normally will be held with
respect to a Fund on every day set forth below after the preceding Dividend
Payment Date, and each subsequent Dividend Period normally will begin on the
following day set forth below (also a Dividend Payment Date):
INITIAL
FIRST DIVIDEND INITIAL
LAUNCH PRICING SETTLEMENT AUCTION PAYMENT RATE
DATE DATE DATE DATE DATE PERIOD
---------- ---------- ---------- ---------- ---------- -------
National Fund
Series A.............
Series B.............
Series C.............
Series D.............
Series E.............
39
INITIAL
FIRST DIVIDEND INITIAL
LAUNCH PRICING SETTLEMENT AUCTION PAYMENT RATE
DATE DATE DATE DATE DATE PERIOD
---------- ---------- ---------- ---------- ---------- -------
California
Series A.............
Series B.............
New York
Series A.............
Series B.............
The Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. See "Description
of APS -- Dividends and Dividend Periods" for information concerning the
circumstances under which a Dividend Payment Date may fall on a date other than
the days specified above, which may affect the Auction Date.
Except as noted below, whenever a Fund intends to include any net capital
gains or other income subject to federal income tax or relevant state taxes
("taxable income") in any dividend on the APS, the Fund will notify the Auction
Agent of the amount to be so included at least five Business Days prior to the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from a Fund, in
turn it will notify each Broker-Dealer, who, on or prior to such Auction Date,
in accordance with its Broker-Dealer Agreement, will notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed to be interested
in submitting an Order in the Auction to be held on such Auction Date. Each Fund
also may include such income in a dividend on the APS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend; provided that each Fund will notify the
Auction Agent of the additional amounts to be included in such dividend at least
five Business Days prior to the applicable Dividend Payment Date. See
"Description of APS -- Dividends and Dividend Periods -- Additional Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date for a series of APS:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone
orders ("Orders") with respect to a series of APS as follows:
(i) Hold Order -- indicating the number of outstanding APS, if any,
that such Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for the next Dividend Period for such shares;
(ii) Bid -- indicating the number of outstanding APS, if any, that
such Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is not less
than the rate per annum then specified by such Beneficial Owner; and/or
(iii) Sell Order -- indicating the number of outstanding APS, if
any, that such Beneficial Owner offers to sell without regard to the
Applicable Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of APS to determine whether such Potential Beneficial Owners desire
to submit Bids indicating the number of APS which they offer to purchase
provided that the Applicable Rate for the next Dividend Period for such
shares is not less than the rates per annum specified in such Bids.
A Beneficial Owner or a Potential Beneficial Owner placing an Order,
including a Broker-Dealer acting in such capacity for its own account, is
hereinafter referred to as a "Bidder" and collectively as "Bidders." Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-
40
Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission
Deadline on any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. For information concerning the priority given to different types
of Orders placed by Beneficial Owners, see "Submission of Orders by Broker-
Dealers to Auction Agent" below.
The Maximum Applicable Rate for the APS will be the Applicable Percentage
of the Reference Rate. The Auction Agent will round each applicable Maximum
Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum,
with any such number ending in five ten-thousandths of one percent being rounded
upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent
will not round the applicable Reference Rate as part of its calculation of the
Maximum Applicable Rate.
The Maximum Applicable Rate for the APS will depend on the credit rating or
ratings assigned to such shares. The Applicable Percentage will be determined
based on (i) the credit ratings assigned on such date to such shares by Moody's
and S&P (or if Moody's or S&P shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency), and (ii) whether a
Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on the APS as follows:
PERCENTAGE OF APPLICABLE PERCENTAGE OF
REFERENCE RATE -- REFERENCE RATE --
MOODY'S CREDIT RATINGS S&P CREDIT RATINGS NO NOTIFICATION NOTIFICATION
---------------------- ------------------ ----------------- ------------------------
Aa3 or Above AA- or higher 110% 150%
A3 to A1 A- to A+ 125 160
Baa3 to Baa1 BBB- to BBB+ 150 250
Below Baa3 Below BBB- 200 275
There is no minimum Applicable Rate in respect of any Dividend Period.
Each Fund will take all reasonable action necessary to enable Moody's and
S&P to provide a rating for the APS. If Moody's and S&P shall not make such a
rating available, the Underwriters or their affiliates and successors, after
consultation with a Fund, will select another Rating Agency (a "Substitute
Rating Agency") to act as a Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares."
Neither a Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. A Broker-Dealer also may
hold APS in its own account as a Beneficial Owner. A Broker-Dealer thus may
submit Orders to the Auction Agent as a Beneficial Owner or a Potential
Beneficial Owner and therefore participate in an Auction as an Existing Holder
or Potential Holder on behalf of both itself and its customers. Any Order placed
with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner
or a Potential Beneficial Owner will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent
an Order in respect of any APS held by it or its customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of APS held by it, as described
in the next paragraph. Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders
41
and Potential Holders also applies to the underlying beneficial ownership
interests represented thereby. For information concerning the priority given to
different types of Orders placed by Existing Holders, see "Submission of Orders
by Broker-Dealers to Auction Agent." Each purchase or sale in an Auction will be
settled on the Business Day next succeeding the Auction Date at a price per
share equal to $25,000. See "Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding APS
held by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period of 91 days or less) and a Sell
Order (in the case of an Auction relating to a Special Dividend Period of longer
than 91 days) to have been submitted on behalf of such Beneficial Owner covering
the number of outstanding the APS held by such Beneficial Owner and not subject
to Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the
Dividend Period next succeeding the Auction automatically shall be the same
length as the immediately preceding Dividend Period, and the Applicable Rate for
the next Dividend Period for all the APS will be 40% of the Reference Rate on
the date of the applicable Auction (or 60% of such rate if a Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on the APS).
For the purposes of an Auction, the APS for which each Fund shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust or segregated in an account at a Fund's custodian bank for the benefit
of the Auction Agent, as set forth under "Description of APS -- Redemption,"
will not be considered as outstanding and will not be included in such Auction.
Pursuant to the Amended By-Laws of the Fund, each Fund will be prohibited from
reissuing and its affiliates (other than the Underwriter) will be prohibited
from transferring (other than to a Fund) any APS they may acquire. Neither a
Fund nor any affiliate of the Fund (other than the Underwriter) may submit an
Order in any Auction, except that an affiliate of the Fund that is a
Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by a Fund) as the Existing Holder
or Potential Holder in respect of the APS subject to such Orders. Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%. If one or more Orders
of an Existing Holder are submitted to the Auction Agent and such Orders cover
in the aggregate more than the number of outstanding APS held by such Existing
Holder, such Orders will be considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding APS held by such Existing Holder, provided that if
more than one Hold Order is submitted by such Existing Holder and the
number of APS subject to such Hold Orders exceeds the number of outstanding
APS held by such Existing Holder, the number of APS subject to each of such
Hold Orders will be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of outstanding APS held by such
Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding APS held by such Existing Holder over the number of outstanding
APS subject to any Hold Order referred to in clause (i) above (and if more
than one Bid submitted by
42
such Existing Holder specifies the same rate per annum and together they
cover more than the remaining number of shares that can be the subject of
valid Bids after application of clause (i) above and of the foregoing
portion of this clause (ii) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids will be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of outstanding shares); and the number of outstanding
shares, if any, subject to Bids not valid under this clause (ii) shall be
treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over
the sum of the number of APS subject to Hold Orders referred to in clause
(i) above and the number of APS subject to valid Bids by such Existing
Holder referred to in clause (ii) above; provided that, if more than one
Sell Order is submitted by any Existing Holder and the number of APS
subject to such Sell Orders is greater than such excess, the number of APS
subject to each of such Sell Orders will be reduced pro rata so that such
Sell Orders, in the aggregate, will cover exactly the number of APS equal
to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of APS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS") and
whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of Potential Holders with rates per annum not higher
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids of Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made,
the Auction Agent will determine the lowest rate per annum specified in the
Submitted Bids (the "Winning Bid Rate") which would result in the number of
shares subject to Submitted Bids specifying such rate per annum or a lower rate
per annum being at least equal to the Available APS. If Sufficient Clearing Bids
have been made, the Winning Bid Rate will be the Applicable Rate for the next
Dividend Period for the APS then outstanding. If Sufficient Clearing Bids have
not been made (other than because all outstanding APS are the subject of
Submitted Hold Orders), the Dividend Period next following the Auction
automatically will be a 7-Day Dividend Period, and the Applicable Rate for such
Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, of the APS subject to such Submitted Sell Orders. See
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares." Thus, under some circumstances, Beneficial Owners may not
have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under "Determination
of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and subject
to the discretion of the Auction Agent to round, the Auction Procedures include
a pro rata allocation of shares for purchase and sale, which may result in an
Existing Holder continuing to hold or selling or a Potential Holder purchasing,
a number of shares of a series of APS that is fewer than the number of shares of
such series specified in its Order. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer Orders will be required to make
appropriate pro rata
43
allocations among their respective customers. See each Fund's Amended By-Laws
set forth in Appendix E to each Fund's Statement of Additional Information.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the Applicable
Rate for the next Dividend Period for the related APS by telephone at
approximately 3:00 p.m., New York City time, on the Auction Date for such
Auction. Each such Broker-Dealer that submitted an Order for the account of a
customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling APS as a result of the Auction and will advise each
customer purchasing or selling APS to give instructions to its Agent Member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate.
In accordance with the Securities Depository's normal procedures, on the
day after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of APS as determined in such Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to APS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the APS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the Auction
Agent against delivery of such certificates.
The following is a simplified example of how a typical Auction works.
Assume that a Fund has 1,000 outstanding APS and three current holders. The
three current holders and three potential holders submit orders through
broker-dealers at the Auction:
Current Holder A.............. Owns 500 shares, wants to sell Bid order of 2.1% rate
all 500 shares if Applicable for all 500 shares
Rate is less than 2.1%
Current Holder B.............. Owns 300 shares, wants to hold Hold Order -- will take
the Applicable Rate
Current Holder C.............. Owns 200 shares, wants to sell Bid order of 1.9% rate
all 200 shares if Applicable for all 200 shares
Rate is less than 1.9%
Potential Holder D............ Wants to buy 200 shares Places order to buy at
or above 2.0%
Potential Holder E............ Wants to buy 300 shares Places order to buy at
or above 1.9%
Potential Holder F............ Wants to buy 200 shares Places order to buy at
or above 2.1%
The lowest dividend rate that will result in all 1,000 APS continuing to be
held is 2.0% (the offer by D). Therefore, the Applicable Rate will be 2.0%.
Current Holders B and C will continue to own their shares. Current Holder A will
sell its shares because A's dividend rate bid was higher than the Applicable
Rate. Potential Holder D will buy 200 shares and Potential Holder E will buy 300
shares because their bid rates were at or below the Applicable Rate. Potential
Holder F will not buy shares because its bid rate was above the Applicable Rate.
44
SECONDARY MARKET TRADING AND TRANSFER OF APS
The Broker-Dealers may maintain a secondary trading market in the APS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long-Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
TAXES
GENERAL
Each Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as a
Fund so qualifies, in any taxable year in which it distributes at least 90% of
the sum of its investment company taxable income (consisting generally of
taxable net investment income, net short-term capital gain and net realized
gains from certain hedging transactions) and its net tax-exempt interest (the
excess of its gross tax-exempt interest over certain disallowed deductions),
that Fund (but not its shareholders) will not be subject to federal income tax
to the extent that it distributes its investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss). Each Fund intends to distribute substantially all of such income
and gain each year.
The APS will constitute stock of each Fund, and distributions by a Fund
with respect to its APS (other than distributions in redemption of APS that are
treated as exchanges of stock under Section 302(b) of the Code) thus will
constitute dividends to the extent of that Fund's current and accumulated
earnings and profits as calculated for federal income tax purposes. It is
possible, however, that the Internal Revenue Service (the "IRS") might take a
contrary position, asserting, for example, that the APS constitute debt of each
Fund. If this position were upheld, the discussion of the treatment of
distributions below would not apply. Instead, distributions by each Fund to
holders of APS would constitute interest, whether or not they exceeded the
earnings and profits of each Fund, would be included in full in the income of
the recipient and would be taxed as ordinary income. Kirkpatrick & Lockhart LLP,
counsel to each Fund, believes that such a position, if asserted by the IRS,
would be unlikely to prevail if the issue were properly litigated.
Each dividend distribution ordinarily will constitute income exempt from
federal income tax (i.e., qualify as an "exempt-interest" dividend, which is
excludable from the shareholder's gross income). A portion of dividends
attributable to interest on certain municipal obligations, however, may be a
Preference Item. Furthermore, exempt-interest dividends are included in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includible in gross income subject to federal income
tax. Distributions of any taxable net investment income and net short-term
capital gain will be taxable as ordinary income. Finally, distributions of each
Fund's net capital gain, if any, will be taxable to shareholders as long-term
capital gains, regardless of the length of time they held their shares.
Distributions, if any, in excess of a Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after that basis has
been reduced to zero, will constitute capital gains to the shareholder (assuming
the shares are held as a capital asset).
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
45
Each Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including tax-exempt interest and net capital gain. A class's proportionate
share of a particular type of income for a year is determined according to the
percentage of total dividends paid by the RIC during that year to the class.
Thus, each Fund is required to allocate a portion of its net capital gain and
other taxable income to the APS. Each Fund generally will notify the Auction
Agent of the amount of any net capital gain and other taxable income to be
included in any dividend on the APS prior to the Auction establishing the
Applicable Rate for that dividend. Except for the portion of any dividend that
it informs the Auction Agent will be treated as net capital gain or other
taxable income, each Fund anticipates that the dividends paid on the APS will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to a Fund's APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Fund and the
total dividends paid by the Fund on its Common Shares and the APS during a
taxable year, but taxable distributions generally are not expected to be
significant. The tax treatment of Additional Dividends also may affect each
Fund's calculation of each class's allocable share of capital gains and other
taxable income. See "Tax Treatment of Additional Dividends."
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart LLP,
counsel to each Fund, under current law the manner in which each Fund intends to
allocate items of tax-exempt income, net capital gain, and other taxable income,
if any, among each Fund's Common Shares and APS will be respected for federal
income tax purposes. It is possible that the IRS could disagree with counsel's
opinion and attempt to reallocate each Fund's net capital gain or other taxable
income. In the event of such recharacterization, however, no Fund will be
required to make payments to such shareholders to offset the tax effect of such
reallocation. In the event of such a reallocation, some of the dividends
identified by a Fund as exempt-interest dividends to holders of APS may be
recharacterized as additional net capital gain or other taxable income. Such an
allocation may happen as a result of (i) the redemption of all or a portion of
the outstanding APS, (ii) the liquidation of the Fund or (iii) a debt obligation
believed to be a Municipal Obligation proving to be an obligation subject to
federal income tax and/or a relevant state tax (the amount of any of such
allocations referred to herein as a "Retroactive Taxable Allocation").
Kirkpatrick & Lockhart LLP has advised each Fund that, in its opinion, if the
IRS were to challenge in court the Fund's allocations of income and gain and the
issue were properly litigated, the IRS would be unlikely to prevail. A holder
should be aware, however, that the opinion of Kirkpatrick & Lockhart LLP
represents only its best legal judgment and is not binding on the IRS or the
courts.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry APS is not deductible for federal income tax purposes to the extent
that interest relates to exempt-interest dividends received from the Fund.
If at any time when APS are outstanding a Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of Common Shares until the asset coverage is restored.
See "Description of APS -- Dividends and Dividend Periods -- Restrictions on
Dividends and Other Payments." Such a suspension may prevent a Fund from
distributing at least 90% of the sum of its investment company taxable income
and net tax-exempt interest and may, therefore, jeopardize the Fund's
qualification for taxation as a RIC. Upon any failure to meet the asset coverage
requirements of the 1940 Act, a Fund, in its sole discretion, may redeem APS in
order to maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify for
treatment as a RIC. See "Description of APS -- Redemption." There can be no
assurance, however, that any such action would achieve that objective.
Certain of each Fund's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require a Fund to recognize income or gain without receiving cash with which to
make distributions in the
46
amounts necessary to satisfy the requirements for maintaining RIC status and for
avoiding income and excise taxes. Each Fund will monitor its transactions and
may make certain tax elections in order to mitigate the effect of these rules
and prevent disqualification of the Fund as a RIC.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If a Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of APS who are subject to the Retroactive Taxable
Allocation. See "Description of APS -- Dividends and Dividend
Periods -- Additional Dividends." The federal income tax consequences of
Additional Dividends under existing law are uncertain. An Additional Dividend
generally will be designated by each Fund as an exempt-interest dividend except
to the extent net capital gain or other taxable income is allocated thereto as
described above. A Fund will not pay a further Additional Dividend with respect
to any taxable portion of an Additional Dividend.
SALES OF APS
The sale of APS (including transfers in connection with a redemption or
repurchase of APS) will be a taxable transaction for federal income tax
purposes. A selling shareholder generally will recognize gain or loss equal to
the difference between the amount received and the holder's adjusted tax basis
in the APS. If the APS are held as a capital asset, the gain or loss will be a
capital loss and will be long-term if the APS have been held for more than one
year. Any loss realized on a disposition of APS held for six months or less will
be disallowed to the extent of any exempt-interest dividends received with
respect to those APS and any such loss that is not disallowed will be treated as
a long-term, rather than a short-term, capital loss to the extent of any capital
gain distributions received with respect to those APS. A shareholder's holding
period for APS is suspended for any periods during which the shareholder's risk
of loss is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options, sales
contracts or short sales. Any loss realized on a sale or exchange of APS will be
disallowed to the extent those APS are replaced by other APS within a period of
61 days beginning 30 days before and ending 30 days after the date of
disposition of the original APS. In that event, the basis of the replacement APS
will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
Each Fund is required to withhold 30% of all taxable dividends, capital
gain distributions and repurchase proceeds payable to any individuals and
certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number. Withholding at that rate from taxable
dividends and capital gain distributions is also required for such shareholders
who fail to provide certain certifications or otherwise are subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against the
shareholder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
STATE TAXES
California Taxes. In the opinion of special California tax counsel, under
California law, dividends paid by the California Fund and designated by it as
tax-exempt are exempt from California state personal income tax on individuals
who reside in California to the extent such dividends are derived from interest
payments on Municipal Obligations exempt from California state personal income
taxes, provided that a least 50% of the assets of the California Fund at the
close of each quarter of its taxable year are invested in obligations the
interest on which is exempt under either federal or California law from taxation
by the state of California. Distributions of short-term capital gains are
treated as ordinary income, and distributions of long-term capital gain are
treated as long-term capital gains taxable at ordinary income rates under the
California state personal income tax.
47
New York Taxes. In the opinion of special New York tax counsel, under New
York law, dividends paid by the New York Fund are exempt from New York State and
New York City personal income tax applicable to individuals who reside in New
York State and New York City to the extent such dividends are excluded from
gross income for federal income tax purposes and are derived from interest
payments on tax-exempt obligations issued by or on behalf of New York State and
its political subdivisions and agencies and the governments of Puerto Rico, the
U.S. Virgin Islands and Guam and other territories. Other distributions from the
New York Fund, including distributions derived from taxable ordinary income and
net short-term and long-term capital gains, are generally not exempt from New
York State and City personal income tax. Distributions to a corporate holder of
APS will be subject to New York State corporate franchise tax and New York City
general corporation tax.
The foregoing briefly summarizes some of the important federal income tax
and state tax consequences of investing in the APS and reflects the federal and
applicable state and local tax laws, as of the date of this Prospectus and does
not address special tax rules applicable to certain types of investors, such as
corporate and foreign investors. Other federal, state or local tax
considerations may apply to a particular investor, including state alternative
minimum tax. Investors should consult their tax advisers.
DESCRIPTION OF CAPITAL STRUCTURE
Each Fund is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
July 2, 2002 for the National Fund and dated July 8, 2002 for the California
Fund and the New York Fund (each a "Declaration of Trust"). Each Declaration of
Trust provides that the Trustees of each Fund may authorize separate classes of
shares of beneficial interest. The Trustees of each Fund have authorized an
unlimited number of shares of beneficial interest stock, par value $0.01 per
share, all of which shares were initially classified as Common Shares. The
Declaration of Trust also authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including Preferred
Shares, having a par value of $0.01 per share, in one or more series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the Shareholders. For a description of the APS,
see "Description of APS." The following table shows the amount of (i) shares
authorized, (ii) shares held by a Fund for its own account and (iii) shares
outstanding, for each class of authorized securities of each Fund as of October
, 2002.
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
-------------- ----------------- ---------------- ----------------
NATIONAL FUND
Common Shares................................ Unlimited -0- 64,606,667
Auction Preferred Shares
Series A................................... 4,740 -0- -0-
Series B................................... 4,740 -0- -0-
Series C................................... 4,740 -0- -0-
Series D................................... 4,740 -0- -0-
Series E................................... 4,740 -0- -0-
48
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
-------------- ----------------- ---------------- ----------------
CALIFORNIA FUND
Common Shares................................ Unlimited -0- 21,621,667
Auction Preferred Shares
Series A................................... 3,900 -0- -0-
Series B................................... 3,900 -0- -0-
NEW YORK FUND
Common Shares................................ Unlimited -0- 15,661,667
Auction Preferred Shares
Series A................................... 2,850 -0- -0-
Series B................................... 2,850 -0- -0-
Holders of Common Shares are entitled to share equally in dividends
declared by a Board of Trustees payable to holders of Common Shares and in the
net assets of each Fund available for distribution to holders of Common Shares
after payment of the preferential amounts payable to holders of any outstanding
Preferred Shares. Neither holders of Common Shares nor holders of Preferred
Shares have pre-emptive or conversion rights and Common Shares are not
redeemable. Upon liquidation of a Fund, after paying or adequately providing for
the payment of all liabilities of the Fund and the liquidation preference with
respect to any outstanding preferred shares, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the holders of the Common Shares. Each Declaration of Trust provides that
Shareholders are not liable for any liabilities of a Fund, requires inclusion of
a clause to that effect in every agreement entered into by the Fund and
indemnifies shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of a
Fund as though they were general partners, the provisions of each Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.
Holders of Common Shares are entitled to one vote for each share held and
will vote with the holders of any outstanding APS or other Preferred Shares on
each matter submitted to a vote of holders of Common Shares, except as described
under "Description of APS -- Voting Rights."
Shareholders are entitled to one vote for each share held. The Common
Shares, APS and any other Preferred Shares do not have cumulative voting rights,
which means that the holders of more than 50% of the Common Shares, APS and any
other Preferred Shares voting for the election of Trustees can elect all of the
Trustees standing for election by such holders, and, in such event, the holders
of the remaining Common Shares, APS and any other Preferred Shares will not be
able to elect any of such Trustees.
So long as any APS or any other Preferred Shares are outstanding, holders
of Common Shares will not be entitled to receive any dividends of or other
distributions from each Fund, unless at the time of such declaration, (1) all
accrued dividends on preferred shares or accrued interest on borrowings has been
paid and (2) the value of a Fund's total assets (determined after deducting the
amount of such dividend or other distribution), less all liabilities and
indebtedness of the Fund not represented by senior securities, is at least 300%
of the aggregate amount of such securities representing indebtedness and at
least 200% of the aggregate amount of securities representing indebtedness plus
the aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, each Fund is required to comply
with other asset coverage requirements as a condition of the Fund obtaining a
rating of the preferred shares from a Rating Agency. These requirements include
an asset
49
coverage test more stringent than under the 1940 Act. See "Description of
APS -- Dividends and Dividend Periods -- Restrictions on Dividends and Other
Payments."
Each Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Common Shares of each Fund commenced trading on the AMEX on August 28,
2002. At October 18, 2002, the net asset value per share of Common Shares and
the closing price per share of Common Shares on the AMEX were as follows:
National Fund -- $13.94, $14.50; California Fund -- $13.78, $14.30; and New York
Fund -- $14.00, $14.35.
PREFERRED SHARES
Under the 1940 Act, each Fund is permitted to have outstanding more than
one series of Preferred Shares as long as no single series has priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Neither holders of Common Shares nor holders of Preferred Shares have
pre-emptive rights to purchase any APS or any other Preferred Shares that might
be issued. It is anticipated that the net asset value per share of the APS will
equal its original purchase price per share plus accumulated dividends per
share.
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
Anti-Takeover Provisions in the Declaration of Trust. Each Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of a Fund or to change the
composition of its Board of Trustees, and could have the effect of depriving
holders of Common Shares of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. These provisions may have the effect of discouraging
attempts to acquire control of a Fund, which attempts could have the effect of
increasing the expenses of the Fund and interfering with the normal operation of
the Fund. Each Board of Trustees is divided into three classes, with the term of
one class expiring at each annual meeting of holders of Common Shares and
Preferred Shares. At each annual meeting, one class of Trustees is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the Board of Trustees. A Trustee may be removed from office
only for cause by a written instrument signed by the remaining Trustees or by a
vote of the holders of at least two-thirds of the class of shares of each Fund
that elected such Trustee and is entitled to vote on the matter.
In addition, each Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of a Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly and whether alone or together
with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class of beneficial interest of each Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of a Fund or any subsidiary of a Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of a Fund to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of a Fund to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to a Fund or any subsidiary thereof, in
exchange for securities of the Fund, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
50
Each Board of Trustees has determined that provisions with respect to the
Board and the 75% voting requirements described above, which voting requirements
are greater than the minimum requirements under Massachusetts law or the 1940
Act, are in the best interest of holders of Common Shares and Preferred Shares
generally. Reference should be made to the Declaration of Trust on file with the
SEC for the full text of these provisions.
Conversion to Open-End Fund. Each Fund may be converted to an open-end
investment company at any time if approved by the lesser of (i) two-thirds or
more of the Fund's then outstanding Common Shares and Preferred Shares (if any),
each voting separately as a class, or (ii) more than 50% of the then outstanding
Common Shares and Preferred Shares (if any), voting separately as a class if
such conversion is recommended by at least 75% of the Trustees then in office.
