<PAGE> 1
[EATON VANCE LOGO]
$131,000,000
EATON VANCE MUNICIPAL INCOME TRUST
2,620 SHARES SERIES A
2,620 SHARES SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
Eaton Vance Municipal Income Trust (the "Trust") is a recently organized
closed-end fund. The Trust's investment objective is to provide current income
exempt from federal income tax. This income will be earned by investing
primarily in investment grade municipal securities. The Trust may also invest a
portion of its assets in higher risk, higher yielding municipal securities of
lesser quality. There is no assurance that the Trust will achieve its investment
objective. See "Investment Objective, Policies and Risks" beginning at page 11.
The Trust's investment adviser is Eaton Vance Management ("Eaton Vance" or
the "Adviser"). Eaton Vance manages 54 different municipal bond funds with
combined assets of over $8 billion.
Capitalized terms not defined on this cover page are defined in the
Glossary that appears at the end of this Prospectus.
<TABLE>
<CAPTION>
Per Share Sales load(2) Proceeds to Trust(1)
--------- ------------- --------------------
<S> <C> <C> <C>
Per Share................................ $25,000 $250 $24,750
TOTAL.................................... $131,000,000 $1,310,000 $129,690,000
</TABLE>
- ---------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Trust and the Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
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.
------------------------
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS MARCH 1, 1999
<PAGE> 2
(continued from the previous page)
The Broker-Dealers may maintain a secondary trading market in the Auction
Preferred Shares ("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.
The APS are offered by the Underwriters, subject to prior sale, when, as
and if issued by the Trust and accepted by the Underwriters, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that one
certificate for each series of the APS will be delivered to the nominee of The
Depository Trust Company on or about March 4, 1999.
Dividends on the APS of the Trust offered hereby will be cumulative from
the Date of Original Issue and payable commencing on March 17, 1999 for Series A
APS and on March 12, 1999 for Series B APS (an "Initial Dividend Payment Date")
and, generally, on each succeeding Wednesday for Series A and each succeeding
Friday for Series B, subject to certain exceptions.
The cash dividend rate (the "Applicable Rate") for the Initial Dividend
Period will be 2.90% per annum for Series A APS and 2.90% per annum for Series B
APS. The Applicable Rate on the APS for each Subsequent Dividend Period will be
determined pursuant to periodic auctions conducted in accordance with the
procedures described herein and in detail in Appendix D to the Statement of
Additional Information (an "Auction"). Except as otherwise provided herein, each
Subsequent Dividend Period for each series of APS will be a 7-Day Dividend
Period; provided, however, that prior to any Auction, the Trust may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period. See "Description of APS--Dividends."
The Applicable Rate on the APS for each Subsequent Dividend Period will be
reset on the basis of Bids, Hold Orders and Sell Orders placed by Existing
Holders and Potential Holders in the Auction conducted on the Business Day
preceding the commencement of such Dividend Period. The Applicable Rate that
results from an Auction for any Dividend Period will not be greater than the
Maximum Applicable Rate (as defined herein). See "Description of APS--The
Auction--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders."
The Trust is required to allocate net capital gains and other taxable
income, if any, proportionately among its Common Shares and the APS. The Trust
will give notice of the amount of any taxable income to be included in a
dividend on APS in the related Auction, as described herein, or, in limited
circumstances, include such income in a dividend on the APS without giving
advance notice thereof if it increases the dividend by an amount sufficient to
offset substantially the tax effect thereof. The amount of taxable income
allocable to the APS will depend upon the amount of such income realized by the
Trust and other factors but generally is not expected to be significant. See
"Taxes."
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus and the
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.
ii
<PAGE> 3
The APS are redeemable, in whole or in part, at the option of the Trust, on
any Dividend Payment Date (except during the Initial Dividend Period or a
Non-Call Period) at the Optional Redemption Price per share and will be subject
to mandatory redemption on dates fixed by the Board of Trustees, under certain
circumstances, at the Mandatory Redemption Price per share.
If the Trust fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption price
of the APS called for redemption, the Applicable Rate will not be based on the
results of an Auction but instead will be equal to the Non-Payment Period Rate
until such failure to pay is cured. See "Description of APS--Dividends--Non-
Payment Period; Late Charge."
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 dated March 1, 1999, has been
filed with the SEC and can be obtained without charge by calling 1-800-225-6265
or by writing to the Trust. A table of contents to the Statement of Additional
Information is located at page 48 of this Prospectus. This Prospectus
incorporates by reference the entire Statement of Additional Information. The
Statement of Additional Information is available along with other Trust-related
materials at the SEC's internet web site (http://www.sec.gov). The Trust's
address is 24 Federal Street, Boston, Massachusetts 02110 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
The Trust................................ 10
Use of Proceeds.......................... 10
Capitalization........................... 10
Portfolio Composition.................... 11
Investment Objective, Policies and
Risks.................................. 11
Description of APS....................... 21
Management of the Trust.................. 39
Taxes.................................... 40
Description of Capital Structure......... 42
Certain Provisions of the Declaration
of Trust............................... 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Underwriting............................. 46
Shareholder Servicing Agent, Custodian
and Transfer Agent..................... 46
Legal