If approved in the foregoing manner, conversion of each Fund could not occur
until 90 days after the Shareholders' meeting at which such conversion was
approved and would also require at least 30 days' prior notice to all
Shareholders. The composition of each Fund's portfolio likely would prohibit it
from complying with regulations of the SEC applicable to open-end investment
companies. Accordingly, conversion likely would require significant changes in
each Fund's investment policies and liquidation of a substantial portion of its
relatively illiquid portfolio. Conversion of each Fund to an open-end investment
company also would require the redemption of any outstanding Preferred Shares
and could require the repayment of borrowings. Each Board of Trustees believes,
however, that the closed-end structure is desirable, given the Fund's investment
objective and policies. Investors should assume, therefore, that it is unlikely
that the Board of Trustees would vote to convert a Fund to an open-end
investment company.
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the Underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement for each Fund dated the date hereof (each an "Underwriting
Agreement"), each Underwriter named below has severally agreed to purchase, and
the Fund has agreed to sell to such Underwriter, the number of APS set forth
opposite the name of such Underwriter.
NATIONAL FUND
--------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E
-------- -------- -------- -------- --------
Salomon Smith Barney Inc.....................
UBS Warburg LLC..............................
A.G. Edwards & Sons, Inc.....................
Prudential Securities Incorporated...........
Wachovia Securities, Inc.....................
Total......................................
CALIFORNIA FUND NEW YORK FUND
----------------------------- -----------------------------
SERIES A SERIES B SERIES A SERIES B
-------- -------- -------- --------
Salomon Smith Barney Inc.....................
UBS Warburg LLC..............................
A.G. Edwards & Sons, Inc.....................
Prudential Securities Incorporated...........
Wachovia Securities, Inc.....................
Total......................................
Each Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The Underwriters
are obligated to purchase all the APS if they purchase any of the APS.
The Underwriters propose to offer some of the APS directly to the public at
the public offering price set forth on the cover page of this Prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $ per share. The sales load the Funds will pay of $ per share
is equal to % of the initial offering price. One half of the sales load
from this offering will be paid to certain Underwriters based on their
participation in the offering of the Funds' Common Shares. The
51
Underwriters may allow, and dealers may reallow, a concession not to exceed
$ per share on sales to other dealers. If all of the APS are not sold at
the initial offering price, the Underwriters may change the public offering
price and the other selling terms. Investors must pay for any APS purchased on
or before , 2002.
Each Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transaction after they have
ceased to be Underwriters. The Underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, each Fund, subject to applicable law.
Each Fund anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
Information.
Each Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities arising under the Securities Act of
1933, or to contribute payments the Underwriters may be required to make for any
of these liabilities. Insofar as indemnifications for liability arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of each Fund pursuant to the foregoing provisions, or
otherwise, each Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, a Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
The settlement date for the purchase of the APS will be , 2002, as
agreed upon by the Underwriters, each Fund and the Adviser pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA
02116 is the custodian of each Fund and will maintain custody of the securities
and cash of each Fund. IBT maintains each Fund's general ledger and computes net
asset value per share at least weekly. IBT also attends to details in connection
with the sale, exchange, substitution, transfer and other dealings with each
Fund's investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027 is the transfer agent
and dividend disbursing agent of each Fund.
LEGAL OPINIONS
Certain legal matters in connection with the APS will be passed upon for
each Fund by Kirkpatrick & Lockhart LLP, Boston, Massachusetts, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher
& Bartlett may rely as to certain matters of Massachusetts law on the opinion of
Kirkpatrick & Lockhart LLP. Kirkpatrick & Lockhart LLP and Simpson Thacher &
Bartlett may rely as to certain matters of California law relating to the
California Fund, and New York law relating to the New York Fund, on the opinion
of Sidley Austin Brown & Wood LLP, New York, New York.
52
INDEPENDENT AUDITORS
Deloitte & Touche LLP, Boston, Massachusetts, is the independent auditor
for each Fund and will audit each Fund's financial statements.
ADDITIONAL INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the SEC. These
documents can be inspected and copied for a fee at the public reference
facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and Northeast Regional Office, Woolworth Building, 233
Broadway, New York, New York 10013-2409. Reports, proxy statements and other
information concerning each Fund can also be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified by this reference.
Additional information regarding each Fund and the APS is contained in the
Registration Statement (including amendments, exhibits and schedules) on Form
N-2 filed by each Fund with the SEC. The SEC maintains a Web site
(http://www.sec.gov) that contains each Fund's Registration statement, reports,
proxy and information statements and other information regarding registrants,
including each Fund, that file electronically with the SEC.
53
NATIONAL FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......... B-1
Trustees and Officers....................................... B-9
Investment Advisory and Other Services...................... B-13
Determination of Net Asset Value............................ B-15
Portfolio Trading........................................... B-15
Taxes....................................................... B-17
Other Information........................................... B-21
Independent Auditors........................................ B-21
Independent Auditors' Report................................ B-22
Financial Statements........................................ B-23
Appendix A: Ratings of Municipal Bonds...................... B-28
Appendix B: Tax Equivalent Yield Table...................... B-34
Appendix C: U.S. Territory Information...................... B-35
Appendix D: Description of Insurers......................... B-37
Appendix E: Amended By-Laws................................. B-40
CALIFORNIA FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......... B-1
Trustees and Officers....................................... B-9
Investment Advisory and Other Services...................... B-14
Determination of Net Asset Value............................ B-16
Portfolio Trading........................................... B-16
Taxes....................................................... B-18
Other Information........................................... B-22
Independent Auditors........................................ B-22
Independent Auditors' Report................................ B-23
Financial Statements........................................ B-24
Appendix A: Ratings of Municipal Bonds...................... B-30
Appendix B: Tax Equivalent Yield Table...................... B-36
Appendix C: California and U.S. Territory Information....... B-37
Appendix D: Description of Insurers......................... B-55
Appendix E: Amended By-Laws................................. B-58
54
NEW YORK FUND
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Investment Information and Restrictions.......... B-1
Trustees and Officers....................................... B-9
Investment Advisory and Other Services...................... B-13
Determination of Net Asset Value............................ B-15
Portfolio Trading........................................... B-15
Taxes....................................................... B-17
Other Information........................................... B-21
Independent Auditors........................................ B-22
Independent Auditors' Report................................ B-23
Financial Statements........................................ B-24
Appendix A: Ratings of Municipal Bonds...................... B-29
Appendix B: Tax Equivalent Yield Table...................... B-35
Appendix C: New York and U.S. Territory Information......... B-37
Appendix D: Description of Insurers......................... B-43
Appendix E: Amended By-Laws................................. B-46
55
GLOSSARY
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act APS Asset Coverage" has the meaning set forth on page of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page of this
Prospectus.
"Additional Dividend" has the meaning set forth on page of this
Prospectus.
"Adviser" means Eaton Vance Management.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more APS or on behalf of a Potential
Beneficial Owner.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"Amended By-Laws" means the By-laws of each Fund, as amended ,
2002, specifying the powers, preferences and rights of the APS. Each Fund's
Amended By-Laws are contained in Appendix E to the Fund's Statement of
Additional Information.
"Anticipation Notes" means the following municipal obligations: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on APS for any Dividend Period.
"APS" means the Auction Preferred Shares with a par value of $0.01 per
share and a liquidation preference of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared), of
a Fund.
"APS Basic Maintenance Amount" has the meaning set forth on page of this
Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page of
this Prospectus.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company, unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Trustees of each Fund or a duly authorized committee
thereof enters into an agreement with each to follow the Auction Procedures for
the purpose of determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the APS.
"Auction Agent Agreement" means the agreement entered into between each
Fund and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" has the meaning set forth on page of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Section 10 of each Fund's Amended By-Laws contained in Appendix E to each
Fund's Statement of Additional Information.
"Available APS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
56
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of APS or a Broker-Dealer that holds APS for its own account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of each Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by each Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Salomon Smith Barney Inc., UBS
Warburg LLC, A.G. Edwards & Sons, Inc., Prudential Securities Incorporated and
Wachovia Securities, Inc., pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.
"Cede & Co." means the nominee of DTC, and in whose name the shares of APS
initially will be registered.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the Common Shares, par value $0.01 per share, of each
Fund.
"Date of Original Issue" means, with respect to each APS, the date on which
such share first is issued by each Fund.
"Declaration of Trust" means the Agreement and Declaration of Trust of each
Fund.
"Discounted Value" of any asset of each means with respect to a Moody's
Eligible Assets or S&P Eligible Asset, the quotient of the market value thereof
divided by the applicable Moody's or S&P Discount Factor.
"Dividend Payment Date" has the meaning set forth on page of this
Prospectus.
"Dividend Periods" has the meaning set forth on page of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets and S&P Eligible Assets.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by each Fund that is listed as the holder of record of APS in the
records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Fund" means each Eaton Vance insured municipal bond fund listed on the
cover page of this Prospectus, each a Massachusetts business trust that is the
issuer of APS.
"General Obligation Bond" has the meaning set forth on page of this
Prospectus.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"IBT" means Investors Bank & Trust Company, the custodian of each Fund's
assets.
"Initial Dividend Payment Date" has the meaning set forth on page of this
Prospectus.
"Initial Dividend Period" means, with respect to the APS, the period from
and including the Date of Original Issue to but excluding the Initial Dividend
Payment Date of the APS.
57
"IRS" means the Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal federal income tax rate
applicable to an individual's or a corporation's ordinary income, whichever is
greater.
"Maximum Applicable Rate" has the meaning specified under "The
Auction -- Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Eligible Assets" has the meaning set forth on page of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
APS.
"Potential Holder" means any Broker-Dealer or any such other person as may
be permitted by each Fund, including any Existing Holder, who may be interested
in acquiring APS (or, in the case of an Existing Holder, additional APS).
"Preference Item" has the meaning set forth on page of this Prospectus.
"Preferred Shares" means preferred shares of beneficial interest, par value
$0.01 per share, of each Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S.
Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page
of this Prospectus.
"Response" has the meaning set forth on page of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page of
this Prospectus.
"S&P" means Standard & Poor's, or its successors.
"S&P Eligible Assets" has the meaning set forth on page of this
Prospectus.
58
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by each
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the APS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Short Term Dividend Period" has the meaning set forth on page of this
Prospectus.
"Special Dividend Period" has the meaning set forth on page of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of each Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the APS subject to such
Dividend Period shall not be subject to redemption at the option of a Fund and
(ii) a period (a "Premium Call Period"), consisting of a number of whole years
and determined by the Board of Trustees of each Fund, after consultation with
the Auction Agent and the Broker-Dealers, during each year of which the APS
subject to such Dividend Period shall be redeemable at a Fund's option at a
price per share equal to $25,000 plus accumulated but unpaid dividends plus a
premium expressed as a percentage of $25,000, as determined by the Board of
Trustees of each Fund after consultation with the Auction Agent and the
Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of
the Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
PaineWebber Incorporated, or its respective affiliates and successors, after
consultation with each Fund, to act as a substitute rating agency or substitute
rating agencies, as the case may be, to determine the credit ratings of the APS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any
date means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30 day High Grade Index (the
"Kenny Index"), or any successor index made available for the Business Day
immediately preceding such date but in any event not later than 8:30 a.m., New
York City time, on such date by Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of bonds the interest on
which is excludable for federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes a Preference Item, divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 a.m., New York
City time, on such date by Kenny Information Systems Inc. or any successor, the
Taxable Equivalent of the Short-Term Municipal Obligations Rate shall mean the
quotient of (A) the per annum rate expressed on an interest equivalent basis
equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the marginal tax rate noted above
(expressed as a decimal). A Fund may not
59
utilize a successor index to the Kenny Index unless S&P provides the Fund with
written confirmation that the use of such successor index will not adversely
affect the then-current S&P rating of the APS.
"Treasury Bonds" has the meaning set forth on page of this Prospectus.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page of this Prospectus.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
60
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EATON VANCE INSURED MUNICIPAL BOND FUND
4,740 SHARES, SERIES A
4,740 SHARES, SERIES B
4,740 SHARES, SERIES C
4,740 SHARES, SERIES D
4,740 SHARES, SERIES E
EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
3,900 SHARES, SERIES A
3,900 SHARES, SERIES B
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
2,850 SHARES, SERIES A
2,850 SHARES, SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
[Eaton Vance Logo]
------------
P R O S P E C T U S
October , 2002
------------
SALOMON SMITH BARNEY
UBS WARBURG
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
WACHOVIA SECURITIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 24, 2002
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER , 2002
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265
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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-21
Independent Auditors........................................ B-22
Independent Auditors' Report................................ B-23
Financial Statements........................................ B-29
Appendix A: Ratings of Municipal Bonds..................... B-40
Appendix B: Tax Equivalent Yield Table..................... B-46
Appendix C: New York and U.S. Territory Information........ B-48
Appendix D: Description of Insurers........................ B-54
Appendix E: Amended By-Laws................................ B-57
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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 NEW YORK MUNICIPAL BOND
FUND (THE "FUND") DATED , 2002, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-225-6265.
Capitalized terms used in this SAI and not otherwise defined have the
meanings given them in the Fund's Prospectus.
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
Municipal Obligations. Municipal obligations are issued to obtain funds
for various public and private purposes. Municipal obligations include long-term
obligations, which are often called municipal bonds, as well as tax-exempt
commercial paper, project notes and municipal notes such as tax, revenue and
bond anticipation notes of short maturity, generally less than three years.
Market rates of interest available with respect to municipal obligations may be
lower than those available with respect to taxable securities, although such
differences may be partially or wholly offset by the effects of federal income
tax on income derived from such taxable securities. While most municipal bonds
pay a fixed rate of interest semi-annually in cash, some bonds pay no periodic
cash interest but instead make a single payment at maturity representing both
principal and interest. Municipal obligations may be issued or subsequently
offered with interest coupons materially greater or less than those then
prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of municipal obligations the
interest on which is exempt from federal income tax and is not a tax preference
item for purposes of the alternative minimum tax ("AMT"): (i) certain "public
purpose" obligations (whenever issued), which include obligations issued
directly by state and local governments or their agencies to fulfill essential
governmental functions; (ii) certain obligations issued before August 8, 1986
for the benefit of non-governmental persons or entities; and (iii) certain
"private activity bonds" issued after August 7, 1986, which include "qualified
Section 501(c)(3) bonds" or refundings of certain obligations included in the
second category.
Interest on certain "private activity bonds" issued after August 7, 1986 is
exempt from regular federal income tax, but is treated as a tax preference item
that could subject the recipient to or increase the recipient's liability for
the AMT. For corporate shareholders, the Fund's distributions derived from
interest on all municipal obligations (whenever issued) is included in "adjusted
current earnings" for purposes of the AMT as applied to corporations (to the
extent not already included in alternative minimum taxable income as income
attributable to private activity bonds). In assessing the federal income tax
treatment of interest on any such obligation, the Fund will rely on an opinion
of the issuer's counsel (when available) obtained by the issuer or other
reliable authority and will not undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual
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 New York or the U.S. territories.
When the Fund does so, it will be sensitive to factors affecting New York 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 New York 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 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.
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 intend initially to invest
in inverse floaters, the Fund may do so at some point in the future. The Fund
will provide 30 days' written notice prior to any change in its policy in
investing in inverse floaters.
Interest Rate Swaps and Forward Rate Contracts. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. The Fund will only enter into interest rate swaps on
a net basis, i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The Fund may also enter forward rate contracts. Under these contracts,
the buyer locks in an interest rate at a future settlement date. If the interest
rate on the settlement date exceeds the lock rate, the buyer pays the seller the
difference between the two rates. If the lock rate exceeds the interest rate on
the settlement date, the seller pays the buyer the difference between the two
rates. Any such gain received by the Fund would be taxable.
If the other party to an interest rate swap or forward rate contract
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The net amount of the excess, if
any, of the Fund's obligations over its entitlements will be maintained in a
segregated account by the Fund's custodian. The Fund will not enter into any
interest rate swap or forward rate contract unless the claims-paying ability of
the other party thereto is considered to be investment grade by the investment
adviser. If there is a default by the other party to such a transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction. These instruments are traded in the over-the-counter market.
Liquidity and Protective Put Options. The Fund may also enter into a
separate agreement with the seller of a security or some other person granting
the Fund the right to put the security to the seller thereof or the other person
at an agreed upon price. Such agreements are subject to the risk of default by
the other party, although the Fund intends to limit this type of transaction to
institutions (such as banks or securities dealers) which the Adviser believes
present minimal credit risks. The Fund would engage in this type of transaction
to facilitate portfolio liquidity or (if the seller so agrees) to hedge against
rising interest rates. There is no assurance that this kind of put option will
be available to the Fund or that selling institutions will be willing to permit
the Fund to exercise a put to hedge against rising interest rates. The Fund does
not expect to assign any value to any separate put option which may be acquired
to facilitate portfolio liquidity, inasmuch as the value (if any) of the put
will be reflected in the value assigned to the
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; or
(8) Invest more than 25% of its total assets in issuers in any one
industry.
For purposes of the Fund's investment restrictions, the determination of
the "issuer" of a municipal obligation which is not a general obligation bond
will be made by the Adviser on the basis of the characteristics of the
obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligation.
The Fund may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.
For purposes of construing restriction (8), securities of the U.S.
Government, its agencies, or instrumentalities are not considered to represent
industries. Municipal obligations backed by the credit of a governmental entity
are also not considered to represent industries. However, municipal obligations
backed only by the assets and revenues of non-governmental users may for this
purpose be deemed to be issued by such non-governmental users. The foregoing 25%
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
B-8
decrease resulting from a change in values, assets or other circumstances will
not compel the Fund to dispose of such security or other asset. Notwithstanding
the foregoing, the Fund must always be in compliance with the borrowing policies
set forth above.
TRUSTEES AND OFFICERS
The Trustees of the Fund are responsible for the overall management and
supervision of the affairs of the Fund. The Trustees and officers of the Fund
are listed below. Except as indicated, each individual has held the office shown
or other offices in the same company for the last five years. The business
address of each Trustee and officer is The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton
Vance Corp., "EV" refers to Eaton Vance, Inc., "BMR" refers to Boston Management
and Research and "EVD" refers to Eaton Vance Distributors, Inc. EVC is the
corporate parent of Eaton Vance. EV is the corporate trustee of Eaton Vance.
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) TERM OF OFFICE COMPLEX
WITH THE AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
------------ ----------- -------------- ------------------------ ----------- -------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee(2) Since 7/25/02 President and Chief 185 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). Ms.
Bibliowicz is an
interested person
because of her
affiliation with a
brokerage firm.
James B. Hawkes Vice Since 7/8/02 3 Chairman, President and 190 Director of EVC, EV
DOB: 11/9/41 President Years Chief Executive Officer and EVD
and of BMR, Eaton Vance and
Trustee(3) their corporate parent
and trustee (EVC and EV
respectively); Vice
President of EVD.
President and/or officer
of 190 investment
companies in the Eaton
Vance Fund Complex. Mr.
Hawkes is an interested
person because of his
positions with BMR,
Eaton Vance and EVC,
which are affiliates of
the Fund.
B-9
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) TERM OF OFFICE COMPLEX
WITH THE AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
------------ ----------- -------------- ------------------------ ----------- -------------------
NONINTERESTED TRUSTEES
Donald R. Dwight Trustee(2) Since 7/25/02 President of Dwight 190 Trustee/Director of
DOB: 3/26/31 3 Years Partners, Inc. the Royce Funds
(corporate relations and mutual funds
communications company). (consisting of 17
portfolios)
Samuel L. Hayes, III Trustee(3) Since 7/25/02 Jacob H. Schiff 190 Director of Tiffany
DOB: 2/23/35 3 Years Professor of Investment & Co. (specialty
Banking Emeritus, retailer) and
Harvard University Telect, Inc.
Graduate School of (telecommunication
Business Administration. services company)
Norton H. Reamer Trustee(4) Since 7/25/02 President, Unicorn 190 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(4) Since 7/25/02 Professor of Law, 185 None
DOB: 9/14/56 3 Years University of California
at Los Angeles School of
Law (since July 2001).
Formerly, Professor of
Law, Georgetown
University Law Center.
---------------
(1) Includes both master and feeder funds in master-feeder structure.
(2) Class I Trustee whose term expires in 2003.
(3) Class II Trustee whose term expires in 2004.
(4) Class III Trustee whose term expires in 2005.
B-10
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
POSITION(S) TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
NAME AND AGE WITH FUND LENGTH OF SERVICE DURING PAST FIVE YEARS
------------ -------------- ------------------ -----------------------------
Thomas J. Fetter............. President Since 7/8/02 Vice President of Eaton Vance
DOB: 8/20/43 and BMR. Officer of 126
investment companies managed
by Eaton Vance or BMR.
Robert B. MacIntosh.......... Vice President Since 7/8/02 Vice President of Eaton Vance
DOB: 1/22/57 and BMR. Officer of 125
investment companies managed
by Eaton Vance or BMR.
Alan R. Dynner............... Secretary Since 7/8/02 Vice President, Secretary and
DOB: 10/10/40 Chief Legal Officer of BMR,
Eaton Vance, EVD and EVC.
Officer of 190 investment
companies managed by Eaton
Vance or BMR.
James L. O'Connor............ Treasurer Since 7/8/02 Vice President of BMR, Eaton
DOB: 4/1/45 Vance and EVD. Officer of 112
investment companies managed
by Eaton Vance or BMR.
The Nominating Committee of the Board of Trustees of the Fund is comprised
of the Trustees who are not "interested persons" of the Fund as that term is
defined under the 1940 Act ("noninterested Trustees"). The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is comprised of noninterested Trustees of the Fund. The Trustees will,
when a vacancy exists or is anticipated, consider any nominee for Trustee
recommended by a shareholder if such recommendation is submitted to the Trustees
in writing and contains sufficient background information concerning the
individual to enable a proper judgment to be made as to such individual's
qualifications.
Messrs. Dwight (Chairman), Hayes and Reamer are members of the Audit
Committee of the Board of Trustees of the Fund. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection and
performance of the independent accountants, and reviewing matters relative to
accounting and auditing practices and procedures, accounting records, and the
internal accounting controls, of the Fund, and certain service providers.
Messrs. Dwight, Hayes and Reamer and Ms. Stout are members of the Special
Committee of the Board of Trustees of the Fund. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Fund, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Fund.
During the fiscal period ended September 30, 2002 the Fund's committees did
not meet. As of the date of this SAI, the Committees had not held any meetings.
In reviewing the approval of the investment advisory agreement between the
Fund and the investment adviser, the noninterested Trustees considered, among
other things, the following:
- A report comparing the fees and expenses of the Fund to a peer group of
funds;
- Information on the relevant peer group(s) of funds and appropriate
indices;
- The economic outlook and the general investment outlook in the relevant
investment markets;
- Eaton Vance's results and financial condition and the overall
organization of the investment adviser;
B-11
- Arrangements regarding the distribution of Fund shares;
- The procedures used to determine the fair value of the Fund's assets;
- The allocation of brokerage, including allocations to soft dollar
brokerage and allocations to firms that sell Eaton Vance fund shares;
- Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;
- The resources devoted to Eaton Vance's compliance efforts undertaken on
behalf of the funds it manages and the record of compliance with the
investment policies and restrictions and with policies on personal
securities transactions;
- The quality nature, cost and character of the administrative and other
non-investment management services provided by Eaton Vance and its
affiliates;
- Investment management staffing;
- Operating expenses (including transfer agency expenses) to be paid to
third parties; and
- Information to be provided to investors, including Fund's shareholders.
In addition to the factors mentioned above, the noninterested Trustees also
reviewed the level of the investment adviser's profits in respect of the
management of the Eaton Vance funds, including the Fund. The noninterested
Trustees considered the profits realized by Eaton Vance and its affiliates in
connection with the operation of the Fund. The noninterested Trustees also
considered Eaton Vance's profit margins in comparison with available industry
data.
The noninterested Trustees did not consider any single factor as
controlling in determining whether or not to approve the investment advisory
agreement(s). Nor are the items described herein all encompassing of the matters
considered by the noninterested Trustees. In assessing the information provided
by Eaton Vance and its affiliates, the noninterested Trustees also took into
consideration the benefits to shareholders of investing in a fund that is part
of large family of funds which provides a large variety of shareholder services.
Based on their consideration of all factors that it deemed material and
assisted by the advice of its independent counsel, the noninterested Trustees
concluded that the approval of the investment advisory agreement(s), including
the fee structure (described herein) is in the interests of shareholders.
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.
DOLLAR RANGE AGGREGATE DOLLAR RANGE OF EQUITY
OF EQUITY SECURITIES OWNED IN ALL REGISTERED
SECURITIES OWNED FUNDS OVERSEEN BY TRUSTEE IN THE
NAME OF TRUSTEE IN THE FUND EATON VANCE FUND COMPLEX
--------------- ---------------- ----------------------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz.................... None $10,001 -- $50,000
James B. Hawkes.......................... None over $100,000
NONINTERESTED TRUSTEES
Donald R. Dwight......................... None over $100,000
Samuel L. Hayes, III..................... None over $100,000
Norton H. Reamer......................... None over $100,000
Lynn A. Stout............................ None $10,001 -- $50,000
B-12
As of December 31, 2001, no noninterested Trustee or any of their immediate
family members owned beneficially or of record any class of securities of EVC,
EVD or any person controlling, controlled by or under common control with EVC or
EVD.
During the calendar years ended December 31, 2000 and December 31, 2001, no
noninterested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any
person controlling, controlled by or under common control with EVC or EVD;
2. Any direct or indirect material interest in any transaction or
series of similar transactions with (i) the Trust or any Fund; (ii) another
fund managed by EVC, distributed by EVD or a person controlling, controlled
by or under common control with EVC or EVD; (iii) EVC or EVD; (iv) a person
controlling, controlled by or under common control with EVC or EVD; or (v)
an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Trust or any
Fund; (ii) another fund managed by EVC, distributed by EVD or a person
controlling, controlled by or under common control with EVC or EVD; (iii)
EVC or EVD; (iv) a person controlling, controlled by or under common
control with EVC or EVD; or (v) an officer of any of the above.
During the calendar years ended December 31, 2000 and December 31, 2001, no
officer of EVC, EVD or any person controlling, controlled by or under common
control with EVC or EVD served on the Board of Directors of a company where a
noninterested Trustee of the Fund or any of their immediate family members
served as an officer.
Trustees of the Fund who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Fund in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Fund's assets, liabilities, and net income per share, and will not obligate the
Fund to retain the services of any Trustee or obligate the Fund to pay any
particular level of compensation to the Trustee. The Fund does not have a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Fund are paid by
the Fund. (The Trustees of the Fund who are members of the Eaton Vance
organization receive no compensation from the Fund.) For the period from the
commencement of operations, August 30, 2002 to the fiscal year ended September
30, 2002, the Trustees received no compensation. During the Fund's fiscal year
ending September 30, 2003, it is anticipated that the noninterested Trustees of
the Fund will earn the following compensation in their capacities as Trustees.
For the year ended December 31, 2001, the noninterested Trustees earned the
compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex(1).
JESSICA M. DONALD R. SAMUEL L. NORTON H. LYNN A.
SOURCE OF COMPENSATION BIBLIOWICZ DWIGHT HAYES, III REAMER STOUT
---------------------- ---------- --------- ---------- --------- --------
Fund*.................................. $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- -------- -------- --------
Fund Complex........................... $160,000 $162,500(2) $170,000 $160,000 $160,000(3)
-------- -------- -------- -------- --------
---------------
* Estimated
(1) As of October 18, 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.
B-13
INVESTMENT ADVISORY AND OTHER SERVICES
Eaton Vance, its affiliates and its predecessor companies have been
managing assets of individuals and institutions since 1924 and of investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies. Eaton Vance and its affiliates act as
adviser to a family of mutual funds, and individual and various institutional
accounts, including corporations, hospitals, retirement plans, universities,
foundations and trusts.
The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Fund
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; rating agency fees and preferred share remarketing
expenses; expenses of reports to shareholders, proxy statements and other
expenses of shareholders' meetings; insurance premiums; printing and mailing
expenses; interest, taxes and corporate fees; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with Eaton Vance; expenses
of conducting repurchase offers for the purpose of repurchasing Fund shares; and
investment advisory and administration fees. The Fund will also bear expenses
incurred in connection with any litigation in which the Fund is a party and any
legal obligation to indemnify its officers and Trustees with respect thereto, to
the extent not covered by insurance.
The Advisory Agreement with the Adviser 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. EV
serves as trustee of Eaton Vance. Eaton Vance and EV are subsidiaries of EVC, a
Maryland corporation and publicly-held holding company. EVC through its
subsidiaries and affiliates engages primarily in investment management,
administration and marketing activities. The Directors of EVC are James B.
Hawkes, John G. L. Cabot, Thomas E. Faust, Jr., Leo I. Higdon, Jr., John M.
Nelson, Vincent M. O'Reilly and Ralph Z. Sorenson. All shares of the outstanding
Voting Common Stock of EVC are deposited in a voting trust, the voting trustees
of which are Messrs. James B. Hawkes, Jeffrey P. Beale, Alan R. Dynner, Thomas
E. Faust, Jr., Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M.
Steul, Payson F. Swaffield, Michael W. Weilheimer and Wharton P. Whitaker (all
of whom are officers of Eaton Vance). 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.
B-14
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Fund and such banks.
Code of Ethics. The investment adviser and the Fund have adopted a Code of
Ethics governing personal securities transactions. Under the Code, Eaton Vance
employees may purchase and sell securities (including securities held by the
Fund) subject to certain pre-clearance and reporting requirements and other
procedures.
Investment Advisory Services. Under the general supervision of the Fund's
Board of Trustees, Eaton Vance will carry out the investment and reinvestment of
the assets of the Fund, will furnish continuously an investment program with
respect to the Fund, will determine which securities should be purchased, sold
or exchanged, and will implement such determinations. Eaton Vance will furnish
to the Fund investment advice and provide related office facilities and
personnel for servicing the investments of the Fund. Eaton Vance will compensate
all Trustees and officers of the Fund who are members of the Eaton Vance
organization and who render investment services to the Fund, and will also
compensate all other Eaton Vance personnel who provide research and investment
services to the Fund.
Administrative Services. Under the Administration Agreement, Eaton Vance
is responsible for managing the business affairs of the Fund, subject to the
supervision of the Fund's Board of Trustees. Eaton Vance will furnish to the
Fund all office facilities, equipment and personnel for administering the
affairs of the Fund. Eaton Vance will compensate all Trustees and officers of
the Fund who are members of the Eaton Vance organization and who render
executive and administrative services to the Fund, and will also compensate all
other Eaton Vance personnel who perform management and administrative services
for the Fund. Eaton Vance's administrative services include record keeping,
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 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 Common 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.
B-15
PORTFOLIO TRADING
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by the
Adviser. The Adviser is also responsible for the execution of transactions for
all other accounts managed by it. The Adviser places the portfolio security
transactions of the Fund and of all other accounts managed by it for execution
with many firms. The Adviser uses its best efforts to obtain execution of
portfolio security transactions at prices which are advantageous to the Fund and
at reasonably competitive spreads or (when a disclosed commission is being
charged) at reasonably competitive commission rates. In seeking such execution,
the Adviser will use its best judgment in evaluating the terms of a transaction,
and will give consideration to various relevant factors, including without
limitation the full range and quality of the executing firm's services, the
value of the brokerage and research services provided, the responsiveness of the
firm to the Adviser, the size and type of the transaction, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any.
Municipal obligations, including state obligations, purchased and sold by
the Fund are generally traded in the over-the-counter market on a net basis
(i.e., without commission) through broker-dealers and banks acting for their own
account rather than as brokers, or otherwise involve transactions directly with
the issuer of such obligations. Such firms attempt to profit from such
transactions by buying at the bid price and selling at the higher asked price of
the market for such obligations, and the difference between the bid and asked
price is customarily referred to as the spread. The Fund may also purchase
municipal obligations from underwriters, and dealers in fixed price offerings,
the cost of which may include undisclosed fees and concessions to the
underwriters. On occasion it may be necessary or appropriate to purchase or sell
a security through a broker on an agency basis, in which case the Fund will
incur a brokerage commission. Although spreads or commissions on portfolio
security transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, spreads or commissions exceeding
those which another firm might charge may be paid to firms who were selected to
execute transactions on behalf of the Fund and the Adviser's other clients for
providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Fund may
receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such compensation was reasonable in
relation to the value of the brokerage and research services provided. This
determination may be made on the basis of that particular transaction or on the
basis of overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, analytical, statistical and quotation services, data, information and
other services, products and materials which assist such advisers in the
performance of their investment responsibilities ("Research Services") from
broker-dealer firms which execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, the Adviser receives Research
Services from many broker-dealer firms with which the Adviser places the Fund's
transactions and from third parties with which these
B-16
broker-dealers have arrangements. These Research Services include such matters
as general economic, political, business and market information, industry and
company reviews, evaluations of securities and portfolio strategies and
transactions, proxy voting data and analysis services, technical analysis of
various aspects of the securities market, recommendations as to the purchase and
sale of securities and other portfolio transactions, financial, industry and
trade publications, news and information services, pricing and quotation
equipment and services, and research oriented computer hardware, software, data
bases and services. Any particular Research Service obtained through a
broker-dealer may be used by the Adviser in connection with client accounts
other than those accounts which pay commissions to such broker-dealer. Any such
Research Service may be broadly useful and of value to the Adviser in rendering
investment advisory services to all or a significant portion of its clients, or
may be relevant and useful for the management of only one client's account or of
a few clients' accounts, or may be useful for the management of merely a segment
of certain clients' accounts, regardless of whether any such account or accounts
paid commissions to the broker-dealer through which such Research Service was
obtained. The advisory fee paid by the Fund is not reduced because the Adviser
receives such Research Services. The Adviser evaluates the nature and quality of
the various Research Services obtained through broker-dealer firms and attempts
to allocate sufficient portfolio security transactions to such firms to ensure
the continued receipt of Research Services which the Adviser believes are useful
or of value to it in rendering investment advisory services to its clients.
The Fund and the Adviser may also receive Research Services from
underwriters and dealers in fixed-price offerings, which Research Services are
reviewed and evaluated by the Adviser in connection with its investment
responsibilities. The investment companies sponsored by the Adviser or its
affiliates may allocate trades in such offerings to acquire information relating
to the performance, fees and expenses of such companies and other mutual funds,
which information is used by the Trustees of such companies to fulfill their
responsibility to oversee the quality of the services provided by various
entities, including the Adviser, to such companies. Such companies may also pay
cash for such information.
Subject to the requirement that the Adviser shall use its best efforts to
seek and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, the Adviser is authorized to
consider as a factor in the selection of any broker-dealer firm with whom
portfolio orders may be placed the fact that such firm has sold or is selling
shares of the Fund or of other investment companies sponsored by the Adviser.
This policy is not inconsistent with a rule of the National Association of
Securities Dealers, Inc. ("NASD"), which rule provides that no firm which is a
member of the NASD shall favor or disfavor the distribution of shares of any
particular 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.
B-17
TAXES
The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart LLP, counsel to the fund. The Fund intends to
elect and to qualify each year as a RIC under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute substantially all of its net
income (including tax-exempt 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 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. As discussed above, the Fund intends to
make timely distributions of its ordinary income and capital gain net income so
as to avoid paying this excise 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 for federal income tax purposes, 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.
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
B-18
the proceeds of industrial development bonds, and the same definition should
apply in the case of private activity bonds.
Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 (except to the extent of a portion of the
discount attributable to original issue discount), is taxable as ordinary
income. A long-term debt obligation is generally treated as acquired at a market
discount if purchased after its original issue at a price less than (i) the
stated principal amount payable at maturity, in the case of an obligation that
does not have original issue discount or (ii) in the case of an obligation that
does have original issue discount, the sum of the issue price and any original
issue discount that accrued before the obligation was purchased, subject to a de
minimis exclusion.
From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain types of municipal obligations, and it can be expected that
similar proposals may be introduced in the future.
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's shareholders.
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
sale, 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 disposition 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.
B-19
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. Backup withholding is not an additional tax. Any amounts
withheld from payments made to a shareholder may be refunded or credited against
the shareholder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, foreign investors,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local, and, where applicable,
foreign tax consequences of investing in the Fund.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including tax-exempt interest and net capital gain. A class's proportionate
share of a particular type of income for a year is determined according to the
percentage of total dividends paid by the RIC during that year to the class.
Thus, the Fund is required to allocate a portion of its net capital gain and
other taxable income to the APS. The Fund generally will notify the Auction
Agent of the amount of any net capital gain and other taxable income to be
included in any dividend on the APS prior to the Auction establishing the
Applicable Rate for that dividend. Except for the portion of any dividend that
it informs the Auction Agent will be treated as net capital gain or other
taxable income, the Fund anticipates that the dividends paid on the APS will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to the Fund's APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Fund and the
total dividends paid by the Fund on its Common Shares and the APS during a
taxable year, but taxable distributions generally are not expected to be
significant. The tax treatment of Additional Dividends also may affect the
Fund's calculation of each class's allocable share of capital gains and other
taxable income. See "Taxes -- Tax Treatment of Additional Dividends."
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart LLP,
counsel to the Fund, under current law the manner in which the Fund intends to
allocate items of tax-exempt income, net capital gain, and other taxable income,
if any, among the Fund's Common Shares and APS will be respected for federal
income tax purposes. It is possible that the IRS could disagree with counsel's
opinion and attempt to reallocate the Fund's net capital gain or other taxable
income. In the event of such a reallocation, some of the dividends identified by
the Fund as exempt-interest dividends to holders of APS may be recharacterized
as additional net capital gain or other taxable income. Kirkpatrick & Lockhart
LLP has advised the Fund that, in its opinion, if the IRS were to challenge in
court the Fund's allocations of income and gain and the issue were properly
litigated, the IRS would be unlikely to prevail. A holder should be aware,
however, that the opinion of Kirkpatrick & Lockhart LLP represents only its best
legal judgment and is not binding on the IRS or the courts.
The Fund is not appropriate for non-U.S. investors or as a retirement plan
investment.
State and Local Taxes. The exemption of interest income for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. Shareholders of the Fund may be
exempt from state and local taxes on distributions of 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
B-20
annually to shareholders the percentages representing the proportionate ratio of
its net tax-exempt income earned in each state.
In the opinion of special New York tax counsel, Sidley Austin Brown & Wood
LLP, distributions by the Fund that are attributable to interest on municipal
obligations of New York and its political subdivisions or to interest on
obligations of U.S. territories and possessions that are exempt from state
taxation under federal law will not be subject to New York State or City
personal income tax. All other distributions, including distributions
attributable to taxable ordinary income and capital gains, will be subject to
New York State and City personal income tax. Interest on indebtedness incurred
to purchase, or continued to carry, APS generally will not be deductible for New
York State or New York City personal income tax purposes. All distributions from
the Fund, regardless of source, will increase the taxable base of shareholders
subject to New York State corporate franchise tax and the New York City general
corporation tax. Gain from the sale, exchange or other disposition of APS will
be subject to New York State and City personal income tax and the State
corporate franchise tax and City general corporation tax.
These provisions are subject to change by legislative or administrative
action, and any such change may be retroactive with respect to Fund
transactions. The discussion is based on assumptions that the Fund will qualify
for the special tax treatment afforded RICs under the Code, that it will satisfy
the conditions necessary to pay exempt-interest dividends to shareholders, and
that the APS will be characterized as stock for federal income tax purposes.
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.
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.
B-21
INDEPENDENT AUDITORS
Deloitte & Touche LLP, Boston, Massachusetts, are the independent auditors
for the Fund, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the SEC.
B-22
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Insured New York Municipal Bond Fund:
We have audited the accompanying statement of assets and liabilities of
Eaton Vance Insured New York Municipal Bond Fund (the "Fund") as of August 19,
2002. This financial statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Eaton Vance Insured New York
Municipal Bond Fund as of August 19, 2002 in conformity with generally accepted
accounting principles.
Boston, Massachusetts
August 20, 2002
B-23
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 19, 2002
ASSETS:
Cash........................................................ $100,000
Offering costs.............................................. $300,000
--------
Total assets................................................ $400,000
========
LIABILITIES:
Accrued offering costs...................................... $300,000
--------
Total liabilities........................................... $300,000
--------
Net assets applicable to 6,666.67 common shares of
beneficial interests issued and outstanding............... $100,000
--------
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 15.00
--------
B-24
NOTES TO FINANCIAL STATEMENT
NOTE 1: ORGANIZATION
The Fund was organized as a Massachusetts business trust on July 8, 2002,
and has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 6,666.67 common shares to
Eaton Vance Management, the Fund's Investment Adviser.
Eaton Vance Management, or an affiliate, has agreed to pay all
organizational expenses and offering costs (other than sales loads) that exceed
$0.03 per common share.
The Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and New York State and
New York City personal income taxes.
NOTE 2: ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require the
use of management estimates. Actual results may differ from those estimates.
The Fund's share of offering costs will be recorded as a reduction of the
proceeds from the sale of common shares upon the commencement of Fund
operations. The offering costs reflected above assume the sale of 10,000,000
common shares.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment advisory agreement between the Adviser and the
Fund, the Fund has agreed to pay an investment advisory fee, payable on a
monthly basis, at an annual rate of 0.65% of the average weekly gross assets of
the Fund. Gross assets of the Fund shall be calculated by deducting accrued
liabilities of the Fund not including the amount of any preferred shares
outstanding or the principal amount of any indebtedness for money borrowed.
In addition, the Adviser has contractually agreed to reimburse the Fund for
fees and expenses during the first 8 years of operations. These reductions range
from 0.32% of the average weekly gross assets during the first year of
operations, declining to 0.08% of the average weekly gross assets during the
eighth year. The Adviser has not agreed to reimburse the Fund for any portion of
its fees and expenses beyond this time.
Eaton Vance serves as the administrator of the Fund, but currently receives
no compensation for providing administrative services to the Fund.
NOTE 4: FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income, if any, and tax-exempt income, including any net realized gain
on investments.
B-25
INSURED NEW YORK MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 2002
PRINCIPAL
AMOUNT
(000'S OMITTED) SECURITY VALUE
--------------- -------- ------------
TAX-EXEMPT INVESTMENTS -- 93.6%
EDUCATION -- 4.0%
$ 2,000 New York Dormitory Authority, (Columbia University), 5.00%,
7/1/23 $ 2,090,160
6,750 New York Dormitory Authority, (University Dormitory
Facility), 5.00%, 7/1/32(1) 6,941,092
------------
$ 9,031,252
============
ESCROWED/PREREFUNDED -- 3.9%
$ 7,500 New York Dormitory Authority, (FGIC), Prerefunded to
5/15/12,
5.00%, 5/15/27 $ 8,628,675
------------
$ 8,628,675
============
GENERAL OBLIGATIONS -- 0.7%
$ 1,480 New York, 5.375%, 6/1/32 $ 1,556,220
------------
$ 1,556,220
============
INSURED-EDUCATION -- 1.3%
$ 200 Nassau County IDA, Civic Facility, (Hofstra University),
(MBIA),
4.75%, 7/1/28 $ 200,824
2,000 New York Dormitory Authority, (University Dormitory
Facility), (XLCA), 5.00%, 7/1/24 2,075,700
610 New York Dormitory Authority, (University Educational
Facility), (MBIA), 4.75%, 5/15/28 612,489
------------
$ 2,889,013
============
INSURED-ELECTRIC UTILITIES -- 9.4%
$ 4,000 Long Island Power Authority, (FSA), 0.00%, 6/1/20 $ 1,811,120
6,250 Long Island Power Authority, (FSA), 0.00%, 6/1/26 2,008,062
4,785 Long Island Power Authority, (FSA), 0.00%, 6/1/28 1,388,320
5,000 Long Island Power Authority, (FSA), 5.125%, 12/1/22(1) 5,202,300
8,500 Puerto Rico Electric Power Authority, (FSA), 5.25%, 7/1/12 9,937,860
650 Puerto Rico Electric Power Authority, (XLCA), 4.75%, 7/1/24 657,312
------------
$ 21,004,974
============
INSURED-GENERAL OBLIGATIONS -- 10.5%
$ 600 Cattaraugus County, (MBIA), 4.75%, 9/15/30 $ 604,428
600 Cattaraugus County, (MBIA), 4.75%, 9/15/31 604,428
600 Cattaraugus County, (MBIA), 4.75%, 9/15/32 604,428
575 Cattaraugus County, (MBIA), 4.75%, 9/15/27 579,243
575 Cattaraugus County, (MBIA), 4.75%, 9/15/28 579,243
575 Cattaraugus County, (MBIA), 4.75%, 9/15/29 579,244
2,945 Patchogue-Medford Union Free School District, (FGIC), 4.50%,
10/1/24(2) 2,916,993
3,095 Patchogue-Medford Union Free School District, (FGIC), 4.50%,
10/1/25(2) 3,062,193
B-26
PRINCIPAL
AMOUNT
(000'S OMITTED) SECURITY VALUE
--------------- -------- ------------
$ 3,250 Patchogue-Medford Union Free School District, (FGIC), 4.50%,
10/1/26(2) $ 3,208,173
3,400 Patchogue-Medford Union Free School District, (FGIC), 4.50%,
10/1/27(2) 3,350,768
7,000 Puerto Rico General Obligation, (FGIC), 5.00%, 7/1/32 7,315,560
------------
$ 23,404,701
============
INSURED-HOSPITAL -- 7.5%
$ 1,500 New York Dormitory Authority, (Mental Health Services
Facility Improvements), (FSA), 5.25%, 8/15/30 $ 1,569,270
1,000 New York Dormitory Authority, (Mental Health Services
Facility), (MBIA), 4.75%, 2/15/25 1,005,290
11,250 New York Dormitory Authority, (Municipal Health Facilities
Improvement), (FSA), 4.75%, 1/15/29 11,283,638
3,000 New York Dormitory Authority, (New York Presbyterian
Hospital), (AMBAC), 4.75%, 8/1/27 3,011,820
------------
$ 16,870,018
============
INSURED-LEASE REVENUE/CERTIFICATES OF PARTICIPATION -- 0.6%
$ 200 New York Urban Development Corp., (Correctional Facility
Service Contract), (AMBAC), 4.75%, 1/1/28 $ 200,868
1,000 Puerto Rico Public Building Authority, (AMBAC), 5.50%,
7/1/21 1,172,500
------------
$ 1,373,368
============
INSURED-MISCELLANEOUS -- 0.8%
$ 1,765 New York Environmental Facility Corp., (MBIA), 5.00%,
6/15/21 $ 1,859,957
------------
$ 1,859,957
============
INSURED-SPECIAL TAX REVENUE -- 5.1%
$ 3,000 New York City Transitional Finance Authority, (Future Tax),
(MBIA), 4.75%, 11/15/23 $ 3,027,540
8,000 New York City Transitional Finance Authority, (Future Tax),
(MBIA), 5.00%, 5/1/31(1) 8,278,480
------------
$ 11,306,020
============
INSURED-TRANSPORTATION -- 30.2%
$10,000 Metropolitan Transportation Authority, (FGIC), 5.125%,
11/15/22(1) $ 10,582,500
27,500 Metropolitan Transportation Authority, (FSA), 5.00%,
11/15/30 28,527,675
1,060 Metropolitan Transportation Authority, (FSA), 5.00%,
11/15/32 1,098,732
9,500 New York Thruway Authority, (Local Highway & Bridge),
(XLCA), 5.50%, 4/1/13 11,062,275
5,850 Port Authority of New York and New Jersey, (FSA), 5.00%,
4/15/32 6,074,640
10,000 Triborough Bridge and Tunnel Authority, (FGIC), 5.00%,
1/1/32 10,339,900
------------
$ 67,685,722
============
INSURED-WATER AND SEWER -- 5.1%
$11,000 New York City Municpal Water Finance Authority, Water and
Sewer, (MBIA), 5.125%, 6/15/34 $ 11,485,870
------------
$ 11,485,870
============
B-27
PRINCIPAL
AMOUNT
(000'S OMITTED) SECURITY VALUE
--------------- -------- ------------
TRANSPORTATION -- 8.1%
$ 2,850 Triborough Bridge and Tunnel Authority, NY, 5.00%, 1/1/32 $ 2,942,511
14,575 Triborough Bridge and Tunnel Authority, NY, 5.00%,
11/15/32(2) 15,083,668
------------
$ 18,026,179
============
WATER AND SEWER -- 6.4%
$ 3,090 New York City Municpal Water Finance Authority, Water and
Sewer, 5.00%, 6/15/28 $ 3,196,698
1,000 New York City Municpal Water Finance Authority, Water and
Sewer, 5.125%, 6/15/31 1,039,800
9,750 New York City Municpal Water Finance Authority, Water and
Sewer, 5.125%, 6/15/32 10,138,050
------------
$ 14,374,548
============
TOTAL TAX-EXEMPT INVESTMENTS
(identified cost $204,041,335) $209,496,517
============
SHORT-TERM INVESTMENTS -- 15.6%
$ 7,400 Jay Street Development Corp., (AMBAC), Variable Rate, 5/1/22 $ 7,400,000
8,000 New York City Health and Hospital Corp., (FSA), Variable
Rate, 2/15/31 8,000,000
4,000 New York, (AMBAC), Variable Rate, 3/14/31 4,000,000
6,000 New York, (FGIC), Variable Rate, 2/15/32 6,000,000
9,525 Troy IDA, (Rensselaer Polytechnic Institute), (FSA),
Variable Rate, 9/1/42 9,525,000
------------
TOTAL SHORT-TERM INVESTMENTS
(at amortized cost, $34,925,000) $ 34,925,000
------------
TOTAL INVESTMENTS -- 109.2%
(identified cost $238,966,335) $244,421,517
------------
OTHER ASSETS, LESS LIABILITIES -- (9.2)% $(20,682,206)
------------
NET ASSETS -- 100.0% $223,739,311
============
---------------
The Fund invests primarily in debt securities issued by New York municipalities.
The ability of the issuers of the debt securities to meet their obligations may
be affected by economic developments in a specific industry or municipality. In
order to reduce the risk associated with such economic developments, at
September 30, 2002, 82.4% of the securities in the portfolio of investments are
backed by bond insurance of various financial institutions and financial
guaranty assurance agencies (90.0% of the Fund's net assets). The aggregate
percentage insured by financial institutions ranged from 5.6% to 22.7% of total
investments.
(1) Security (or a portion thereof) has been segregated to cover when-issued
securities.
(2) When-issued security.
B-28
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF SEPTEMBER 30, 2002
PERIOD ENDED
SEPTEMBER 30, 2002(1)(2)
INSURED CALIFORNIA FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.031
Net realized and unrealized gain............................ 0.420
--------
Total income from operations................................ $ 0.451
--------
Common Share offering costs................................. $ (0.016)
--------
Net asset value -- End of period............................ $ 14.760
--------
Market value -- End of period............................... $ 15.000
--------
Total Investment Return on Net Asset Value(4)............... 3.04%
--------
Total Investment Return on Market Value(4).................. 4.71%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $311,634
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.59%(5)
Net investment income..................................... 2.54%(5)
Portfolio Turnover.......................................... 0%
--------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee. Had such action not been taken, the ratios and net investment
income per share would have been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses.......................................... 0.91%(5)
Net investment income............................. 2.22%(5)
Net investment income per share................... $ 0.027
--------------------------------------------------------------------------------
(1) For the period from the start of business, August 30, 2002, to September 30,
2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
B-29
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF SEPTEMBER 30, 2002
PERIOD ENDED
SEPTEMBER 30, 2002(1)(2)
INSURED MUNICIPAL FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.040
Net realized and unrealized gain............................ 0.454
--------
Total income from operations................................ $ 0.494
--------
Common share offering costs................................. $ (0.009)
--------
Net asset value -- End of period............................ $ 14.810
--------
Market value -- End of period............................... $ 15.000
--------
Total Investment Return on Net Asset Value(4)............... 3.39%
--------
Total Investment Return on Market Value(4).................. 4.71%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $934,619
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.46%(5)
Net investment income..................................... 3.20%(5)
Portfolio Turnover.......................................... 0%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee. Had such action not been taken, the ratios and net investment
income per share would have been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 0.78%(5)
Net investment income........................... 2.88%(5)
Net investment income per share................... $ 0.036
--------------------------------------------------------------------------------
(1) For the period from the start of business, August 30, 2002, to September 30,
2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
B-30
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF SEPTEMBER 30, 2002
PERIOD ENDED
SEPTEMBER 30, 2002(1)(2)
INSURED NEW YORK FUND ------------------------
Net asset value -- Beginning of period(3)................... $ 14.325
--------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.028
Net realized and unrealized gain............................ 0.358
--------
Total income from operations................................ $ 0.386
--------
Common Share offering costs................................. $ (0.021)
--------
Net asset value -- End of period............................ $ 14.690
--------
Market value -- End of period............................... $ 15.060
--------
Total Investment Return on Net Asset Value(4)............... 2.55%
--------
Total Investment Return on Market Value(4).................. 5.13%
--------
RATIOS/SUPPLEMENTAL DATA+
Net assets, end of period (000's omitted)................... $223,739
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.68%(5)
Net investment income..................................... 2.26%(5)
Portfolio Turnover.......................................... 8%
--------------------------------------------------------------------------------------
+ The operating expenses of the Fund reflect a reduction of the investment
adviser fee. Had such action not been taken, the ratios and net investment
income per share would have been as follows:
Ratios (As a percentage of average daily net
assets):
Expenses........................................ 1.00%(5)
Net investment income........................... 1.94%(5)
Net investment income per share................... $ 0.024
--------------------------------------------------------------------------------
(1) For the period from the start of business, August 30, 2002, to September 30,
2002.
(2) Computed using average common shares outstanding.
(3) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.000 offering
price.
(4) Total investment return on net asset value is calculated assuming a purchase
at the offering price of $15.000 less the sales load of $0.675 per share
paid by the shareholder on the first day and a sale at the net asset value
on the last day of the period reported. Total investment return on market
value is calculated assuming a purchase at the offering price of $15.000
less the sales load of $0.675 per share paid by the shareholder on the first
day and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
(5) Annualized.
B-31
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 2002
INSURED MUNICIPAL FUND INSURED CALIFORNIA FUND INSURED NEW YORK FUND
---------------------- ----------------------- ---------------------
ASSETS
Investments --
Identified cost................... $958,576,041 $316,372,392 $238,966,335
Unrealized appreciation........... 28,816,305 8,962,473 5,455,182
--------------------------------------------------------------------------------------------------------------
Investments, at value............... $987,392,346 $325,334,865 $244,421,517
--------------------------------------------------------------------------------------------------------------
Cash................................ 2,816,419 2,323,768 14,012,125
Interest receivable................. 7,748,856 2,465,339 2,385,821
--------------------------------------------------------------------------------------------------------------
Total assets........................ $997,957,621 $330,123,972 $260,819,463
--------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased... -- -- 4,107,174
Payable for when-issued
securities........................ 62,676,751 18,113,505 32,605,905
Payable to affiliate for Trustees'
fees.............................. 1,000 868 868
Accrued expenses.................... 660,854 375,617 366,205
--------------------------------------------------------------------------------------------------------------
Total liabilities................... $ 63,338,605 $ 18,489,990 $ 37,080,152
--------------------------------------------------------------------------------------------------------------
Net Assets.......................... $934,619,016 $311,633,982 $223,739,311
--------------------------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Paid-in capital..................... 903,443,120 302,047,090 217,894,205
Accumulated net realized loss
(computed on the basis of
identified cost).................. -- -- (9,464)
Accumulated undistributed net
investment income................. 2,359,591 624,419 399,388
Net unrealized appreciation
(computed on the basis of
identified cost).................. 28,816,305 8,962,473 5,455,182
--------------------------------------------------------------------------------------------------------------
Total............................... $934,619,016 $311,633,982 $223,739,311
--------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING........... 63,106,667 21,106,667 15,231,667
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE
Net assets applicable to common
shares / common shares issued and
outstanding....................... $ 14.81 $ 14.76 $ 14.69
--------------------------------------------------------------------------------------------------------------
See notes to financial statements
B-32
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 2002(1)
INSURED MUNICIPAL FUND INSURED CALIFORNIA FUND INSURED NEW YORK FUND
---------------------- ----------------------- ---------------------
INVESTMENT INCOME
Interest............................ $ 2,697,670 $ 770,817 $ 520,158
--------------------------------------------------------------------------------------------------------------
Total investment income............. $ 2,697,670 $ 770,817 $ 520,158
--------------------------------------------------------------------------------------------------------------
EXPENSES
Investment adviser fee.............. $ 474,113 $ 158,249 $ 113,470
Trustees fees and expenses.......... 1,000 868 868
Legal and accounting services....... 41,000 38,637 37,854
Printing and postage................ 25,000 10,000 10,621
Custodian fee....................... 22,005 9,738 6,983
Transfer and dividend disbursing
agent............................. 5,333 5,115 4,960
Miscellaneous....................... 3,038 1,698 1,876
--------------------------------------------------------------------------------------------------------------
Total expenses...................... $ 571,489 $ 224,305 $ 176,632
--------------------------------------------------------------------------------------------------------------
Deduct --
Preliminary reduction of
investment adviser fee......... 233,410 77,907 55,862
--------------------------------------------------------------------------------------------------------------
Total expense reductions............ $ 233,410 $ 77,907 $ 55,862
--------------------------------------------------------------------------------------------------------------
Net expenses........................ $ 338,079 $ 146,398 $ 120,770
--------------------------------------------------------------------------------------------------------------
Net investment income............... $ 2,359,591 $ 624,419 $ 399,388
--------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions
(identified cost basis)........ -- -- (9,464)
--------------------------------------------------------------------------------------------------------------
Net realized loss................... $ -- $ -- $ (9,464)
--------------------------------------------------------------------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost
basis)......................... 28,816,305 8,962,473 5,455,182
--------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)....... $28,816,305 $8,962,473 $5,455,182
--------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain.... $28,816,305 $8,962,473 $5,445,718
--------------------------------------------------------------------------------------------------------------
Net increase in net assets from
operations........................ $31,175,896 $9,586,892 $5,845,106
--------------------------------------------------------------------------------------------------------------
(1) For the period from the start of business, August 30, 2002, to September 30,
2002.
See notes to financial statements
B-33
EATON VANCE INSURED MUNICIPAL BOND FUNDS
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED SEPTEMBER 30, 2002(1)
INSURED MUNICIPAL FUND INSURED CALIFORNIA FUND INSURED NEW YORK FUND
---------------------- ----------------------- ---------------------
INCREASE (DECREASE) IN NET ASSETS
From operations --
Net investment income............. $ 2,359,591 $ 624,419 $ 399,388
Net realized loss................. -- -- (9,464)
Net change in unrealized
appreciation (depreciation).... 28,816,305 8,962,473 5,455,182
--------------------------------------------------------------------------------------------------------------
Net increase in net assets from
operations........................ $ 31,175,896 $ 9,586,892 $ 5,845,106
--------------------------------------------------------------------------------------------------------------
Transactions in shares of beneficial
interest --
Proceeds from sale of shares(2)... $903,904,500 $302,257,500 $218,098,125
Offering costs.................... (564,380) (310,410) (303,920)
--------------------------------------------------------------------------------------------------------------
Net increase in net assets from Fund
share transactions................ $903,343,120 $301,947,090 $217,794,205
--------------------------------------------------------------------------------------------------------------
Net increase in net assets.......... $934,519,016 $311,533,982 $223,639,311
--------------------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of period.............. $ 100,000 $ 100,000 $ 100,000
--------------------------------------------------------------------------------------------------------------
At end of period.................... $934,619,016 $311,633,982 $223,739,311
--------------------------------------------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME INCLUDED IN NET
ASSETS
At end of period.................... $ 2,359,591 $ 624,419 $ 399,388
--------------------------------------------------------------------------------------------------------------
(1) For the period from the start of business, August 30, 2002, to September 30,
2002.
(2) Proceeds from sale of shares net of sales load paid of $42,592,500,
$14,242,500 and $10,276,875 for Insured Municipal Fund, Insured California
Fund and Insured New York Fund, respectively.
See notes to financial statements
B-34
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 2002
1 SIGNIFICANT ACCOUNTING POLICIES
Eaton Vance Insured Municipal Bond Fund (Insured Municipal Fund), Eaton
Vance Insured California Municipal Bond Fund (Insured California Fund), and
Eaton Vance Insured New York Municipal Bond Fund (Insured New York Fund),
(individually referred to as the Fund or collectively the Funds) are registered
under the Investment Company Act of 1940, as amended, as non-diversified,
closed-end management investment companies. The Insured Municipal Fund was
organized under the laws of the Commonwealth of Massachusetts by an Agreement
and Declaration of Trust dated July 2, 2002. The Insured California Fund and the
Insured New York Fund were organized under the laws of the Commonwealth of
Massachusetts by an Agreement and Declaration of Trust dated July 8, 2002. Each
Fund's investment objective is to achieve current income exempt from regular
federal income tax, including alternative minimum tax, and taxes in its
specified state. Each Fund seeks to achieve its objective by investing primarily
in high grade municipal obligations that are insured as to the timely payment of
principal and interest.
The following is a summary of significant accounting policies consistently
followed by each Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America.
A Investment Valuation -- Municipal bonds are normally valued on the basis
of valuations furnished by a pricing service. Futures contracts listed on the
commodity exchanges are valued at closing settlement prices. Interest rate swaps
are normally valued on the basis of valuations furnished by a broker. Short-term
obligations, maturing in sixty days or less, are valued at amortized cost, which
approximates fair value. Investments for which valuations or market quotations
are unavailable are valued at fair value using methods determined in good faith
by or at the direction of the Trustees.
B Investment Transactions -- Investment transactions are recorded on a
trade date basis. Realized gains and losses from such transactions are
determined using the specific identification method. Securities purchased or
sold on a when-issued or delayed delivery basis may be settled a month or more
after the transaction date. The securities so purchased are subject to market
fluctuations during this period. To the extent that when-issued or delayed
delivery purchases are outstanding, the Fund instructs the custodian to
segregate assets in a separate account, with a current value at least equal to
the amount of its purchase commitments.
C Income -- Interest income is determined on the basis of interest accrued,
adjusted for amortization of premium or discount.
D Federal Taxes -- Each Fund's policy is to comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable, if any, and tax-exempt
income, including any net realized gain on investments. Therefore, no provision
for federal income or excise tax is necessary. At September 30, 2002, the
Insured New York Fund, for federal income tax purposes, had a capital loss
carryover of $9,464 which will reduce the taxable income arising from future net
realized gain on investments, if any, to the extent permitted by the Internal
Revenue Code and thus will reduce the amount of distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal income or excise tax. Such capital loss carryover will expire on
September 30, 2010.
In addition, each Fund intends to satisfy conditions which will enable it
to designate distributions from the interest income generated by its investments
in municipal obligations, which are exempt from regular federal income taxes
when received by each Fund, as exempt-interest dividends.
B-35
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E Offering Costs -- Costs incurred by the Fund in connection with the
offerings of the common shares were recorded as a reduction of capital paid in
excess of par applicable to common shares.
F Financial Futures Contracts -- Upon the entering of a financial futures
contract, a Fund is required to deposit (initial margin) either in cash or
securities an amount equal to a certain percentage of the purchase price
indicated in the financial futures contract. Subsequent payments are made or
received by a Fund (margin maintenance) each day, dependent on the daily
fluctuations in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by a Fund. A Fund's investment in
financial futures contracts is designed for both hedging against anticipated
future changes in interest rates and investment purposes. Should interest rates
move unexpectedly, a Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss.
G Interest Rate Swaps -- The Funds may enter into interest rate swap
agreements to enhance return, to hedge against fluctuations in securities prices
or interest rates or as substitution for the purchase and sale of securities.
Pursuant to these agreements, the Funds make bi-annual payments at a fixed
interest rate. In exchange, the Funds receive payments based on the interest
rate of a benchmark industry index. During the term of the outstanding swap
agreement, changes in the underlying value of the swap are recorded as
unrealized gains and losses. The value of the swap is determined by changes in
the relationship between two rates of interest. The Funds are exposed to credit
loss in the event of non-performance by the swap counterparty. However, the
Funds do not anticipate non-performance by the counterparty. Risk may also arise
from the unanticipated movements in value of interest rates.
H Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reporting period. Actual
results could differ from those estimates.
I Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian of the Funds. Pursuant to the respective custodian agreements, IBT
receives a fee reduced by credits which are determined based on the average
daily cash balances each Fund maintains with IBT. All significant credit
balances used to reduce the Funds' custodian fees are reported as a reduction of
total expenses in the Statement of Operations.
J Unaudited Financial Statements -- The Financial Statements relating to
September 30, 2002 and for the period then ended have not been audited by
independent certified public accountants but in the opinion of the Fund's
management reflect all adjustments consisting of only normal recurring
adjustments, necessary for the fair presentation of the Financial Statements.
2 DISTRIBUTIONS TO SHAREHOLDERS
Each Fund intends to make monthly distributions of net investment income.
Distributions are recorded on the ex-dividend date. In addition, at least
annually, the Funds intend to distribute net capital gain and taxable ordinary
income, if any.
3 INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee, computed at an annual rate of 0.65% of each
Fund's average weekly gross assets, was earned by Eaton Vance Management (EVM)
as compensation for investment advisory services rendered to each Fund. Except
for Trustees of each Fund who are not members of EVM's organization, officers
and Trustees receive remuneration for their services to each Fund out of such
investment adviser fee. For the period from the start of business August 30,
2002 to September 30, 2002 the fee was equivalent to 0.65% (annualized) of each
Fund's average weekly gross assets and amounted to $474,113,
B-36
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$158,249, and $113,470 for Insured Municipal Fund, Insured California Fund and
Insured New York Fund, respectively. EVM also serves as the administrator of the
Funds, but currently received no compensation.
In addition, the Adviser has contractually agreed to reimburse the Fund for
fees and other expenses in the amount of 0.32% of average weekly total assets of
each Fund during the first five full years of each Fund's operations, 0.24% of
average weekly total assets of each Fund in year six, 0.16% in year seven and
0.08% in year eight. For the period from the start of business August 30, 2002
to September 30, 2002 the Investment Adviser waived $233,410, $77,907, and
$55,862 of its advisory fee for Insured Municipal Fund, Insured California Fund
and Insured New York Fund, respectively.
Trustees of the Funds that are not affiliated with the Investment Adviser
may elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of the Trustees Deferred Compensation Plan. For the
period from the start of business August 30, 2002 to September 30, 2002, no
significant amounts have been deferred.
Certain officers and one Trustee of each Fund are officers of the above
organization.
4 INVESTMENTS
Purchases and sales of investments, other than U.S. Government securities
and short-term obligations for the period from the start of business August 30,
2002 to September 30, 2002 were as follows:
INSURED MUNICIPAL FUND
Purchases................................................. $899,677,805
INSURED CALIFORNIA FUND
Purchases................................................. $297,863,054
INSURED NEW YORK FUND
Purchases................................................. $215,134,387
Sales..................................................... 11,083,750
B-37
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5 FEDERAL INCOME TAX BASIS OF UNREALIZED APPRECIATION (DEPRECIATION)
The cost and unrealized appreciation (depreciation) in value of the
investments owned by each Fund at September 30, 2002, as computed for Federal
income tax purposes, were as follows:
INSURED MUNICIPAL FUND
Aggregate cost.............................................. $958,572,254
============
Gross unrealized appreciation............................... $ 28,820,092
Gross unrealized depreciation............................... --
------------
Net unrealized appreciation................................. $ 28,820,092
============
INSURED CALIFORNIA FUND
Aggregate cost.............................................. $316,349,392
============
Gross unrealized appreciation............................... $ 9,029,051
Gross unrealized depreciation............................... (43,578)
------------
NET UNREALIZED APPRECIATION................................. $ 8,985,473
============
INSURED NEW YORK FUND
Aggregate cost.............................................. $238,964,310
============
Gross unrealized appreciation............................... $ 5,471,415
Gross unrealized depreciation............................... (14,208)
------------
Net unrealized appreciation................................. $ 5,457,207
============
6 SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Funds to issue an unlimited number of
full and fractional $0.01 par value common shares. Transactions in Fund shares
were as follows:
PERIOD ENDED
SEPTEMBER 30, 2002(1)
---------------------
INSURED MUNICIPAL FUND
Sales....................................................... 63,100,000
----------
Net increase................................................ 63,100,000
==========
INSURED CALIFORNIA FUND
Sales....................................................... 21,100,000
----------
Net increase................................................ 21,100,000
==========
INSURED NEW YORK FUND
Sales....................................................... 15,225,000
----------
Net increase................................................ 15,225,000
==========
---------------
(1) For the period from the start of business, August 30, 2002 to September 30,
2002.
B-38
EATON VANCE INSURED MUNICIPAL BOND FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7 FINANCIAL INSTRUMENTS
Each Fund may trade in financial instruments with off-balance sheet risk in
the normal course of its investing activities to assist in managing exposure to
various market risks. These financial instruments include futures contracts and
may involve, to a varying degree, elements of risk in excess of the amounts
recognized for financial statement purposes. The notional or contractual amounts
of these instruments represent the investment each Fund has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
At September 30, 2002 there were no outstanding obligations under these
financial instruments.
B-39
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.
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.
---------------
+ 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.
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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.
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.
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AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
P: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
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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 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-43
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.
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
B-44
period of time. A Moody's insurance claims-paying ability rating is an opinion
of the ability of an insurance company to repay punctually senior policy holder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of the these companies is likely to change,
such changes as can be visualized are most unlikely to impair the company's
fundamentally strong position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on an specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take in account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P and Moody's to debt issues that are fully
or partially supported by insurance policies, contracts, or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination of such debt issues.
B-45
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 regular 2002 federal income
tax New York State and New York City personal income tax rates applicable to
individuals.
COMBINED FEDERAL AND
NEW YORK STATE TAX RATES A TAX EXEMPT YIELD OF
------------------------- -------------------------------------------------
SINGLE RETURN JOINT RETURN FEDERAL STATE BLENDED 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
----------------- ----------------- ------- ----- ------- ---- ---- ---- ---- ----- ----- -----
(TAXABLE INCOME)* IS EQUIVALENT TO A FULLY TAXABLE YIELD OF
$ 20,001-$ 27,950 $ 40,001-$ 46,700 15.0% 6.85% 20.82% 5.05% 5.69% 6.31% 6.95% 7.58% 8.21% 8.84%
$ 27,951-$ 67,700 $ 46,701-$112,850 27.0% 6.85% 32.00% 5.88% 6.62% 7.35% 8.09% 8.82% 9.56% 10.29%
$ 67,701-$141,250 $112,851-$171,950 30.0% 6.85% 34.80% 6.13% 6.90% 7.67% 8.43% 9.20% 9.97% 10.74%
$141,251-$307,050 $171,951-$307,050 35.0% 6.85% 39.45% 6.61% 7.43% 8.26% 9.08% 9.91% 10.74% 11.56%
Over $307,050 Over $307,050 38.6% 6.85% 42.81% 6.99% 7.87% 8.74% 9.62% 10.49% 11.36% 12.24%
COMBINED FEDERAL, NEW YORK
STATE AND CITY TAX RATES
---------------------------- A TAX EXEMPT YIELD OF
STATE -------------------------------------------------
SINGLE RETURN JOINT RETURN FEDERAL AND CITY 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
$ 20,001-$ 25,000 $ 40,001-$ 45,000 15.0% 10.38% 23.83% 5.25% 5.91% 6.56% 7.22% 7.88% 8.53% 9.19%
$ 25,001-$ 27,950 $ 45,001-$ 46,700 15.0% 10.44% 23.87% 5.25% 5.91% 6.57% 7.22% 7.88% 8.54% 9.20%
$ 27,951-$ 50,000 $ 46,701-$ 90,000 27.0% 10.44% 34.62% 6.12% 6.88% 7.65% 8.41% 9.18% 9.94% 10.71%
$ 50,001-$ 67,700 $ 90,001-$112,850 27.0% 10.50% 34.66% 6.12% 6.89% 7.65% 8.42% 9.18% 9.95% 10.71%
$ 67,701-$141,250 $112,851-$171,950 30.0% 10.50% 37.35% 6.38% 7.18% 7.98% 8.78% 9.58% 10.37% 11.17%
$141,251-$307,050 $171,951-$307,050 35.0% 10.50% 41.82% 6.88% 7.74% 8.59% 9.45% 10.31% 11.17% 12.03%
Over $307,050 Over $307,050 38.60% 10.50% 45.06% 7.28% 8.19% 9.10% 10.01% 10.92% 11.83% 12.74%
---------------
* 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 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, New York State and New York City tax brackets are
calculated using the highest New York 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 New York taxes are
itemized deductions for federal income tax purposes. Investors who do not
itemize deductions on their federal income tax return will have a higher
combined bracket and higher taxable equivalent yield than those indicated above.
The applicable federal tax rates within the brackets are 15%, 27%, 30%, 35% and
38.6%. A supplemental New York State tax will also apply to filers with adjusted
gross income between $100,000 and $150,000 which phases out the benefit of lower
marginal brackets. The adjustment is not reflected above.
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 New York State and New York City (if applicable)
personal income taxes, other income received by the Fund may be taxable. The
table does not take into account state or local taxes, if
B-46
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 advisers for additional information.
B-47
APPENDIX C
NEW YORK AND U.S. TERRITORY INFORMATION
The following is a summary of certain selected information relating to the
economy and finances of New York State, New York City 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 New York State and New York City 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 New York 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 New York State, New
York City 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.
NEW YORK
The State ended its 2001-2002 fiscal year balanced on a cash basis, with a
reported closing balance in the General Fund of $1.03 billion. The State adopted
the debt service portion of the State budget for the 2002-2003 fiscal year on
March 26, 2002. The State Legislature adopted the remainder of the budget for
the State's 2002-2003 fiscal year on May 16, 2002, and the State released a
revised State Financial Plan on May 22, 2002 and its first quarterly Financial
Plan update on July 12, 2002. There were no changes to the State Financial Plan
projections in the update. The revised State Financial Plan projects balance on
a cash basis for the 2002-2003 fiscal year. General Fund disbursements,
including transfers to other funds are projected to total $40.22 billion for
2002-2003. The projected General Fund closing balance is $716 million. The State
Financial Plan accompanying the Governor's 2002-2003 amended Executive Budget
projected General Fund budget gaps of $2.8 billion in the 2003-2004 fiscal year
and $3.3 billion in the 2004-2005 fiscal year.
To permanently improve the State's reserve levels, the Executive Budget
includes proposed legislation to increase the maximum permissible size of the
State Tax Stabilization Reserve Fund from 2 percent to 5 percent of General Fund
spending.
The most significant risks to the State's financial plan set forth in the
Executive Budget are the rate of layoffs related to September 11, and the impact
of the event upon the City and the personal income statewide. In addition, the
occurrence of other terrorist attacks whether within or outside of New York
could have a significant adverse effect on the State's economy. The volatility
of the financial markets even before September 11 and its impact upon financial
sector compensation and capital gains recognition by investors also represent a
significant risk to the State's financial plan, as set forth in the Executive
Budget.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from lower receipts and the spending required to maintain State
programs at mandated levels. Any such recurring imbalance would be exacerbated
by the use by the State of nonrecurring resources to achieve budgetary balance
in a particular fiscal year. To correct any recurring budgetary imbalance, the
State would need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
Under the State law, the Governor is required to submit a Five-Year Capital
Program and Financing Plan ("Capital Plan") annually. The proposed 2002-2003
through 2006-2007 fiscal year Capital Plan provides for capital spending of $5.0
billion in the 2002-2003 fiscal year to be financed through general obligation,
authority and state bonds and available resources. General obligation bonds are
backed by the full faith and credit of the State. The Executive Budget does not
currently provide for the issuance of general obligation bonds in 2002-2003. As
of March 31, 2002, $4.1 billion of State general obligation bonds were
outstanding. Also as of such date, $4.7 billion of bonds issued by the Local
Governmental
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Assistance Corporation, an entity established to fund assistance to localities
in earlier years when the State was running budget deficits, were outstanding.
Various state authorities had $27.9 billion of indebtedness outstanding in the
form of bonds, lease financings and other financing arrangements. This state
authority indebtedness is not backed by the full faith and credit of the State.
The State is currently a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. State
programs, primarily Medicaid and mental health programs are frequently
challenged on State and Federal constitutional grounds. Several Native American
groups have commenced litigation against New York claiming the rights to
thousands of acres of land seized in the eighteenth and nineteenth centuries.
Adverse developments in legal proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced State Financial
Plan in any given fiscal year. There can be no assurance that an adverse
decision in one or more legal proceedings would not exceed the amount the State
reserves for the payment of judgments or materially impair the State's financial
operations. The State reported in the October 9, 2002 update to its Annual
Information Statement, dated as of June 3, 2002, an amount of $698 million for
awarded unfavorable judgements, of which $91 million was expected to be paid
within the 2002-2003 fiscal year.
The state legislature has enacted the Debt Reform Act of 2000, which
applies to new state-supported debt (i.e. general obligation debt of the state
and lease-purchase and contractual obligations of public authorities and
municipalities where debt service is paid from state appropriations) issued on
or after April 1, 2000. It imposes caps on new debt outstanding and new debt
service costs.
The fiscal stability of New York state relates, at least in part, to the
fiscal stability of its localities and authorities. Various state agencies,
authorities and localities have issued large amounts of bonds and notes
supported by the state. In some cases, the state has had to provide special
assistance in recent years to enable such agencies, authorities and localities
to meet their financial obligations and, in some cases, to prevent or cure
defaults. The extent to which state agencies and local governments require state
assistance to meet their financial obligations, may adversely affect the ability
of the state to meet its own obligations as they become due or to obtain
additional financing.
Fiscal difficulties experienced in Nassau County resulted in the creation
of the Nassau County Interim Finance Authority (the "Authority") in 2000. The
Authority is charged with oversight of the fiscal affairs of Nassau County. The
State paid $25 million in assistance to Nassau County for the 2001-2002 fiscal
year and the Governor has proposed assistance of $50 million in the Executive
Budget. The Authority as of January 22, 2002 had issued $436 million in bonds
and $690 million in bond anticipation notes.
Moody's has given the State's general obligation bonds a rating of A2,
Standard & Poor's had given the bonds a rating of AA, and Fitch had given the
bonds a rating of AA. Such ratings reflect only the view of Moody's and Standard
& Poor's from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an adverse effect on the
market prices of State bonds and could increase the State's borrowing costs.
For each of the 1981 through 2001 fiscal years, New York City's General
Fund had an operating surplus, before discretionary and other transfers, and
achieved balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"), after discretionary and other transfers
("transfers"). For the 2001 fiscal year, the City had an operating surplus of
$2.949 billion, before transfers. General Fund total revenues for the 2001
fiscal year were approximately $40.23 billion. Historically, the City has been
required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. Particularly given
the uncertain impact of September 11 and the expected reduction in economic
activity in the City, there can be no assurance that the City will continue to
maintain balanced operating results as required by State law without reductions
in City services or entitlement programs to tax or other revenue increases that
could adversely affect the
B-49
City's economic base. The City's Financial Plan for the 2002 through 2006 fiscal
years projects revenues and expenditures for the 2002 and 2003 fiscal years,
balanced in accordance with GAAP, and projects gaps of $3.7 billion, $4.2
billion and $4.6 billion for fiscal years 2004 through 2006, respectively. New
York City has shown a pattern of consistently projecting and closing budget
gaps. The City has outlined a gap-closing program which anticipates additional
City agency programs to reduce expenditures or increase revenues and additional
federal and state actions such as intergovernmental aid to the City. There can
be no assurance that additional gap-closing measures, such as tax increases or
reductions in City services, will not be required.
Implementation of the City's four-year annual financial plan is also
dependent upon the City's ability to market its securities successfully in the
public credit markets including its ability to issue short term notes to finance
its seasonal working capital needs. The fiscal health of New York City, which
has been the largest issuer of municipal bonds in the country and is a leading
international commercial center, exerts a significant influence upon the fiscal
health and bond values of issues throughout the state. Bond values of the
Municipal Assistance Corporation, the state of New York, the New York Local
Government Assistance Corporation, the New York State Dormitory Authority, the
New York City Municipal Water Finance Authority, the New York City Transitional
Finance Authority and The Metropolitan Transportation Authority may be
particularly affected by serious financial difficulties encountered by New York
City. The Fund could be expected to hold bonds issued by many, if not all of
these issuers, at any given time.
The City's financing program for fiscal years 2002 through 2006
contemplates the issuance of $13.6 billion of general obligation bonds, $3.9
billion of bonds and $2.5 billion of Recovery Bonds and Recovery Notes described
below to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority"), $1.8 billion of bonds to be issued by TSASC,
Inc., a not-for-profit corporation empowered to issue tax-exempt debt backed by
tobacco settlement revenues, and $8.3 billion of bonds and notes to be issued by
New York City Municipal Water Finance Authority (the "Water Authority"). In
1997, the State created the Transitional Finance Authority, to assist the City
in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. The City had faced limitations on its borrowing capacity after 1998 under
the State's constitution that would have prevented it from borrowing additional
funds, as a result of the decrease in real estate values within the City. The
Transitional Finance Authority is authorized to issue up to $11.5 billion of
bonds. In addition, the City issues revenue notes and tax anticipation notes to
finance seasonal working capital requirements. The success of projected public
sales of these bonds and notes will be subject to prevailing market conditions.
The City's planned capital and operating expenditures are dependent upon the
sale of its general obligation bonds and notes, and the Water Authority and
Transitional Finance Authority bonds. In September 2001, the state legislature
granted the City an additional $2.5 billion in debt-incurring capacity to pay
costs related to September 11 through bonds ("Recovery Bonds") and notes
("Recovery Notes") issued by the Transitional Finance Authority. The
Transitional Finance Authority issued $1.026 billion of Recovery Bonds on
September 27, 2002 to pay its Outstanding Recovery Notes.
The 2001 fiscal year was the twenty-first year that the City has achieved
an operating surplus, before discretionary and other transfers, and balanced
operating results, after discretionary and other transfers.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
2002 through 2006 fiscal years, the City Financial Plan released on June 26,
2002. The projections set forth in the City Financial Plan are based on various
assumptions and contingencies that are uncertain and may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet annual cash flow and
financing requirements.
To help finance the Fiscal Year 2003 budget and to narrow the out-year
gaps, the adopted budget for 2003 includes a gap-closing program that relies
heavily on assistance from Federal and State governments
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($771 million) and the municipal unions ($500 million); agency actions ($1.3
million); deficit financing ($1.5 million) and other non-recurring sources.
The City Financial Plan is based on numerous assumptions, including the
impact of September 11 on the City's economy, the general condition of the
City's and the region's economies and the receipt of economically sensitive tax
revenues in the amounts projected and reimbursement by the federal government
and State of expenditures necessitated by September 11. The City Financial Plan
is subject to various other uncertainties and contingencies relating to, among
other factors: (i) the extent, if any, to which wage increases for City
employees exceed the annual wage costs assumed for the 2002 through 2006 fiscal
years; (ii) interest earnings and wage projections underlying projections of the
City's required pension fund contributions; (iii) the willingness and ability of
the State and federal governments to provide the aid and enact the revenue
enhancing or expenditure relief initiatives contemplated by the City Financial
Plan and to take various other actions to assist the City in its gap closing
actions; (iv) the ability of Health and Hospitals Corporation, the Board of
Education and other agencies to maintain balanced budgets; (v) the impact on
City revenues and expenditures of Federal and State welfare reform and any
future legislation affecting Medicare or other entitlement programs; (vi) the
ability of the City to control expenditures and implement cost reduction and gap
closing initiatives identified in the City Financial Plan for the 2003 fiscal
year and proposed but unspecified for later years; (vii) the City's ability to
market its securities successfully in the public credit markets; (viii) the
impact of conditions in the real estate market on real estate revenues; (ix) the
sale of OTB in fiscal year 2004, which requires State legislative approval; and
(x) unanticipated expenditures that may be incurred as a result of the need to
maintain the City's infrastructure or future terrorist acts.
The City Financial Plan assumes a sudden economic downturn as the result of
September 11 in the last half of 2001 and job and income losses in the first
half of 2002 as the City economy shrinks by 4.6% for calendar year 2002. The
Plan forecasts a sluggish recovery thereafter. The City does not expect to
recover all of the jobs lost as a result of September 11 until fiscal year 2006.
Given the uncertain impact of September 11 on the City's economy, including the
loss of jobs and business, impact on tourism in the City and the slowdown in the
securities industry, there can be no assurance that the economic projections
included in the City Financial Plan are accurate or that the tax revenues
projected in the Financial Plan to be received will be received in the amounts
anticipated.
The Mayor's gap closing proposals in fiscal year 2003 include a slight
reduction of the City's workforce through attrition, severance and early
retirement, including a reduction of 2,400 in uniformed police officers that
will be partially offset by hiring of civilians by the Police Department. These
police department and other staff reduction proposals may require union
consents. While the City has established a Reserve for Collective Bargaining,
the terms of wage settlements could be determined through the impasse procedure
in the New York City Collective Bargaining Law, which can impose a binding
settlement that substantially increases reserves established by the City.
The City depends on the State for aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no assurance that
State aid to the City will be maintained at amounts currently projected or
interim appropriations enacted, or that the State will not reduce or delay aid
any of which could have adverse effects on the City's cash flow or expenditures.
In addition, the Federal budget negotiation process could result in reductions
or delays in the receipt of Federal grants which would have additional adverse
effects on the City's cash flow or revenues. The City is particularly dependent
upon the federal government and the State to reimburse it for expenditures
relating to September 11. While both the federal government and the State have
publicly supported the City and promised to make funds available to fund
recovery, clean-up and repairs relating to September 11, there can be no
assurance that budget constraints or the other priorities, including future
terrorist attacks will not interfere or prevent delivery of such aid.
As of March 31, 2002, the City and the Municipal Assistance Corporation for
the City of New York had respectively approximately $27.7 and $2.2 billion of
net outstanding long-term debt.
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The City is currently a defendant in a significant number of lawsuits.
While the ultimate outcome and fiscal impact, if any, on the proceedings and
claims are not currently predictable, adverse determination in certain of them
might have a material adverse effect upon the City's ability to carry out the
City Financial Plan. As of June 30, 2001 claims were pending against the City,
for which the City has estimated it may potentially incur liability of $4.2
billion. The City currently is a defendant in a proceeding relating to the New
York City Teachers' Retirement System in which damages in excess of $250 million
are sought. In fiscal year 2000-2001 the City paid $594.8 million with respect
to judgments and claims and projects such payments will total $409.6 million and
$418.7 million in fiscal years 2001-2002 and 2002-2003, respectively.
The financial condition of the state, City and other New York issuers may
be affected by many economic, social, political and international factors which
cannot be predicted with certainty. These factors include, but may not be
limited to, litigation, pension costs and pension fund earnings, collective
bargaining with governmental employees, changes resulting from entitlement
program reforms, the receipt of intergovernmental aid, and the performance of
the securities and financial sector which is more significant to the New York
economy than to the national economy. Factors particularly affecting New York
City also include its ability to meet its extensive infrastructure and other
capital needs in the face of limited funding capacity.
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 gross domestic product growth in the 3.1% to
3.5% range over the last 5 fiscal years and significant increases in General
Fund cash balances from fiscal year end 1997 to fiscal year end 1999. These
factors, combined with minimal negative impact to date from the 1996 federal
legislation phasing out Section 936 tax benefits to Puerto Rico subsidiaries of
U.S. corporations, created a positive outlook for the credit in the late 1990s.
Despite the fact that there have been some high profile U.S. companies that have
left the island partially due to the Section 936 phase out, many corporations
have elected to convert to controlled foreign corporation
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("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.
B-53
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-54
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 New York 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-55
though a loss coverage agreement with ACE American Insurance Co., (rated A). ACA
insures primarily in the municipal and CDO market and acts as the
manager/originator of CDO issues.
Radian is a wholly owned subsidiary of Radian Group Inc. Radian is rated AA
by S&P and Fitch and provides financial guaranty insurance and reinsurance for
debt and asset backed securities. Radian was formerly known as Asset Guarantee
Company and was purchased by Radian Group for $518 million in February 2001. As
of December 31, 2001, Radian had assets of $381 million and statutory capital of
$169.8 million.
XL Capital is a new AAA rated financial guarantor and a wholly owned
subsidiary of property casualty insurer XL Capital Ltd. XL Capital began
transactions in January of 2001 and is rated AAA/Aaa by Moody's and S&P
respectively. It is currently capitalized with $100 million and cedes 90% of its
exposure to XL Financial Assurance a Bermuda based subsidiary of XL Capital Ltd.
XL Financial Assurance has $274 million in hard capital and $100 million in stop
loss protection. Beyond this XL Financial Assurance further guarantees 100% of
XL Capital exposure with $2.7 billion in shareholders equity. XL Capital has $88
million in assets and through its parent and subsidiary agreements XL Capital
has $1 billion in qualified statutory capital.
CIFG NA is a new financial guarantor rated AAA from Fitch, Moody's and S&P.
CIFG NA is a subsidiary of CDC IXIS Financial Guaranty ("CIFG"), which is a
subsidiary of CIFG Holding, which is in turn owned by parent company CDC IXIS.
CDC IXIS is a French domiciled corporation with a broad spectrum of insurance
related businesses. CIFG recently entered the bond insurance business with two
companies, CIFG Europe and CIFG NA. CIFG is capitalized with $280 million in
cash, with CIFG NA holding $100 million in cash. CDC IXIS backs the two entities
with $220 million in the form of a subordinated loan agreement. Over 75% of CIFG
NA's business will be passed on through a reinsurance policy to CIFG. Combining
all capital, CIFG NA will have claims paying resources of $500 million.
FSA purchased Capital Guaranty Insurance Company including its book of
business and reserves effective December 20, 1995. FSA is a monoline insurer
whose policies guaranty the timely payment of principal and interest on new
issue and secondary market issue municipal securities transactions, among other
financial obligations. As of December 31, 2001 FSA had total assets of
approximately $4.3 billion and qualified statutory capital of approximately
$1.52 billion. FSA has a claims-paying ability rating of "AAA" by S&P and "Aaa"
by Moody's. On March 14, 2000, Dexia, Europe's largest municipal lender with
assets in excess of $230 billion announced that it had signed a definitive
agreement providing for the acquisition of FSA Holdings, holding company for
FSA, Inc. Dexia acquired the company in the second quarter of 2000, for $2.6
billion in cash, or $76 per share.
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APPENDIX E
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
AMENDMENT NO. 1 TO BY-LAWS -- STATEMENT
CREATING TWO SERIES OF
AUCTION PREFERRED SHARES
WHEREAS, Section 5.1 of Article VI of the Agreement and Declaration of
Trust dated July 8, 2002 of Eaton Vance Insured New York Municipal Bond Fund
(the "Declaration of Trust"), a copy of which is on file in the office of the
Secretary of the Commonwealth of The Commonwealth of Massachusetts, provides
that the Trustees may, without shareholder approval, authorize one or more
classes of shares (which classes may be divided into two or more series), shares
of each such class or series having such preferences, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption, as the Trustees may determine and as shall be set
forth in the By-laws; and
WHEREAS, pursuant to authority expressly vested in the Trustees of the
Trust by Section 5.1 of Article VI of the Declaration of Trust, the Trustees
have authorized, in addition to that Trust's common shares, a class of 5,700
preferred shares which are now to be issued divided into one series of 2,850
shares and one series of 2,850 of its authorized preferred shares, $0.01 par
value, liquidation preference $25,000 per share plus accumulated but unpaid
dividends thereon, if any (whether or not earned or declared), plus the premium,
if any, resulting from the designation of a Premium Call Period, designated
respectively Series A Auction Preferred Shares, and Series B Auction Preferred
Shares.
NOW, THEREFORE, the By-laws of Eaton Vance Insured New York Municipal Bond
Fund are hereby amended as follows:
1. ARTICLES VII through XIII shall be redesignated as ARTICLES VIII
through XIV and all affected cross references therein hereby are amended
accordingly.
2. A new ARTICLE VII shall be added as follows:
ARTICLE VII
STATEMENT CREATING TWO SERIES OF AUCTION PREFERRED SHARES
DESIGNATION
Auction Preferred Shares, Series A: 2,850 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series A." Each share of Auction Preferred Shares, Series A (sometimes referred
to herein as "Series A APS") may be issued on a date to be determined by the
Board of Trustees of the Trust or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Trustees of the
Trust or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series A
APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series A APS shall be identical.
Auction Preferred Shares, Series B: 2,850 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series B." Each share of Auction Preferred Shares, Series B (sometimes referred
to herein as "Series B APS") may be issued on a date to be determined by the
Board of Trustees of the Trust or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
B-57
determined in advance of the issuance thereof by the Board of Trustees of the
Trust or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series B
APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series B APS shall be identical. The Series A APS and the Series B
APS are sometimes collectively referred to herein as the "APS."
1. DEFINITIONS. (a) Unless the context or use indicates another or
different meaning or intent, in these Amended By-Laws the following terms have
the following meanings, whether used in the singular or plural:
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act APS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Trust which are shares of beneficial interest, including all
outstanding shares of APS and Other APS (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of beneficial interest of a closed-end
investment company as a condition of paying dividends on its Common Shares).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act APS Asset Coverage (as required by paragraph 6 of these Amended
By-Laws) as of the last Business Day of each month, means the last Business Day
of the following month.
" 'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by another nationally recognized rating agency,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by Salomon Smith Barney Inc. or its successors that
are Commercial Paper Dealers, to the Auction Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or
more but fewer than 49 days, such rate shall be the Interest Equivalent of the
30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days,
such rate shall be the Interest Equivalent of the 60-day rate on such commercial
paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the
arithmetic average of the Interest Equivalent on the 60-day and 90-day rates on
such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate
shall be the Interest Equivalent of the 90-day rate on such commercial paper;
(v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 90-day and 120-day rates on such
commercial paper; (vi) 120 or more days but fewer than 141 days, such rate shall
be the Interest Equivalent of the 120-day rate on such commercial paper; (vii)
141 or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day rates on such
commercial paper; and (viii) 162 or more days but fewer than 183 days, such rate
shall be the Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
these Amended By-Laws.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of these
Amended By-Laws.
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"Adviser" means the Trust's investment adviser, which initially shall be
Eaton Vance Management.
"Affiliate" means any Person, other than Salomon Smith Barney Inc. or its
successors, known to the Auction Agent to be controlled by, in control of, or
under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of APS or a Potential
Beneficial Owner.
"Amended By-Laws" means the By-Laws of the Trust, as amended by this
Statement creating the APS and as may otherwise be amended from time-to-time.
"Anticipation Notes" shall mean the following Municipal Obligations:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
of these Amended By-Laws.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the APS or Other APS, as the case may be, for any Dividend Period.
"APS" means, as the case may be, the Auction Preferred Shares.
"APS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of shares of APS
and Other APS Outstanding on such Valuation Date multiplied by the sum of (a)
$25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
APS and Other APS Outstanding, in each case, to (but not including) the end of
the current Dividend Period for each series of APS that follows such Valuation
Date in the event the then current Dividend Period will end within 37 calendar
days of such Valuation Date or through the 37th day after such Valuation Date in
the event the then current Dividend Period for each series of APS will not end
within 37 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 37 calendar days of such Valuation Date,
the aggregate amount of cash dividends that would accumulate at the Maximum
Applicable Rate applicable to a Dividend Period of 28 or fewer days on any
shares of APS and Other APS Outstanding from the end of such Dividend Period
through the 37th day after such Valuation Date, multiplied by the larger of the
Moody's Volatility Factor and the S&P Volatility Factor, determined from time to
time by Moody's and S&P, respectively (except that if such Valuation Date occurs
during a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then current Non-Payment Period Rate); (D) the amount of
anticipated expenses of the Trust for the 90 days subsequent to such Valuation
Date (including any premiums payable with respect to a Portfolio Insurance
policy); (E) the amount of the Trust's Maximum Potential Additional Dividend
Liability as of such Valuation Date; (F) the amount of any indebtedness or
obligations of the Trust senior in right of payments to the APS; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in any
of (i)(A) through (i)(E) (including, without limitation, and immediately upon
determination, any amounts due and payable by the Trust pursuant to repurchase
agreements and any amounts payable for Municipal Obligations purchased as of
such Valuation Date) less (ii) either (A) the Discounted Value of any of the
Trust's assets, or (B) the face value of any of the Trust's assets if such
assets mature prior to or on the date of redemption of APS or payment of a
liability and are either securities issued or guaranteed by the United States
Government or Deposit Securities, in both cases irrevocably deposited by the
Trust for the payment of the amount needed to redeem shares of APS subject to
redemption or to satisfy any of (i)(B) through (i)(F).
"APS Basic Maintenance Cure Date," with respect to the failure by the Trust
to satisfy the APS Basic Maintenance Amount (as required by paragraph 7(a) of
these Amended By-Laws) as of a given Valuation Date, means the second Business
Day following such Valuation Date.
"APS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Trust which sets forth, as of the related Valuation
B-59
Date, the assets of the Trust, the Market Value and the Discounted Value thereof
(seriatim and in aggregate), and the APS Basic Maintenance Amount.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Trustees of the Trust or a duly authorized committee
thereof enters into an agreement with the Trust to follow the Auction Procedures
for the purpose of determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the APS and Other
APS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of this Article VII, of these Amended By-Laws.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of APS or a Broker-Dealer that holds APS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of this
Article VII, of these Amended By-Laws, that has been selected by the Trust and
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of this Article VII, of these Amended
By-Laws.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Salomon Smith Barney Inc. and such other
commercial paper dealer or dealers as the Trust may from time to time appoint,
or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the shares of beneficial interest designated as
common shares, par value $0.01 per share, of the Trust.
"Date of Original Issue" means, with respect to any share of APS or Other
APS, the date on which the Trust originally issues such share.
"Declaration of Trust" means the Agreement and Declaration of Trust , as
amended and supplemented (including these Amended By-Laws), of the Trust.
"Deposit Securities" means cash and Municipal Obligations rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discounted Value" as of any Valuation Date, means (i) with respect to an
S&P Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor and (ii)(a) with respect to a Moody's Eligible
Asset that is not currently callable as of such Valuation Date at the option of
the issuer thereof, the quotient of the Market Value thereof divided by the
applicable Moody's Discount Factor, or (b) with respect to a Moody's Eligible
Asset that is currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of (1) the lesser of the Market Value or call price
thereof, including any call premium, divided by (2) the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to APS, has the meaning set forth in
paragraph 2(b)(i) of these Amended By-Laws and, with respect to Other APS, has
the equivalent meaning.
B-60
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Trust that is listed as the holder of record of shares of APS
in the Share Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of this
Article VII, of these Amended By-Laws.
"Holder" means a Person identified as a holder of record of shares of APS
in the Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Trust or their designee with respect
to each series of APS or Other APS, as the case may be.
"Initial Dividend Period" has the meaning set forth in paragraph 2(c)(i) of
this Article VII, of these Amended By-Laws and, with respect to Other APS, has
the equivalent meaning.
"Initial Dividend Rate" means the rate per annum established by the Board
of Trustees or their designee, applicable to the Initial Dividend Period for
such series of APS and, with respect to Other APS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Interest Rate Swaps" means the exchange by the Trust with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
fixed rate payments for floating rate payments.
"Interest Rate Locks" means a forward contract under which the Trust locks
in an interest rate at a future settlement date. If the interest rate on the
settlement date exceeds the lock rate, the buyer pays the seller the difference
between the two rates. If the lock rate exceeds the interest rate on the
settlement date, the seller pays the buyer the difference between the two rates.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more Municipal Obligations that qualify as Moody's Eligible
Assets and/or S&P Eligible Assets, the interest rates on which are adjusted at
short term intervals on a basis that is inverse to the simultaneous readjustment
of the interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that he ration of the aggregate
dollar amount of floating rate instruments in inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating instruments have only one reset remaining until
maturity.
"Issue Type Category" means, with respect to a Municipal Obligation
acquired by the Trust, (A) for purposes of calculating Moody's Eligible Assets
as of any Valuation Date, one of the following categories into which such
Municipal Obligation falls based upon a good faith determination by the Fund:
health care issues (including issues related to teaching and non-teaching
hospitals, public or private); housing issues (including issues related to
single- and multi-family housing projects); educational facilities issues
(including issues related to public and private schools); student loan issues;
resource recovery issues; transportation issues (including issues related to
mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); utility issues
(including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not
B-61
falling within one of the aforementioned categories; the general obligation
issue category includes any issue that is directly or indirectly guaranteed by
the State of New York or its political subdivisions. Utility issues are included
in the general obligation issue category if the issue is directly or indirectly
guaranteed by the State of New York or its political subdivisions. Municipal
Obligations in the utility issue category will be classified within one of the
three following sub-categories: (i) electric, gas and combination issues (if the
combination issue includes an electric issue); (ii) water and sewer utilities
and combination issues (if the combination issue does not include an electric
issue); and (iii) irrigation, resource recovery, solid waste and other
utilities. Municipal Obligations in the transportation issue category will be
classified within one of the two following sub-categories: (i) streets and
highways, toll roads, bridges and tunnels, airports and multi-purpose port
authorities (multiple revenue streams generated by toll roads, airports, real
estate, bridges); (ii) mass transit, parking seaports and others.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of APS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Trust from dealers who are members
of the National Association of Securities Dealers, Inc. and who make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are valued at closing prices for such instruments established by the
exchange or board of trade on which they are traded, or if market quotations are
not readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Trustees.
"Maximum Applicable Rate," with respect to APS, has the meaning set forth
in paragraph 10(a)(vii) of this Article VII, of these Amended By-Laws and, with
respect to Other APS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Trust were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and its successors.
"Moody's Discount Factor" means for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined by reference to
(i)(A) in the even such Municipal obligation is covered by an Original Issue
Insurance policy or a Portfolio Insurance policy which does not provide the
Trust with the option to obtain Permanent Insurance with respect to such
Municipal Obligation, or is not covered by bond insurance, the Moody's or S&P
rating on such Municipal Obligation, (B) in the event such Municipal Obligation
is covered by a Secondary Market Insurance policy, the Moody's insurance
B-62
claims-paying ability rating of the issuer of the policy, or (C) in the event
such Municipal Obligation is covered by a Portfolio Insurance with respect to
such Municipal Obligation, at the Trust's option, the Moody's or S&P rating on
such Municipal Obligation or the Moody's insurance claims-paying ability rating
of the issuer of the Portfolio Insurance policy and (ii) the rating on such
asset and the shortest Exposure Period set forth opposite such rating that is
the same length as or is longer than the Moody's Exposure Period, in accordance
with the table set forth below:
RATING CATEGORY
EXPOSURE PERIOD AAA* AA* A* BAA* OTHER** (V)MIG-1*** SP-1**** UNRATED*****
--------------- ---- --- --- ---- ------- ----------- -------- ------------
7 weeks..................... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than 7 weeks.............. 154% 161% 168% 176% 190% 137% 149% 231%
9 weeks or less but greater
than 8 weeks.............. 158% 163% 170% 177% 192% 138% 150% 240%
---------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which
do not mature or have a demand feature at par exercisable in 30 days and
which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB by
S&P or not rated by Moody's or S&P.
If the Moody's Discount Factor used to discount a particular Municipal
Obligation is determined by reference to the insurance claims-paying ability
rating of the insurer of such Municipal Obligation, such Moody's Discount Factor
will be increased by an amount equal to 50% of the difference between (i) the
percentage set forth in the above table under the applicable rating category,
and (ii) the percentage set forth in the above table under the rating category
that is one rating category below the applicable rating category.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMG-1 or P-1 by Moody's and mature or have
a demand feature at par exercisable in 30 days or less or 125%, as long as such
Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature
or have a demand feature at par exercisable in 30 says or less and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.
"Moody's Eligible Asset" means cash, Receivables for Municipal Obligations
Sold, futures and options (to the extent entered into in Moody's Hedging
Transactions) and similar instruments (including Inverse Floaters (provided that
the trusts in which such Inverse Floaters are held may be terminated within five
(5) Business Days) and structured notes), or a Municipal Obligation that (i)
pays interest in cash, (ii) does not have its Moody's rating, as applicable,
suspended by Moody's, and (iii) is part of an issue of Municipal Obligations of
at least $5,000,000 except for Municipal Obligations rated below A by Moody's,
Municipal Obligations within the healthcare Issue Type Category, in which case
the minimum issue size is $10,000,000. Except for general obligation bonds,
Municipal Obligations issued by any one issuer and rated BBB or lower by S&P, Ba
or B by Moody's, or not rated by S&P and Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by the same
issuer and rated Baa by Moody's or A by S&P, may comprise no more than 6% of
total Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more than 10% of
total Moody's Eligible
B-63
Assets; and such Other Securities, Baa, A and AA-rated Municipal Obligations, if
any, together with any Municipal Obligations issued by the same and issuer and
rated Aa by Moody's or AAA by S&P, may comprise no more than 20% of total
Moody's Eligible Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party shall be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Municipal
Obligation.
Other Securities falling within a particular Issue Type Category may
comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Baa by Moody's or A by S&P, may
comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
A by Moody's or AA by S&P, may comprise no more than 40% of total Moody's
Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular issue Type Category and rated Aa by Moody's or AAA by S&P, may
comprise no more than 60% of total Moody's Eligible Assets. For purposes of this
definition, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise
more than 4% of Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations issued by issuers located within the same county
and rated Baa by Moody's or A by S&P, may comprise no more than 6% of Moody's
Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by issuers located within
the same county and rated A by Moody's or Aa by S&P, may comprise no more than
10% of Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same county and rated Aa by Moody's or AAA by S&P,
may comprise no more than 20% of Moody's Eligible Assets; and (B) in no event
may (i) student loan Municipal Obligations comprise more than 10% of Moody's
Eligible Assets; (ii) resource recovery Municipal Obligations comprise more than
10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than 10% of
Moody's Eligible Assets. For purposes of applying the foregoing requirements, a
Municipal Obligation rated BBB- by S&P shall not be considered to be rated BBB
by S&P, Moody's Eligible Assets shall be calculated without including cash, and
Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's
rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-time rating
of A.
When the Trust sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the APS Basic Maintenance
Amount. When the Trust purchases a Moody's Eligible Asset and agrees to sell it
at a future date, such Eligible Asset shall be valued at the amount of cash to
be received by the Trust upon such future date, provided that the counterparty
to the transaction has a long-term debt rating of at least A2 from Moody's and
the transaction has a term of no more than 30 days, otherwise such Eligible
Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by Eaton Vance Management, the Trust's custodian or the Auction Agent
and (d) Liens by virtue of any repurchase agreement; or (ii) deposited
irrevocably for the payment of any liabilities for purposes of determining the
APS Basic Maintenance Amount.
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For purposes of determining as of any Valuation Date whether the Trust has
Moody's Eligible Assets with an aggregate Discounted Value at least equal to the
APS Basic Maintenance Amount, the Trust shall include as a liability in the
calculation of the APS Basic Maintenance Amount an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining Permanent
Insurance with respect to Moody's Eligible Assets that are (i) covered by
Portfolio Insurance policies which provide the Trust with the option to obtain
such Permanent Insurance and (ii) discounted by a Moody's Discount Factor
determined by reference to the insurance claims-paying ability rating of the
issuer of such Portfolio Insurance policy.
"Moody's Exposure Period" means the period commencing on a given Valuation
Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Amended By-Laws.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any 7-Day Dividend Period, any Special Dividend Period of 28 days or
fewer, or any Special Dividend Period of 57 days or more, a multiplicative
factor equal to 275%, except as otherwise provided in the last sentence of this
definition; (ii) in the case of any Special Dividend Period of more than 28 but
fewer than 36 days, a multiplicative factor equal to 203%; (iii) in the case of
any Special Dividend Period of more than 35 but fewer than 43 days, a
multiplicative factor equal to 217%; (iv) in the case of any Special Dividend
Period of more than 42 but fewer than 50 days, a multiplicative factor equal to
226%; and (v) in the case of any Special Dividend Period of more than 49 but
fewer than 57 days, a multiplicative factor equal to 235%. If, as a result of
the enactment of changes to the Code, the greater of the maximum marginal
Federal individual income tax rate applicable to ordinary income and the maximum
marginal Federal corporate income tax rate applicable to ordinary income will
increase, such increase being rounded up to the next five percentage points (the
"Federal Tax Rate Increase"), until the effective date of such increase, the
Moody's Volatility Factor in the case of any Dividend Period described in (i)
above in this definition instead shall be determined by reference to the
following table:
FEDERAL TAX RATE INCREASE VOLATILITY FACTOR
------------------------- -----------------
5%.......................................... 295%
10%........................................... 317%
15%........................................... 341%
20%........................................... 369%
25%........................................... 400%
30%........................................... 436%
35%........................................... 477%
40%........................................... 525%
"Municipal Index" has the meaning set forth in paragraph 8(a) of this
Article VII, of these Amended By-Laws.
"Municipal Obligations" means "municipal obligations" as defined in the
Trust's Registration Statement on Form N-2 (File No. 333-100086) relating to the
APS on file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time, as well as short-term municipal
obligations.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means any period commencing on and including the day
on which the Trust shall fail to (i) declare, prior to the close of business on
the second Business Day preceding any Dividend Payment Date, for payment on or
(to the extent permitted by paragraph 2(c)(i) of this Article VII, of these
Amended By-Laws) within three Business Days after such Dividend Payment Date to
the Holders
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as of 12:00 noon, New York City time, on the Business Day preceding such
Dividend Payment Date, the full amount of any dividend on shares of APS payable
on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares
payable (if declared) on such Dividend Payment Date or (B) on any redemption
date for any shares of APS called for redemption, the Mandatory Redemption Price
per share of such APS or, in the case of an optional redemption, the Optional
Redemption Price per share, and ending on and including the Business Day on
which, by 12:00 noon, New York City time, all unpaid cash dividends and unpaid
redemption prices shall have been so deposited or shall have otherwise been made
available to Holders in same-day funds; provided that, a Non-Payment Period
shall not end unless the Trust shall have given at least five days' but no more
than 30 days' written notice of such deposit or availability to the Auction
Agent, all Existing Holders (at their addresses appearing in the Share Books)
and the Securities Depository. Notwithstanding the foregoing, the failure by the
Trust to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above
within three Business Days after any Dividend Payment Date or redemption date,
as the case may be, in each case to the extent contemplated by paragraph 2(c)(i)
of these Amended By-Laws, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Trust has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be included in such dividend on shares of APS), provided
that the Board of Trustees of the Trust shall have the authority to adjust,
modify, alter or change from time to time the initial Non-Payment Period Rate if
the Board of Trustees of the Trust determines and S&P (and any Substitute Rating
Agency in lieu of S&P in the event such party shall not rate the APS) advise the
Trust in writing that such adjustment, modification, alteration or change will
not adversely affect its then current ratings on the APS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of Article VII, of these Amended By-Laws.
"Notice of Redemption" means any notice with respect to the redemption of
shares of APS pursuant to paragraph 4 of Article VII, of these Amended By-Laws.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
Article VII, of these Amended By-Laws.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of Article VII, of these Amended By-Laws.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Original Issue Insurance" means insurance purchased with respect to a
particular issue of Municipal Obligations at the time of initial issuance. Under
this insurance, the insurer unconditionally guarantees the holder of the
Municipal Obligation timely payment of principal and interest, generally with
certain exceptions for default and acceleration events.
"Other APS" means the auction rate Preferred Shares of the Trust, other
than the APS.
"Other Issues" have the respective meanings specified in the definition of
"Issue Type Category."
"Outstanding" means, as of any date (i) with respect to APS, shares of APS
therefor issued by the Trust except, without duplication, (A) any shares of APS
theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to paragraph 4(c) and (B) any shares of APS as to which the
Trust or any Affiliate thereof shall be a
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Beneficial Owner, provided that shares of APS held by an Affiliate shall be
deemed outstanding for purposes of calculating the APS Basic Maintenance Amount
and (ii) with respect to shares of other Preferred Shares, has the equivalent
meaning.
"Parity Shares" means the APS and each other outstanding series of
Preferred Shares the holders of which, together with the holders of the APS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Permanent Insurance" means an option generally pursuant to a Portfolio
Insurance policy to purchase an irrevocable commitment by the insurer to insure
a Municipal Obligation sold by the Trust. Such options generally only are
exercised to increase the value of a Municipal Obligation on sale if it is
determined that the increased value will exceed the additional Permanent
Insurance premium.
"Person" means and includes an individual, a partnership, a Trust, a trust,
an unincorporated association, a joint venture or other entity or a government
or any agency or political subdivision thereof.
"Portfolio Insurance" means an insurance policy guaranteeing the payment of
principal and interest on specified eligible Municipal Obligations purchased by
and presently held the Trust. Portfolio Insurance generally provides the same
type of coverage as Original Issue Insurance or Secondary Market Insurance.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of APS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of APS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring shares of APS (or, in the case of an Existing Holder, additional
shares of APS).
"Preferred Shares" means the preferred shares of beneficial interest, par
value $0.01 per share, of the Trust, and includes APS and Other APS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means Standard & Poor's/J.J. Kenny or any pricing service
designated by the Board of Trustees of the Trust provided the Trust obtains
written assurance from S&P that such designation will not impair the rating then
assigned by S&P to the APS.
"Quarterly Valuation Date" means the last Business Day of the last month of
each fiscal quarter of the Trust in each fiscal year of the Trust, commencing
from the Date of Original Issue.
"Receivables for Municipal Obligations Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of Article VII, of these Amended By-Laws.
"Response" has the meaning set forth in paragraph 2(c)(iii) of Article VII,
of these Amended By-Laws.
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"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of Article VII, of these Amended By-Laws.
"Right" has the meaning set forth in paragraph 2(e) of Article VII, of
these Amended By-Laws and, with respect to Other APS, has the equivalent
meaning.
"S&P" means Standard & Poor's Corporation, a New York Corporation, and its
successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Obligation which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a)(i) the rating by S&P or Moody's on
such Municipal Obligation or (ii) in the event the Municipal Obligation is
covered by a Secondary Market Issuance policy, the S&P insurance claims-paying
ability rating of the issuer of the policy or (iii) in the event the Municipal
Obligation is covered by a Portfolio Insurance policy which provides the Trust
with the option to obtain Permanent Insurance with respect to such Municipal
Obligation, at the Trust's option, the S&P or Moody's rating on such Municipal
Obligation or the S&P insurance claims paying ability of the insurer of the
Portfolio Insurance policy and (b) the rating on such asset and the shortest
exposure period set forth opposite such rating that is the same length as or is
longer than the S&P Exposure Period, in accordance with the table set forth
below:
S&P RATING CATEGORY
BB AND AAA
S&P EXPOSURE PERIOD AAA AA A BBB BELOW* ZEROS**
------------------- --- --- --- --- ------ -------
45 Business Days................................ 210% 215% 230% 270% 240% 508%
25 Business Days................................ 190% 195% 210% 250% 240% 409%
10 Business Days................................ 175% 180% 195% 235% 240% 303%
7 Business Days................................. 170% 175% 190% 230% 240% 273%
3 Business Days................................. 150% 155% 170% 210% 240% 220%
---------------
* Also includes non-rated Municipal Obligations.
** AAA Rated 30-Year General Obligation Zero Coupon Municipal Obligations.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 120% so long as such Municipal Obligations are rated A-1 or
SP-1 by S&P and mature or have a demand feature in 30 days or less, or 125% if
such Municipal Obligations are not rated by S&P but are rated A-1+ or SP-1+ by
another nationally recognized statistical rating organization; provided,
however, that any such non-S&P rated short-term Municipal Obligations having a
demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such non-S&P short-term Municipal Obligations may comprise no more
than 50% of short-term Municipal Obligations that qualify as S&P Eligible
Assets, provided, however, that Municipal Obligations not rated by S&P but rated
equivalent to BBB or lower by another nationally recognized statistical rating
organization, rated BB or lower by S&P or non-rated (such Municipal Obligations
are hereinafter referred to as "High Yield Securities") may comprise no more
than 20% of the short-term Municipal Obligations that qualify as S&P Eligible
Assets; (ii) the S&P Discount Factor for Receivables for Municipal Obligations
Sold that are due in more than five (5) Business Days from such Valuations Date
will be the S&P Discount Factor applicable to the Municipal Obligations sold;
(iii) no S&P Discount Factor will be applied to cash, money market funds with
effective next day maturities rated AAA by S&P or to Receivables for Municipal
Obligations sold is such receivables are due within five (5) Business Days of
Valuation Date; and (iv) except as set forth in clause (i) above, in the case of
any Municipal Obligation that is not rated by S&P but qualifies as an S&P
Eligible Asset pursuant to clause (iii) of that definition, such Municipal
Obligation will be deemed to have an S&P rating one full rating category lower
than the S&P rating category that is the equivalent of the rating category in
which
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such Municipal Obligation is placed by a nationally recognized statistical
rating organization. "Receivables for Municipal Obligations Sold," for purposes
of calculating S&P Eligible Assets as of any Valuation Date, means the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date. The Trust may adopt S&P Discount Factors for Municipal
Obligations other than Municipal Obligations provided that S&P advises the Trust
in writing that such action will not adversely affect its current rating on the
APS. For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not
rated by S&P, equivalent to A-1+ or SP-1+ by another nationally recognized
statistical rating organization, on a case-by-case basis, which do not mature or
have a demand feature at par exercisable in 30 days and that do not have a
long-term rating, shall be considered to be short-term Municipal Obligations.
"S&P Eligible Asset" means cash, short-term money market instruments,
Receivables for Municipal Obligations Sold or a Municipal Obligation that (i)
except for AAA rated 30-year general obligation zero coupon bonds, is interest
bearing and pays interest at least semi-annually; (ii) is issued by any of the
states, the territories and their subdivisions, counties, cities, towns,
villages, and school districts, agencies, such as authorities and special
districts created by the states, and certain federally sponsored agencies such
as local housing authorities (payments made on these bonds are exempt from
regular federal income taxes and are generally exempt from state and local taxes
in the state of issuance), (iii) is payable with respect to principal and
interest in United States Dollars; (iv) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, is rated at least A
by Moody's (provided that such Moody's-rated Municipal Obligations will be
included in S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 50% of the aggregate Market Value of the
S&P Eligible Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated Municipal Obligation,
such Municipal Obligation will be deemed to have an S&P rating which is one full
rating category lower than its Moody's rating); (v) is not subject to a covered
call or covered put option written by the Trust; (vi) is not part of a private
placement of Municipal Obligations, except for such Municipal Obligations
distributed in a transaction under Rule 144A under the Securities Act of 1933
that also possesses the characteristics of a public issue transaction such as a)
the offering is underwritten, b) the terms are non-negotiable by investors, c)
public bond market settlement conventions are employed and d) investors receive
mandatory registration rights; and (vii) except for Inverse Floaters, is part of
an issue of Municipal Obligations with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million (but in
no event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding.
Notwithstanding the foregoing:
(1) Municipal Obligations of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Obligations does not exceed 10% of the
aggregate Market Value of the S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the
Market Value of such Municipal Obligations exceeds 5% of the aggregate
Market Value of the S&P Eligible Assets; and
(2) Municipal Obligations issued by issuers in any one industry,
except the utility and transportation sectors, will be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 20% of the aggregate Market Value of S&P
Eligible Assets; provided, however, that
(a) the Market Value of the Municipal Obligations of each (1)
electric, gas and combination issues (if the combination issue includes
an electric issue) (2) water and sewer utilities and combination issues
(if the combination issue does not include an electric issue) and (3)
irrigation, resource recovery, solid waste, and other utilities
(provided the security is rated by S&P) comprise no more than 20% of the
Trust's S&P Eligible Assets, and
(b) the Market Value of the Municipal Obligations of (1) streets
and highways, toll roads, bridges and tunnels, airports and
multi-purpose port authorities (multiple revenue streams
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generated by toll roads, air ports, real estate, bridges) issues and (2)
mass transit, parking, seaports and other transportation issues comprise
no more than 40% of the Trust's S&P Eligible Assets; provided that the
Market Value of Municipal Obligations in subgroup (1) comprises no more
than 20% of the Trust's S&P Eligible Assets.
General Obligation Bonds of the State of New York may comprise up to 50% of
the Trust's S&P Eligible Assets. "General Obligation Bonds" include bonds of
issuers that are directly or indirectly guaranteed by the applicable state and
utility issuers where the utility issuer is directly or indirectly supported by
the applicable state.
Escrow bonds (defeased bonds) may comprise 100% of the Trust's S&P Eligible
Assets. Bonds that are legally defeased and secured by direct U.S. government
obligations are not required to meet any minimum issuance size requirement.
Bonds that are economically defeased or secured by other U.S. agency paper must
meet the minimum issuance size requirement for the Trust described above. Bonds
initially rated or rerated as an escrow bond by another Rating Agency are
limited to 50% of the Trust's S&P Eligible Assets, and carry one full rating
lower than the equivalent S&P rating for purposes of determining the applicable
discount factors. Bonds economically defeased and either initially rated or
rerated by S&P or another Rating Agency are assigned that same rating level as
its debt issuer, and will remain in its original industry category.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the APS Basic Maintenance Cure
Date, that the Trust has under these Amended By-Laws to cure any failure to
maintain, as of such Valuation Date, the Discounted Value for its portfolio at
least equal to the APS Basic Maintenance Amount (as described in paragraph 7(a)
of Article VII, of these Amended By-Laws).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
Article VII, of these Amended By-Laws.
"S&P Volatility Factor" means, as of any Valuation Date, a multiplicative
factor equal to (i) 305% in the case of a 7-Day Dividend Period or any Special
Dividend Period of 28 days or fewer, (ii) 268% in the case of any Special
Dividend Period of more than 28 days but fewer than 182 days; and (iii) 204% in
the case of any Special Dividend Period of more than 182 days.
"Secondary Market Insurance" means insurance with respect to a Municipal
Obligation purchase after the time or original issue. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Trust as securities depository for the
shares of APS that agrees to follow the procedures required to be followed by
such securities depository in connection with the shares of APS.
"Series A APS" means the Auction Preferred Shares, Series A.
"Series B APS" means the Auction Preferred Shares, Series B.
"Service" means the United States Internal Revenue Service.
"Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the APS.
"Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the APS.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a
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specified period of one whole year or more but not greater than five years (in
each case subject to adjustment as provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of APS subject to
such Dividend Period shall not be subject to redemption at the option of the
Trust and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Trustees of the Trust, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of APS subject to such Dividend Period shall be redeemable at
the Trust's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Trustees of the Trust after consultation with the
Auction Agent and the Broker-Dealers.
"Subsequent Dividend Period," with respect to APS, has the meaning set
forth in paragraph 2(c)(i) of Article VII, of these Amended By-Laws and, with
respect to Other APS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Trust may from time to time appoint or, in lieu
of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
PaineWebber Incorporated or its affiliates and successors, after consultation
with the Trust, to act as the substitute rating agency or substitute rating
agencies, as the case may be, to determine the credit ratings of the shares of
APS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 a.m., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 a.m., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the Marginal
Tax Rate (expressed as a decimal). The Trust may not utilize a successor index
to the Kenny Index unless S&P provides the Trust with written confirmation that
the use of such successor index will not adversely affect the then-current S&P
rating of the APS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of Article
VII, of these Amended By-Laws.
"Trust" means Eaton Vance Insured New York Municipal Bond Fund, a
Massachusetts business trust.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date.
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"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the APS Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, APS Basic
Maintenance Amount, APS Basic Maintenance Cure Date, APS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, S&P Discount Factor, Moody's Eligible Asset, S&P Eligible
Asset, Moody's Exposure Period, S&P Exposure Period, Moody's Hedging
Transactions, S&P Hedging Transactions, Moody's Volatility Factor, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined by
the Board of Trustees of the Trust in order to obtain a AAA rating from S&P and
Aaa rating from Moody's on the APS on their Date of Original Issue; and the
Board of Trustees of the Trust shall have the authority, without shareholder
approval, to amend, alter or repeal from time to time the foregoing definitions
and the restrictions and guidelines set forth thereunder if Moody's, S&P or any
Substitute Rating Agency advises the Trust in writing that such amendment,
alteration or repeal will not adversely affect its then current rating on the
APS.
2. DIVIDENDS. (a) The Holders of a particular series of APS shall be
entitled to receive, when, as and if declared by the Board of Trustees of the
Trust, out of funds legally available therefor, cumulative dividends each
consisting of (i) cash at the Applicable Rate, (ii) a Right to receive cash as
set forth in paragraph 2(e) below, and (iii) any additional amounts as set forth
in paragraph 2(f) below, and no more, payable on the respective dates set forth
below. Dividends on the shares of each series of APS so declared and payable
shall be paid (i) in preference to and in priority over any dividends declared
and payable on the Common Shares, and (ii) to the extent permitted under the
Code and to the extent available, out of net tax-exempt income earned on the
Trust's investments. To the extent permitted under the Code, dividends on shares
of APS will be designated as exempt-interest dividends. For the purposes of this
section, the term "net tax-exempt income" shall exclude capital gains of the
Trust.
(b)(i) Cash dividends on shares of each series of APS shall accumulate from
the Date of Original Issue and shall be payable, when, as and if declared by the
Board of Trustees, out of funds legally available therefor, commencing on the
Initial Dividend Payment Date. Following the Initial Dividend Payment Date for a
series of APS, dividends on that series of APS will be payable, at the option of
the Trust, either (i) with respect to any 7-Day Dividend Period and any Short
Term Dividend Period of 28 or fewer days, on the day next succeeding the last
day thereof, or (ii) with respect to any Short Term Dividend Period of more than
28 days and with respect to any Long Term Dividend Period, monthly on
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the first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof (each such date referred to in clause (i) or (ii) being herein referred
to as a "Normal Dividend Payment Date"), except that if such Normal Dividend
Payment Date is not a Business Day, then the Dividend Payment Date shall be the
first Business Day next succeeding such Normal Dividend Payment Date. Although
any particular Dividend Payment Date may not occur on the originally scheduled
date because of the exception discussed above, the next succeeding Dividend
Payment Date, subject to such exception, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Board of Trustees shall fix the Dividend
Payment Date. The Board of Trustees by resolution prior to authorization of a
dividend by the Board of Trustees may change a Dividend Payment Date if such
change does not adversely affect the contract rights of the Holders of shares of
APS set forth in the Declaration of Trust or the Amended By-Laws. The Initial
Dividend Period, 7-Day Dividend Periods and Special Dividend Periods with
respect to a series of APS are hereinafter sometimes referred to as Dividend
Periods. Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to the Holders as they appear on the
Stock Register on a date, not exceeding 15 days prior to the payment date
therefor, as may be fixed by the Board of Trustees of the Trust.
(c)(i) During the period from and including the Date of Original Issue to
but excluding the Initial Dividend Payment Date for each series of APS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of APS,
the Applicable Rate for each subsequent dividend period (hereinafter referred to
as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall
commence on and include a Dividend Payment Date and shall end on and include the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from implementation of the
Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period in the case of each series of APS.
Except in the case of the willful failure of the Trust to pay a dividend on a
Dividend Payment Date or to redeem any shares of APS on the date set for such
redemption, any amount of any dividend due on any Dividend Payment Date (if,
prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Trust has declared such dividend payable on such
Dividend Payment Date to the Holders of such shares of APS as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to any shares of APS not paid to such Holders when
due may be paid to such Holders in the same form of funds by 12:00 noon, New
York City time, on any of the first three Business Days after such Dividend
Payment Date or due date, as the case may be, provided that, such amount is
accompanied by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. In the case of a
willful failure of the Trust to pay a dividend on a Dividend Payment Date or to
redeem any shares of APS on the date set for such redemption, the preceding
sentence shall not apply and the Applicable Rate for the Dividend Period
commencing during the Non-Payment Period resulting from such failure shall be
the Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time shall be considered
equivalent to payment to such person in New York Clearing House (next-day) funds
at the same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00 noon,
New York City time, on the next Business Day.
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(ii) The amount of cash dividends per share of any series of APS
payable (if declared) on the Initial Dividend Payment Date, each 7-Day
Dividend Period and each Dividend Payment Date of each Short Term Dividend
Period shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be the number of
days in such Dividend Period or part thereof that such share was
outstanding and the denominator of which will be 365, multiplying the
amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent. During any Long Term Dividend Period, the amount of cash
dividends per share of a series of APS payable (if declared) on any
Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment
Date and the denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest
cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Trust may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend
Period") to the Auction Agent and to each Broker-Dealer, request that the
next succeeding Dividend Period for a series of APS be a number of days
(other than seven), evenly divisible by seven and not fewer than 7 nor more
than 364 in the case of a Short Term Dividend Period or one whole year or
more but not greater than 5 years in the case of a Long Term Dividend
Period, specified in such notice, provided that the Trust may not give a
Request for Special Dividend Period of greater than 28 days (and any such
request shall be null and void) unless, for any Auction occurring after the
initial Auction, Sufficient Clearing Bids were made in the last occurring
Auction and unless full cumulative dividends, any amounts due with respect
to redemption's, and any Additional Dividends payable prior to such date
have been paid in full. Such Request for Special Dividend Period, in the
case of a Short Term Dividend Period, shall be given on or prior to the
second Business Day but not more than seven Business Days prior to an
Auction Date for a series of APS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than 28 days prior to an Auction Date for a series of APS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealer(s) shall
jointly determine whether, given the factors set forth below, it is
advisable that the Trust issue a Notice of Special Dividend Period for the
series of APS as contemplated by such Request for Special Dividend Period
and the Optional Redemption Price of the APS during such Special Dividend
Period and the Specific Redemption Provisions and shall give the Trust and
the Auction Agent written notice (a "Response") of such determination by no
later than the second Business Day prior to such Auction Date. In making
such determination the Broker-Dealer(s) will consider (1) existing
short-term and long-term market rates and indices of such short-term and
long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-
term securities comparable to the APS, (4) industry and financial
conditions which may affect the APS, (5) the investment objective of the
Trust, and (6) the Dividend Periods and dividend rates at which current and
potential beneficial holders of the APS would remain or become beneficial
holders. If the Broker-Dealer(s) shall not give the Trust and the Auction
Agent a Response by such second Business Day or if the Response states that
given the factors set forth above it is not advisable that the Trust give a
Notice of Special Dividend Period for the series of APS, the Trust may not
give a Notice of Special Dividend Period in respect of such Request for
Special Dividend Period. In the event the Response indicates that it is
advisable that the Trust give a Notice of Special Dividend Period for the
series of APS, the Trust may by no later than the second Business Day prior
to such Auction Date give a notice (a "Notice of Special Dividend Period")
to the Auction Agent, the Securities Depository and each Broker-Dealer
which notice will specify (i) the duration of the Special Dividend Period,
(ii) the Optional Redemption Price as specified in the related Response and
(iii) the Specific Redemption Provisions, if any, as specified in the
related Response. The Trust also shall provide a copy of such Notice of
Special Dividend Period to Moody's and S&P. The Trust shall not give a
Notice of Special Dividend Period and, if the Trust has given a Notice of
Special Dividend Period, the Trust is required to give telephonic and
written notice of its revocation (a "Notice of
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Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction
Date if (x) either the 1940 Act APS Asset Coverage is not satisfied or the
Trust shall fail to maintain S&P Eligible Assets or Moody's Eligible Assets
with an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Auction Date on an actual
basis and on a pro forma basis giving effect to the proposed Special
Dividend Period (using as a pro forma dividend rate with respect to such
Special Dividend Period the dividend rate which the Broker-Dealers shall
advise the Trust is an approximately equal rate for securities similar to
the APS with an equal dividend period), (y) sufficient funds for the
payment of dividends payable on the immediately succeeding Dividend Payment
Date have not been irrevocably deposited with the Auction Agent by the
close of business on the third Business Day preceding the related Auction
Date or (z) the Broker-Dealer(s) jointly advise the Trust that after
consideration of the factors listed above they have concluded that it is
advisable to give a Notice of Revocation. The Trust also shall provide a
copy of such Notice of Revocation to S&P and Moody's. If the Trust is
prohibited from giving a Notice of Special Dividend Period as a result of
any of the factors enumerated in clause (x), (y) or (z) above or if the
Trust gives a Notice of Revocation with respect to a Notice of Special
Dividend Period for any series of APS, the next succeeding Dividend Period
will be a 7-Day Dividend Period. In addition, in the event Sufficient
Clearing Bids are not made in the applicable Auction or such Auction is not
held for any reason, such next succeeding Dividend Period will be a 7-Day
Dividend Period and the Trust may not again give a Notice of Special
Dividend Period for the APS (and any such attempted notice shall be null
and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period.
(d)(i) Holders shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends and applicable
late charges, as herein provided, on the shares of APS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(i) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the shares of APS that
may be in arrears.
(ii) For so long as any share of APS is Outstanding, the Trust shall
not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or
other shares of beneficial interest, if any, ranking junior to the shares
of APS as to dividends or upon liquidation) in respect of the Common Shares
or any other shares of beneficial interest of the Trust ranking junior to
or on a parity with the shares of APS as to dividends or upon liquidation,
or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of the Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Trust
ranking junior to the shares of APS as to dividends and upon liquidation)
or any other such Parity Shares (except by conversion into or exchange for
stock of the Trust ranking junior to or on a parity with the shares of APS
as to dividends and upon liquidation), unless (A) immediately after such
transaction, the Trust shall have S&P Eligible Assets and Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount and the Trust shall maintain the 1940 Act APS
Asset Coverage, (B) full cumulative dividends on shares of APS and shares
of Other APS due on or prior to the date of the transaction have been
declared and paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent, (C) any Additional
Dividend required to be paid under paragraph 2(e) below on or before the
date of such declaration or payment has been paid and (D) the Trust has
redeemed the full number of shares of APS required to be redeemed by any
provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an
uncertificated right (a "Right") to receive an Additional Dividend (as defined
below), and (iii) any additional amounts as set forth in paragraph 2(f) below.
Each Right shall thereafter be independent of the share or shares of APS on
which the dividend was paid. The Trust shall cause to be maintained a record of
each Right received
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by the respective Holders. A Right may not be transferred other than by
operation of law. If the Trust retroactively allocates any net capital gains or
other income subject to regular Federal income taxes to shares of APS without
having given advance notice thereof to the Auction Agent as described in
paragraph 2(f) hereof solely by reason of the fact that such allocation is made
as a result of the redemption of all or a portion of the outstanding shares of
APS, the liquidation of the Trust, or a debt obligation believed to be a
Municipal Obligation proving to be taxable (the amount of such allocation
referred to herein as a "Retroactive Taxable Allocation"), the Trust will,
within 90 days (and generally within 60 days) after the end of the Trust's
fiscal year for which a Retroactive Taxable Allocation is made, provide notice
thereof to the Auction Agent and to each holder of a Right applicable to such
shares of APS (initially Cede & Co. as nominee of The Depository Trust Company)
during such fiscal year at such holder's address as the same appears or last
appeared on the Share Books of the Trust. The Trust will, within 30 days after
such notice is given to the Auction Agent, pay to the Auction Agent (who will
then distribute to such holders of Rights), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividend with respect to
all Retroactive Taxable Allocations made to such holders during the fiscal year
in question.
An "Additional Dividend" means payment to a present or former holder of
shares of APS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and New York State and City income tax consequences) from the aggregate
of both the Retroactive Taxable Allocations and the Additional Dividend to be
equal to the dollar amount of the dividends which would have been received by
such holder if the amount of the aggregate Retroactive Taxable Allocations would
have been excludable from the gross income of such holder. Such Additional
Dividend shall be calculated (i) without consideration being given to the time
value of money; (ii) assuming that no holder of shares of APS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Trust; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of APS at the greater of: (x) the
maximum marginal combined regular Federal and New York State and City individual
income tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (including any surtax); or (y) the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or capital gains depending on the taxable character of the distribution
(disregarding in both (x) and (y) the effect of any other state or local taxes
and the phase out of, or provision limiting, personal exemptions, itemized
deductions, or the benefit of lower tax brackets).
(f) Except as provided below, whenever the Trust intends to include any net
capital gains or other income subject to regular Federal income taxes in any
dividend on shares of APS, the Trust will notify the Auction Agent of the amount
to be so included at least 5 Business Days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. The Trust may also
include such income in a dividend on shares of a series of APS without giving
advance notice thereof if it increases the dividend by an additional amount
calculated as if such income was a Retroactive Taxable Allocation and the
additional amount was an Additional Dividend, provided that the Trust will
notify the Auction Agent of the additional amounts to be included in such
dividend at least 5 Business Days prior to the applicable Dividend Payment Date.
(g) No fractional shares of APS shall be issued.
3. LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of
the Trust, whether voluntary or involuntary, the Holders shall be entitled to
receive, out of the assets of the Trust available for distribution to
shareholders, before any distribution or payment is made upon any Common Shares
or any other shares of beneficial interest ranking junior in right of payment
upon liquidation to the APS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Trust, the amounts
payable with respect to the APS and any other Outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the APS as to
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payment upon liquidation are not paid in full, the Holders and the holders of
such other class or series will share ratably in any such distribution of assets
in proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the Holders will not be entitled to any further participation in
any distribution of assets by the Trust except for any Additional Dividends. A
consolidation, merger or statutory share exchange of the Trust with or into any
other Trust or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Trust shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Trust.
4. REDEMPTION. (a) Shares of APS shall be redeemable by the Trust as
provided below:
(i) To the extent permitted under the 1940 Act and Massachusetts law,
upon giving a Notice of Redemption, the Trust at its option may redeem
shares of any series of APS, in whole or in part, out of funds legally
available therefor, at the Optional Redemption Price per share, on any
Dividend Payment Date; provided that no share of APS may be redeemed at the
option of the Trust during (A) the Initial Dividend Period with respect to
a series of shares or (B) a Non-Call Period to which such share is subject.
In addition, holders of APS which are redeemed shall be entitled to receive
Additional Dividends to the extent provided herein. The Trust may not give
a Notice of Redemption relating to an optional redemption as described in
this paragraph 4(a)(i) unless, at the time of giving such Notice of
Redemption, the Trust has available Deposit Securities with maturity or
tender dates not later than the day preceding the applicable redemption
date and having a value not less than the amount due to Holders by reason
of the redemption of their shares of APS on such redemption date, the
Discounted Value of S&P Eligible Assets at least equals the APS Basic
Maintenance Amount, and would at least equal the APS Basic Maintenance
Amount immediately subsequent to such redemption if such redemption were to
occur on such date.
(ii) The Trust shall redeem, out of funds legally available therefor,
at the Mandatory Redemption Price per share, shares of APS to the extent
permitted under the 1940 Act and Massachusetts law, on a date fixed by the
Board of Trustees, if the Trust fails to maintain S&P Eligible Assets and
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount as provided in paragraph 7(a)
or to satisfy the 1940 Act APS Asset Coverage as provided in paragraph 6
and such failure is not cured on or before the APS Basic Maintenance Cure
Date or the 1940 Act Cure Date (herein collectively referred to as a "Cure
Date"), as the case may be. In addition, holders of APS so redeemed shall
be entitled to receive Additional Dividends to the extent provided herein.
The number of shares of APS to be redeemed shall be equal to the lesser of
(i) the minimum number of shares of APS the redemption of which, if deemed
to have occurred immediately prior to the opening of business on the Cure
Date, together with all shares of other Preferred Shares subject to
redemption or retirement, would result in the Trust having S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset
Coverage, as the case may be, on such Cure Date (provided that, if there is
no such minimum number of shares of APS and shares of other Preferred
Shares the redemption of which would have such result, all shares of APS
and shares of other Preferred Shares then Outstanding shall be redeemed),
and (ii) the maximum number of shares of APS, together with all shares of
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of APS required to be
redeemed in accordance with the foregoing, the Trust shall allocate the
number required to be redeemed which would result in the Trust having S&P
Eligible Assets and Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount or
satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro
rata among shares of APS of all series, Other APS and other Preferred
Shares subject to redemption pursuant to provisions similar to those
contained in this paragraph 4(a)(ii); provided that, shares of APS which
may not be redeemed at the option of the Trust due to the designation of a
Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to
satisfy the
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number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the
Non-Call Period (with shares with the lowest number of days to be redeemed
first) and by lot in the event of shares having an equal number of days in
such Non-Call Period. The Trust shall effect such redemption on a Business
Day which is not later than 35 days after such Cure Date, except that if
the Trust does not have funds legally available for the redemption of all
of the required number of shares of APS and shares of other Preferred
Shares which are subject to mandatory redemption or the Trust otherwise is
unable to effect such redemption on or prior to 35 days after such Cure
Date, the Trust shall redeem those shares of APS which it is unable to
redeem on the earliest practicable date on which it is able to effect such
redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
APS may be redeemed pursuant to paragraph 4(a)(i) of Article VII, of these
Amended By-Laws (i) unless all dividends in arrears on all remaining outstanding
shares of Parity Shares shall have been or are being contemporaneously paid or
declared and set apart for payment and (ii) if redemption thereof would result
in the Trust's failure to maintain S&P Eligible Assets and Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount. In the event that less than all the outstanding shares of a
series of APS are to be redeemed and there is more than one Holder, the shares
of that series of APS to be redeemed shall be selected by lot or such other
method as the Trust shall deem fair and equitable.
(c) Whenever shares of APS are to be redeemed, the Trust, not less than 17
nor more than 30 days prior to the date fixed for redemption, shall mail a
notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of shares of APS to be redeemed and to the Auction Agent. The Trust shall
cause the Notice of Redemption to also be published in the eastern and national
editions of The Wall Street Journal. The Notice of Redemption shall set forth
(i) the redemption date, (ii) the amount of the redemption price, (iii) the
aggregate number of shares of APS of such series to be redeemed, (iv) the place
or places where shares of APS of such series are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed shall cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of these Amended
By-Laws pursuant to which such shares are being redeemed. No defect in the
Notice of Redemption or in the mailing or publication thereof shall affect the
validity of the redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Trust shall have deposited in trust with the
Auction Agent, or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, Deposit Securities (with a right of substitution)
having an aggregate Discounted Value (utilizing in the case of S&P an S&P
Exposure Period of 22 Business Days and in the case of Moody's the Moody's
Exposure Period of 49 days) equal to the redemption payment for the shares of
APS as to which such Notice of Redemption has been given with irrevocable
instructions and authority to pay the redemption price to the Holders of such
shares, then upon the date of such deposit or, if no such deposit is made, then
upon such date fixed for redemption (unless the Trust shall default in making
the redemption payment), all rights of the Holders of such shares as
shareholders of the Trust by reason of the ownership of such shares will cease
and terminate (except their right to receive the redemption price in respect
thereof and any Additional Dividends, but without interest), and such shares
shall no longer be deemed outstanding. The Trust shall be entitled to receive,
from time to time, from the Auction Agent the interest, if any, on such Deposit
Securities deposited with it and the Holders of any shares so redeemed shall
have no claim to any of such interest. In case the Holder of any shares so
called for redemption shall not claim the redemption payment for his shares
within one year after the date of redemption, the Auction Agent shall, upon
demand, pay over to the Trust such amount remaining on deposit and the Auction
Agent shall thereupon be relieved of all responsibility to the Holder of such
shares called for redemption and such Holder thereafter shall look only to the
Trust for the redemption payment.
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5. VOTING RIGHTS. (a) General. Except as otherwise provided in the
Declaration of Trust or Amended By-Laws, each Holder of shares of APS shall be
entitled to one vote for each share held on each matter submitted to a vote of
shareholders of the Trust, and the holders of outstanding shares of Preferred
Shares, including APS, and of shares of Common Shares shall vote together as a
single class; provided that, at any meeting of the shareholders of the Trust
held for the election of trustees, the holders of outstanding shares of
Preferred Shares, including APS, shall be entitled, as a class, to the exclusion
of the holders of all other securities and classes of capital stock of the
Trust, to elect two trustees of the Trust. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Trust, including the
holders of outstanding shares of Preferred Shares, including APS, voting as a
single class, shall elect the balance of the trustees.
(b) Right to Elect Majority of Board of Trustees. During any period in
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Shares, would constitute a majority of the Board
of Trustees as so increased by such smallest number; and the holders of shares
of Preferred Shares shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of shares of
beneficial interest of the Trust), to elect such smallest number of additional
trustees, together with the two trustees that such holders are in any event
entitled to elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of APS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Shares
are entitled to elect a majority of the trustees of the Trust under the
1940 Act. Upon the termination of a Voting Period, the voting rights
described in this paragraph 5(b) shall cease, subject always, however, to
the reverting of such voting rights in the Holders upon the further
occurrence of any of the events described in this paragraph 5(b)
(c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of APS are outstanding, the Trust shall not, without the affirmative vote
of the Holders of at least a majority of the shares of Preferred Shares
Outstanding at the time, voting separately as one class, approve any conversion
of the Trust from a closed-end to an open-end investment company and: (i)
authorize, create or issue any class or series of shares of beneficial interest
ranking prior to the APS or any other series of Preferred Shares with respect to
payment of dividends or the distribution of assets on liquidation, or (ii)
amend, alter or repeal the provisions of the Declaration of Trust, whether by
merger, consolidation or otherwise, so as to adversely affect any of the
contract rights expressly set forth in the Declaration of Trust of holders of
shares of APS or any other Preferred Shares. To the extent permitted under the
1940 Act, in the event shares of more than one series of APS are outstanding,
the Trust shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the
Declaration of Trust of a Holder of shares of a series of APS differently than
those of a Holder of shares of any other series of APS without the affirmative
vote of the holders of at least a majority of the shares of APS of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Trust shall notify S&P and Moody's ten
(10) Business Days prior to any such vote described in clause (i) or (ii).
Unless a higher percentage is provided for under the Declaration of Trust, the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred Shares, including APS, voting together as a single class, will be
required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act. The class vote of holders
of shares of Preferred Shares, including APS, described above will in each case
be in addition to a separate vote of the requisite
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percentage of shares of Common Shares and shares of Preferred Shares, including
APS, voting together as a single class necessary to authorize the action in
question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Shares to elect additional trustees as
described in paragraph 5(b) above, the Trust shall call a special meeting
of such holders and instruct the Auction Agent to mail a notice of such
special meeting to such holders, such meeting to be held not less than 10
nor more than 20 days after the date of mailing of such notice. If the
Trust fails to send such notice to the Auction Agent or if the Trust does
not call such a special meeting, it may be called by any such holder on
like notice. The record date for determining the holders entitled to notice
of and to vote at such special meeting shall be the close of business on
the fifth Business Day preceding the day on which such notice is mailed. At
any such special meeting and at each meeting held during a Voting Period,
such Holders, voting together as a class (to the exclusion of the holders
of all other securities and classes of shares of beneficial interest of the
Trust), shall be entitled to elect the number of directors prescribed in
paragraph 5(b) above. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of such holders present in person or by
proxy shall have the power to adjourn the meeting without notice, other
than by an announcement at the meeting, to a date not more than 120 days
after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether
such right is created by these Amended By-Laws, by the other provisions of
the Declaration of Trust, by statute or otherwise, a share of APS which is
not Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust
at the time of a special meeting of Holders and holders of other Preferred
Shares to elect trustees shall continue, notwithstanding the election at
such meeting by the Holders and such other holders of the number of
trustees that they are entitled to elect, and the persons so elected by the
Holders and such other holders, together with the two incumbent trustees
elected by the Holders and such other holders of Preferred Shares and the
remaining incumbent trustees elected by the holders of the Common Shares
and Preferred Shares, shall constitute the duly elected trustees of the
Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional trustees elected by the Holders and holders of
other Preferred Shares pursuant to paragraph 5(b) above shall terminate,
the remaining trustees shall constitute the trustees of the Trust and the
voting rights of the Holders and such other holders to elect additional
trustees pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
shares of APS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of APS shall have no
preemptive rights or rights to cumulative voting. In the event that the Trust
fails to pay any dividends on the shares of APS, the exclusive remedy of the
Holders shall be the right to vote for trustees pursuant to the provisions of
this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of APS
is required pursuant to the provisions of Section 13(a) of the 1940 Act, the
Trust shall, not later than ten Business Days prior to the date on which such
vote is to be taken, notify S&P that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken and, not later than
ten Business Days after the date on which such vote is taken, notify S&P of the
result of such vote.
6. 1940 ACT APS ASSET COVERAGE. The Trust shall maintain, as of the last
Business Day of each month in which any share of APS is outstanding, the 1940
Act APS Asset Coverage.
7. APS BASIC MAINTENANCE AMOUNT. The following references in this
paragraph 7 to S&P Eligible Assets and/or Moody's Eligible Assets, as the case
may be, are only applicable if S&P and/or Moody's, as the case may be, is rating
the APS. (a) The Trust shall maintain, on each Valuation Date, and shall verify
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to its satisfaction that it is maintaining on such Valuation Date S&P Eligible
Assets and Moody's Eligible Assets having an aggregate Discounted Value equal to
or greater than the APS Basic Maintenance Amount. Upon any failure to maintain
the required Discounted Value, the Trust will use its best efforts to alter the
composition of its portfolio to retain a Discounted Value at least equal to the
APS Basic Maintenance Amount on or prior to the APS Basic Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the APS Basic
Maintenance Amount, the Trust shall complete and deliver to the Auction Agent,
Moody's and S&P, a complete APS Basic Maintenance Report as of the date of such
failure, which will be deemed to have been delivered to the Auction Agent if the
Auction Agent receives a copy or telecopy, telex or other electronic
transcription thereof and on the same day the Trust mails to the Auction Agent
for delivery on the next Business Day the complete APS Basic Maintenance Report.
The Trust will deliver an APS Basic Maintenance Report to the Auction Agent,
Moody's and S&P, on or before 5:00 p.m., New York City time, on the third
Business Day after a Valuation Date on which the Trust cures its failure to
maintain S&P Eligible Assets and Moody's, with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount or on which the Trust
fails to maintain S&P Eligible Assets and Moody's Eligible Assets, with an
aggregate Discounted Value which exceeds the APS Basic Maintenance Amount by 5%
or more. The Trust will also deliver an APS Basic Maintenance Report to the
Auction Agent and S&P, Moody's as of each Quarterly Valuation Date on or before
the third Business Day after such date. Additionally, on or before 5:00 p.m.,
New York City time, on the third Business Day after the first day of a Special
Dividend Period, the Trust will deliver an APS Basic Maintenance Report to S&P,
Moody's and the Auction Agent. The Trust shall also provide S&P and Moody' with
an APS Basic Maintenance Report when specifically requested by S&P or Moody's,
as applicable. A failure by the Trust to deliver an APS Basic Maintenance Report
under this paragraph 7(b) shall be deemed to be delivery of an APS Basic
Maintenance Report indicating the Discounted Value for S&P Eligible Assets and
Moody's Eligible Assets of the Trust is less than the APS Basic Maintenance
Amount, as of the relevant Valuation Date.
(c) Within 10 Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation 50 Date, the Independent Accountant will confirm in writing
to the Auction Agent, Moody's and S&P (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other APS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Trust during the quarter ending on such Quarterly Valuation Date), (ii)
that, in such Report (and in such randomly selected Report), the Trust correctly
determined the assets of the Trust which constitute S&P Eligible Assets and
Moody's Eligible Assets at such Quarterly Valuation Date in accordance with
these Amended By-Laws, (iii) that, in such Report (and in such randomly selected
Report), the Trust determined whether the Trust had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly selected Report) in
accordance with these Amended By-Laws, S&P Eligible Assets and Moody's Eligible
Assets of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, (iv) with respect to the S&P ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent Accountant has requested that S&P verify such information
and the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any differences),
(vi) with respect to the bid or mean price (or such alternative permissible
factor used in calculating the Market Value) provided by the custodian of the
Trust's assets to the Trust for purposes of valuing securities in the Trust's
portfolio, the Independent Accountant has traced the price used in such Report
to the bid or mean price listed in such Report as provided to the Trust and
verified that such information agrees (in the event such information does not
agree, the Independent Accountant will provide a listing in its letter of such
differences) and (vii) with respect to such confirmation to Moody's, that the
Trust has satisfied the requirements of paragraph 8(b) of these Amended By-Laws
(such confirmation is herein called the "Accountant's Confirmation").
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(d) Within 10 Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to any
Valuation Date on which the Trust failed to maintain S&P Eligible Assets and
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the APS Basic Maintenance Amount, and relating to the APS Basic Maintenance
Cure Date with respect to such failure, the Independent Accountant will provide
to the Auction Agent, Moody's and S&P an Accountant's Confirmation as to such
APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraphs
(c) or (d) of this paragraph 7 shows that an error was made in the APS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets and Moody's
Eligible Assets of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be final
and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the APS Basic Maintenance Report to the Auction
Agent, Moody's and S&P promptly following receipt by the Trust of such
Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of APS, the Trust will complete
and deliver to S&P and Moody's an APS Basic Maintenance Report as of the close
of business on such Date of Original Issue. Within five Business Days of such
Date of Original Issue, the Independent Accountant will confirm in writing to
S&P and Moody's (i) the mathematical accuracy of the calculations reflected in
such Report and (ii) that the aggregate Discounted Value of S&P Eligible Assets
or Moody's Eligible Assets, as applicable reflected thereon equals or exceeds
the APS Basic Maintenance Amount reflected thereon. Also, on or before 5:00
p.m., New York City time, on the first Business Day after shares of Common
Shares are repurchased by the Trust, the Trust will complete and deliver to S&P
and Moody's an APS Basic Maintenance Report as of the close of business on such
date that Common Shares is repurchased.
8. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any shares of APS are rated by S&P, the Trust will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the shares of APS by S&P except that the Trust may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds"), write, purchase or sell put and call options on such contracts, enter
into Interest Rate Locks and enter into Interest Rate Swaps (collectively, "S&P
Hedging Transactions"), subject to the following limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures
contract or option held by the Trust by the Trust's taking an opposite
position thereto ("Closing Transactions")), which would cause the Trust at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Trust's total assets
divided by $1,000 or (C) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the average number of daily
traded futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 25% of the quotient of the Market Value of the
Trust's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding futures contracts
based on Treasury Bonds exceeding in number 10% of the average
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number of daily traded futures contracts based on Treasury Bonds in the 30
days preceding the time of effecting such transaction as reported by The
Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have S&P Eligible Assets Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount
on two consecutive Valuation Dates and (B) the Trust is required to pay
Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or high grade
(rated A or better by S&P), fixed-income securities in a segregated account
with the Trust's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the account of or on
behalf of the Trust's broker with respect to such futures contract or
option equals the Market Value of the futures contract or option, or, in
the event the Trust writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets
with a Discounted Value that equals or exceeds the APS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal
to (i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned
by the Trust plus (ii) 25% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Trust.
(vi) the Trust will only enter into Interest Rate Locks subject to the
following conditions: (A) for counterparties with a S&P short-term rating,
the counterparty to the transaction must have either (1) a short-term
rating of A-1+ or (2) a long-term rating of AAA; (B) for counterparties
without an S&P short-term rating, the counterparty to the transaction must
have a senior unsecured long-term debt rating equal to or higher than the
desired rating of the issue; (C) the original aggregate notional amount of
the Interest Rate Lock transaction(s) must not be greater than the
liquidation preference or the Preferred Shares originally issued; (C) the
Interest Rate Lock transaction is marked-to-market on a daily basis by a
broker covering the transaction and verified by the Trust's custodian; (D)
the terms of the Interest Rate Lock agreement provides for its immediate
termination if the Trust fails to maintain an aggregate discounted value at
least equal to the APS Basic Maintenance Amount on 2 consecutive Valuation
Dates; (E) the counterparty to the Interest Rate Lock agrees not to cause
the Trust to file for Bankruptcy, voluntarily or involuntarily; and (F) for
purposes of calculating the APS Basic Maintenance Amount, the Discount
Factor for Interest Rate Lock is 95% for any positive mark-to-market
valuation of the Trust's rights under an Interest Rate Lock and 100% for
any negative mark-to-market valuation of the Trust's rights under an
Interest Rate Lock.
(vii) the Trust will only enter into Interest Rate Swaps subject to
the following conditions: (A) the counterparty to the swap transaction has
a short-term rating of not less than the desired rating of the issue or, if
the counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is equal to or higher than the
desired rating of the issue; (B) the original aggregate notional amount of
the Interest Rate Swap transaction(s) is not greater than the liquidation
preference of the Preferred Shares originally issued; (C) the Interest Rate
Swap transaction is marked-to-market daily by the swap counterparty; (D)
the terms of the Interest Rate Swap agreement provides for its immediate
termination if the Trust fails to maintain an aggregate discounted value at
least equal to the APS Basic Maintenance Amount on 2 consecutive Valuation
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Dates; (E) the counterparty to the Interest Rate Swap agrees not to cause
the Trust to file for Bankruptcy, voluntarily or involuntarily; and (F) for
purposes of calculating the APS Basic Maintenance Amount, the Discount
Factor for Interest Rate Swaps is 95% for any positive mark-to-market
valuation of the Trust's rights under an Interest Rate Swap and 100% for
any negative mark-to-market valuation of the Trust's rights under an
Interest Rate Swap.
(b) For so long as any shares of APS are rated by Moody's, the Trust will
not buy or sell futures contracts, write, purchase or sell put or call options
on futures contracts or write put or call options (except covered call or put
options) on portfolio securities unless sit receives written confirmation from
Moody's that engaging in such transactions would not impair the rating then
assigned to the shares of APS by Moody's, except that the Trust may purchase or
sell exchange-traded futures contracts based on the Municipal Index or Treasury
Bonds and purchase, write or sell exchange-traded put options on such futures
contracts and purchase, write or sell exchange-traded call options on such
futures contracts (collectively, Moody's Hedging Transactions"), subject to the
following limitations:
(i) the Trust will not engage in any Moody's Hedging Transactions
based on the Municipal Index (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on
the Municipal Index in the thirty days preceding the time of effecting such
transaction as reported by The Wall Street Journal or (B) outstanding
futures contracts based on the Municipal Index having a Market Value
exceeding 50% of the Market Value constituting Moody's Eligible Assets
owned by the Trust;
(ii) the Trust will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Trust at the time of such transaction to own or have sold in the
aggregate (A) outstanding futures contracts based on Treasury Bonds having
an aggregate Market Value exceeding 5% of the aggregate Market Value of all
Moody's Eligible Assets owned by the Trust and rated Aaa by Moody's, (B)
outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 25% of the aggregate Market Value of all Moody's
Eligible Assets owned by the Trust and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by S&P) or (C) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 45% of the aggregate Market Value of Moody's Eligible Assets
owned by the Trust and rated Baa or A by Moody's (or, if not rated by
Moody's but rated by S&P, rated A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Trust shall be deemed to own the number
of futures contracts that underlie any outstanding options written by the
Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal
is less that 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such options
expires;
(v) the Trust will engage in Moody's Hedging Transaction only with
respect to futures contracts or options thereon having the next settlement
date for such type of futures contract or options, or the settlement date
immediately thereafter;
(vi) the Trust will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the Trust
that to do so would not adversely affect Moody's then current rating of the
shares of APS; provided, however, that the Trust will not be deemed to have
engaged in a futures or options transaction for leveraging or speculative
purposes so long as it has done so otherwise in accordance with this
paragraph 8; and
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(vii) the Trust will not enter into an option or futures transaction
unless, after giving effect thereto, the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Trust is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows (unless the
Trust receives written confirmation to the contrary from Moody's): (i)
assets subject to call options written by the Trust which are either
exchange-traded and "readily reversible" or which expire within 48 days
after the date as of which such valuation is made shall be valued at the
lesser of (a) Discounted Value and (b) the exercise price of the call
option written by the Trust; (ii) assets subject to call options written by
the Trust not meeting the requirements of clause (i) of this sentence shall
have no value; (iii) assets subject to put options written by the Trust
shall be valued at the lesser of (a) the exercise price and (b) the
Discounted Value of such security; and (iv) futures contracts shall be
valued at the lesser of (a) settlement price and (b) the Discounted Value
of the subject security, provided that, if a contract matures within 48
days after the date as of which such valuation is made, where the Trust is
the seller the contract may be valued at the settlement price and where the
Trust is the buyer the contract may be valued at the Discounted Value of
the subject securities.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS
Basic Maintenance Amount, the following amounts shall be added to the APS
Basic Maintenance Amount required to be maintained by the Trust under
paragraph 7 of these By-Laws (unless the Trust receives written
confirmation to the contrary from Moody's): (i) 10% of the exercise price
of a written call option; (ii) the exercise price of any written put
option; (iii) where the Trust is the seller under a futures contract, 10%
of the settlement price of the futures contract; (iv) where the Trust is
the purchaser under a futures contract, the settlement price of assets to
be purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Trust writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures
contracts if the Trust writes call options on futures contracts and does
not won the underlying contract.
(viii) the Trust will not enter into Interest Rate Locks unless
Moody's advises the Trust that to do so would not adversely affect Moody's
then current rating of the shares of APS.
(ix) the Trust will not enter into Interest Rate Swaps unless Moody's
advises the Trust that to do so would not adversely affect Moody's then
current rating of the shares of APS.
(c) For so long as any shares of APS are rated by Moody's the Trust will
not enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under paragraph 8(b)), except
that the Trust may enter into such contracts to purchase newly-issued securities
on the date such securities are issued ("Forward Commitments"), subject to the
following limitations:
(i) the Trust will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a face value that equals or exceeds the amount of the
Trust's obligations under any Forward Commitments to which it is form time
to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Trust's obligations under
any Forward Commitments to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless, after
giving effect thereto, the Trust would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS
Basic Maintenance Amount, the Discounted Value
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of all Forward Commitment to which the Trust is a party and of all
securities deliverable to the Trust pursuant to such Forward Commitments
shall be zero.
(d) For so long as shares of APS are rated by S&P or Moody's, the Trust
will not, unless it has received written confirmation from S&P or Moody's, as
applicable, that such action would not impair the rating then assigned to shares
of APS by S&P or Moody's, as applicable (i) borrow money except for the purpose
of clearing transactions in portfolio securities (which borrowings shall under
any circumstances be limited to the lesser of $10 million or an amount equal to
5% of the Market Value of the Trust's assets at the time of such borrowings and
which borrowings shall be repaid within 60 days and not be extended or renewed
and shall not cause the aggregate Discounted Value of S&P Eligible Assets and
Moody's Eligible Assets to be less than the APS Basic Maintenance Amount), (ii)
engage in short sales of securities, (iii) lend any securities, (iv) issue any
class or series of stock ranking prior to or on a parity with the APS with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Trust, (v) reissue any APS
previously purchased or redeemed by the Trust, (vi) merge or consolidate into or
with any other Trust or entity, (vii) change the Pricing Service or (viii)
engage in reverse repurchase agreements.
A preferred stock rating is an assessment of the capacity and willingness
of an issuer to pay preferred stock obligations. The ratings on the APS are not
recommendations to purchase, hold, or sell those shares, inasmuch as the ratings
do not comment as to market price or suitability for a particular investor. The
rating agency guidelines described above also do not address the likelihood that
an owner of APS will be able to sell such shares in an Auction or otherwise.
The Trust agrees to notify Moody's and S&P with no less than 30 days'
notification of: (i) any material changes to the Trust's organizational
documents and material contracts, as determined by the Trust's officers in their
sole discretion, (ii) any redemptions of APS by the Trust, or (iii) any failed
Auctions.
9. NOTICE. All notices or communications, unless otherwise specified in
the Amended By-Laws of the Trust or these Amended By-Laws, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid. Notice shall be deemed given on the earlier of the date
received or the date 7 days after which such notice is mailed.
10. AUCTION PROCEDURES. (a) Certain definitions. As used in this
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "APS" means the shares of APS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available APS" has the meaning specified in paragraph 10(d)(i)
below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the credit rating assigned on such date to such
shares by S&P and Moody's (or if S&P or Moody's shall not make such rating
available, the equivalent of such rating by a Substitute Rating Agency) and
(ii) whether the Trust has provided notification to the Auction Agent prior
to the Auction establishing the
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Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of APS as follows:
PERCENTAGE OF PERCENTAGE OF
REFERENCE REFERENCE
CREDIT RATINGS RATE RATE
---------------------------- --------------- -------------
MOODY'S S&P NO NOTIFICATION NOTIFICATION
-------------- ------------ --------------- -------------
Aaa3 or higher AA- or 110% 150%
higher
A3 to A1 A- to A+ 125% 160%
Baa3 to Baa1 BBB- to BBB+ 150% 250%
Below Baa3 Below BBB- 200% 275%
The Trust shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for each series of APS. If S&P or Moody's shall
not make such a rating available, Salomon Smith Barney Inc. or its
affiliates and successors, after consultation with the Trust, shall select
a nationally recognized statistical rating organization to act as a
Substitute Rating Agency.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for
the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of APS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for the next succeeding Dividend
Period;
(2) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next
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succeeding Dividend Period shall not be less than the rate per annum
specified by such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard
to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a competitive
Auction, shall contact Potential Beneficial Owners, including Persons that are
not Beneficial Owners, on such list to determine the number of Outstanding
shares, if any, of APS which each such Potential Beneficial Owner offers to
purchase, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this paragraph 10(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this paragraph 10(b)(i) is hereinafter referred
to as a "Sell Order". Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii)(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or (1) such number or a lesser number
of Outstanding shares of APS to be determined as set forth in paragraph
10(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be
equal to the rate per annum specified therein; or
(2) a lesser number of Outstanding shares of APS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do
not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of APS specified in such Sell
Order; or
(2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in paragraph 10(e)(ii)(C) if Sufficient Clearing
Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than
the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained
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by such Broker-Dealer, designating itself (unless otherwise permitted by the
Trust) as an Existing Holder in respect of shares subject to Orders submitted or
deemed submitted to it by Beneficial Owners and as a Potential Holder in respect
of shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding shares of APS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of APS subject to any
Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of APS subject to any
Bid placed by such Existing Holder and the rate per annum specified in
such Bid; and
(3) the number of Outstanding shares, if any, of APS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of APS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding shares of APS held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of APS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding shares of
APS held by such Existing Holder; provided that if more than one Hold Order
is submitted on behalf of such Existing Holder and the number of shares of
APS subject to such Hold Orders exceeds the number of Outstanding shares of
APS held by such Existing Holder, the number of shares of APS subject to
each of such Hold Orders shall be reduced pro rata so that such Hold
Orders, in the aggregate, will cover exactly the number of Outstanding
shares of APS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of APS
held by such Existing Holder over the number of shares of APS subject to
any Hold Order referred to in paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of paragraph
10(c)(iv)(A) above and of the foregoing portion of this paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
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(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of APS held by such Existing
Holder over the number of shares of APS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of APS subject to such Sell Orders
is greater than such excess, the number of shares of APS subject to each of
such Sell Orders shall be reduced pro rata so that such Sell Orders, in the
aggregate, cover exactly the number of shares of APS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of APS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of APS over
the number of Outstanding shares of APS that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
APS");
(B) from the Submitted Orders whether the number of Outstanding shares
of APS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of APS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of APS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of APS in clause (1) above
and this clause (2) are each zero because all of the Outstanding shares
of APS are the subject of Submitted Hold Orders), such Submitted Bids by
Potential Holders being hereinafter referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other Submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the shares of APS that are the subject of
such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of APS that are the subject of
such Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per annum
being at least equal to the Available APS.
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(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph 10(d)(i), the Auction Agent shall advise the Trust of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding shares of APS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of APS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 40% of the Reference Rate (or 60% of such rate if
the Trust has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend pursuant to
paragraph 2(f) hereof that net capital gains or other taxable income will
be included in such dividend on shares of APS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Based on the determinations made pursuant to paragraph
10(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or
rejected and the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the
Outstanding shares of APS that are the subject of such Submitted Sell
Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to hold
the Outstanding shares of APS that are the subject of such Submitted
Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of APS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
APS ("Remaining Shares") equal to the excess of the Available APS over
the number of Outstanding shares of APS subject to Submitted Bids
described in paragraph 10(e)(i)(B) and paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell Outstanding
shares of APS, but only in an amount equal to the difference between (1)
the number of Outstanding shares of APS then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares of APS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of Outstanding
shares of APS held by such Existing Holder subject to such Submitted Bid
and the denominator of which shall be the sum of the number of
Outstanding shares of APS subject to such Submitted Bids made by all
such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
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(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of Outstanding shares of APS
obtained by multiplying (x) the difference between the Available APS and
the number of Outstanding shares of APS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number
of Outstanding shares of APS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding
shares of APS subject to such 74 Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning
Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding shares of APS are subject to Submitted Hold
Orders), subject to the provisions of paragraph 10(e)(iii), Submitted
Orders shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be rejected, thus entitling such Existing Holder to continue to
hold the Outstanding shares of APS that are the subject of such
Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of APS that are the subject of such Submitted Bid;
and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference
between (1) the number of Outstanding shares of APS then held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order
and (2) the number of shares of APS obtained by multiplying (x) the
difference between the Available APS and the aggregate number of
Outstanding shares of APS subject to Submitted Bids described in
paragraph 10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of Outstanding shares of APS held
by such Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which shall be the number of Outstanding
shares of APS subject to all such Submitted Bids and Submitted Sell
Orders.
(iii) If, as a result of the procedures described in paragraph
10(e)(i) or paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of APS on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
round up or down the number of shares of APS to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date so that each
Outstanding share of APS purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be a whole share of APS.
(iv) If, as a result of the procedures described in paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase
less than a whole share of APS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine,
allocate shares of APS for purchase among Potential Holders so that only
whole shares of APS are purchased on such Auction Date by any Potential
Holder, even if such allocation results in one or more of such Potential
Holders not purchasing any shares of APS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding shares of APS to be purchased and the aggregate
number of the Outstanding shares of APS to be sold by such Potential
Holders and Existing Holders
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and, to the extent that such aggregate number of Outstanding shares to be
purchased and such aggregate number of Outstanding shares to be sold
differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one
or more sellers such Broker-Dealer shall receive, as the case may be,
Outstanding shares of APS
(f) Miscellaneous. The Trust may interpret the provisions of this paragraph
10 to resolve any inconsistency or ambiguity, remedy any formal defect or make
any other change or modification that does not substantially adversely affect
the rights of Beneficial Owners of APS. A Beneficial Owner or an Existing Holder
(A) may sell, transfer or otherwise dispose of shares of APS only pursuant to a
Bid or Sell Order in accordance with the procedures described in this paragraph
10 or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of APS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Trust nor any Affiliate shall submit an Order in any Auction. Any Beneficial
Owner that is an Affiliate shall not sell, transfer or otherwise dispose of
shares of APS to any Person other than the Trust. All of the Outstanding shares
of APS of a series shall be represented by a single certificate registered in
the name of the nominee of the Securities Depository unless otherwise required
by law or unless there is no Securities Depository. If there is no Securities
Depository, at the Trust's option and upon its receipt of such documents as it
deems appropriate, any shares of APS may be registered in the Stock Register in
the name of the Beneficial Owner thereof and such Beneficial Owner thereupon
will be entitled to receive 77 certificates therefor and required to deliver
certificates therefor upon transfer or exchange thereof.
11. SECURITIES DEPOSITORY; STOCK CERTIFICATES. (a) If there is a
Securities Depository, one certificate for all of the shares of APS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of APS. All such certificates shall bear
a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of APS contained in these Amended
By-Laws. Unless the Trust shall have elected, during a Non-Payment Period, to
waive this requirement, the Trust will also issue stop-transfer instructions to
the Auction Agent for the shares of APS. Except as provided in paragraph
(b) below, the Securities Depository or its nominee will be the Holder, and
no Beneficial Owner shall receive certificates representing its ownership
interest in such shares. (b) If the Applicable Rate applicable to all shares of
APS of a series shall be the Non-Payment Period Rate or there is no Securities
Depository, the Trust may at its option issue one or more new certificates with
respect to such shares (without the legend referred to in paragraph 11(a))
registered in the names of the Beneficial Owners or their nominees and rescind
the stop-transfer instructions referred to in paragraph 11(a) with respect to
such shares.
B-93
EATON VANCE INSURED NEW YORK MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER , 2002
---------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
255 State Street
Boston, MA 02109
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
(800) 331-1710
INDEPENDENT AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
Independent Auditor's Report
Statement of Assets and Liabilities as of August 19, 2002
Notes to Financial Statement
(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. 333-92200 and
811-21148) 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. 0000898432-02-000464) ("Initial Common Shares
Registration Statement").
(b) (1) By-Laws are incorporated herein by reference to the
Registrant's Initial Common Shares Registration Statement.
(2) Form of Amended By-Laws filed herewith as Appendix E to
Registrant's Statement of Additional Information contained in
this registration statement and incorporated herein by
reference.
(3) Amendment to By-Laws dated October 1, 2002 filed herewith.
(c) Not applicable.
(d) (1) Form of Specimen Certificate for Common Shares of
Beneficial Interest incorporated herein by reference to the
Registrant's Initial Common Shares Registration Statement.
(2) Form of Specimen Certificate of Series A Auction Preferred
Shares is incorporated herein by reference to The Registrant's
initial Registration Statement on Form N-2 (File Nos.
333-100086 and 811-21148) as to Registrant's Auction Preferred
Shares ("APS") filed with the Commission on September 25, 2002
(Accession No. 0000898432-02-000662) ("Initial APS
Registration Statement").
(3) Form of Specimen Certificate of Series B Auction Preferred
Shares is incorporated herein by reference to Registrant's
Initial APS Registration Statement.
(e) Dividend Reinvestment Plan is incorporated herein by
reference to the Trust's Initial Common Shares Registration
Statement.
(f) Not applicable.
(g) Investment Advisory Agreement dated July 25, 2002 is
incorporated herein by reference to Pre-Effective Amendment
No. 1 to the Registrant's Common Shares Registration Statement
filed with the Commission on July 26, 2002 (Accession No.
0000950135-02-003435) ("Initial Common Shares Registration
Statement Pre-Effective Amendment No. 1").
(h) (1) Form of Underwriting Agreement as to Registrant's Common
Shares is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment
No. 3 filed with the Commission on August 27, 2002
(Accession No. 0000950135-02-003952) ("Common Shares
Registration Statement Pre-Effective Amendment No. 3").
(2) Form of Master Agreement Among Underwriters as to Registrant's
Common Shares is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment
No. 3.
(3) Form of Master Selected Dealers Agreement as to Registrant's
Common Shares is incorporated herein by reference to Initial
Common Shares Registration Statement Pre-Effective Amendment
No. 3.
(4) Form of Underwriting Agreement filed herewith.
(5) Form of Master Agreement Among Underwriters as to Registrant's
Auction Preferred Shares is incorporated herein by reference
to Initial Common Shares Registration Statement Pre-Effective
Amendment No. 3.
(6) Form of Master Selected Dealers Agreement as to Registrant's
Auction Preferred Shares is incorporated herein by reference
to Initial Common Shares Registration Statement Pre-Effective
Amendment No. 3.
(i) The Securities and Exchange Commission has granted the
Registrant an exemptive order that permits the Registrant to
enter into deferred compensation arrangements with its
independent Trustees. See in the matter of Capital Exchange
Fund, Inc., Release No. IC-20671 (November 1, 1994).
(j) (1) Master Custodian Agreement with Investors Bank & Trust
Company dated July 25, 2002 is incorporated herein by
reference to Initial Common Shares Registration Statement
Pre-Effective Amendment No. 1.
(2) Extension Agreement dated August 31, 2000 to Master Custodian
Agreement with Investors Bank & Trust Company filed as
Exhibit (g)(4) to Post-Effective Amendment No. 85 of Eaton
Vance Municipals Trust (File Nos. 33-572, 811-4409) filed
with the Commission on January 23, 2001 (Accession No.
0000940394-01-500027) and incorporated herein by reference.
(3) Delegation Agreement dated December 11, 2000, with Investors
Bank & Trust Company filed as Exhibit (j)(e) to the Eaton
Vance Prime Rate Reserves N-2, Amendment No. 5 (File Nos.
333-32267, 811-05808) filed April 3, 2002 (Accession No.
0000940394-01-500126) and incorporated herein by reference.
(k) (1) Amendment to the Transfer Agency and Services Agreement
dated July 25, 2002 is incorporated herein by reference to
Initial Common Shares Registration Statement Pre-Effective
Amendment No. 1.
(2) Transfer Agency and Services Agreement dated December 21,
1998 is incorporated herein by reference to Initial Common
Shares Registration Statement Pre-Effective Amendment No. 1.
(3) Administration Agreement dated July 25, 2002 is incorporated
herein by reference to Initial Common Shares Registration
Statement Pre-Effective Amendment No. 1.
(4) Form of Auction Agreement between Registrant and the Auction
Agent as to Registrant's Auction Preferred Shares filed
herewith.
(5) Form of Broker-Dealer Agreement as to Registrant's Auction
Preferred Shares filed herewith.
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP as to
Registrant's Auction Preferred Shares filed herewith.
(m) Not applicable.
(n) Consent of Independent Auditors filed herewith.
(o) Not applicable.
(p) Letter Agreement with Eaton Vance Management is incorporated
herein by reference to Initial Common Shares Registration
Statement Pre-Effective Amendment No. 3.
(q) Not applicable.
(r) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance
Management, Boston Management and Research, Eaton Vance
Distributors, Inc. and the Eaton Vance Funds effective
September 1, 2000, as revised June 4, 2002, filed as Exhibit
(p) to Post-Effective Amendment No. 45 of Eaton Vance
Investment Trust (File Nos, 33-1121, 811-4443) filed July 24,
2002 (Accession No. 0000940394-02-000462) and incorporated
herein by reference.
(s) Power of Attorney is incorporated herein by reference to
Registrant's Initial APS Registration Statement.
Item 25. Marketing Arrangements
See Form of Underwriting Agreement filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The approximate expenses in connection with the offering are
as follows:
Registration and Filing Fees $ 13,000
Rating Agency Fees 43,000
Costs of Printing and Engraving 19,000
Accounting Fees and Expenses 5,000
Legal Fees and Expenses 80,000
--------
Total $160,000
--------
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
October 22, 2002 of each class of securities of the Registrant:
Title of Class Number of Record Holders
-------------- ------------------------
Common Shares of Beneficial interest, par 54
value $0.01 per share
Series A Auction Preferred Shares, par value 0
$0.01 per share
Series B Auction Preferred Shares, par value 0
$0.01 per share
Item 29. Indemnification
The Registrant's By-Laws and the Underwriting Agreement filed in the
Trust's Initial Common Shares Registration Statement contain and the form of
Underwriting Agreement filed herewith contains provisions limiting the
liability, and providing for indemnification, of the Trustees and officers under
certain circumstances.
Registrant's Trustees and officers are insured under a standard
investment company errors and omissions insurance policy covering loss incurred
by reason of negligent errors and omissions committed in their official
capacities as such.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and other Connections of Investment Adviser
Reference is made to: (i) the information set forth under the caption
"Investment Advisory and Other Services" in the Statement of Additional
information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 1-8100); and (iii) the Form ADV of Eaton Vance Management
(File No. 801-15930) filed with the Commission, all of which are incorporated
herein by reference.
Item 31. Location of Accounts and Records
All applicable accounts, books and documents required to be maintained
by the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
16th Floor, Boston, MA 02116, and its transfer agent, PFPC Inc., 4400 Computer
Drive, Westborough, MA 01581-5120, with the exception of certain corporate
documents and portfolio trading documents which are in the possession and
custody of Eaton Vance Management, The Eaton Vance Building, 255 State Street,
Boston, MA 02109. Registrant is informed that all applicable accounts, books and
documents required to be maintained by registered investment advisers are in the
custody and possession of Eaton Vance Management.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. The Registrant undertakes to suspend offering of Preferred Shares until
the prospectus is amended if (1) subsequent to the effective date of
this Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of this
Registration Statement or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to 497(h) under
the 1933Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of an oral or written request, its Statement of Additional
Information.
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance Insured
New York Municipal Bond Fund is on file with the Secretary of State of the
Commonwealth of Massachusetts and notice is hereby given that this instrument is
executed on behalf of the Registrant by an officer of the Registrant as an
officer and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or shareholders
individually, but are binding only upon the assets and property of the
Registrant.
SIGNATURES
Pursuant to requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
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 24th day of October 2002.
EATON VANCE INSURED NEW YORK
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 October 24, 2002
Thomas J. Fetter Executive Officer
/s/ James L. O'Connor*
---------------------------------- Treasurer and Principal Financial and October 24, 2002
James L. O'Connor Accounting Officer
/s/ Jessica M. Bibliowicz*
---------------------------------- Trustee October 24, 2002
Jessica M. Bibliowicz
/s/ Donald R. Dwight*
---------------------------------- Trustee October 24, 2002
Donald R. Dwight
/s/ James B. Hawkes*
---------------------------------- Trustee October 24, 2002
James B. Hawkes
/s/ Samuel L. Hayes, III*
---------------------------------- Trustee October 24, 2002
Samuel L. Hayes, III
/s/ Norton H. Reamer*
---------------------------------- Trustee October 24, 2002
Norton H. Reamer
/s/ Lynn A. Stout*
---------------------------------- Trustee October 24, 2002
Lynn A. Stout
*By: /s/ Alan R. Dynner
------------------------------------
Alan R. Dynner (As attorney-in-fact)
INDEX TO EXHIBITS
(b)(3) Amendment to By-Laws, dated October 1, 2002.
(h)(4) Form of Underwriting Agreement.
(k)(4) Form of Auction Agreement between Registrant and the Auction Agent
as to Registrant's Auction Preferred Shares.
(5) Form of Broker-Dealer Agreement as to Registrant's Auction
Preferred Shares.
(l) Opinion and Consent of Kirkpatrick & Lockhart LLP as to
Registrant's Auction Preferred Shares.
(n) Consent of Independent Auditors.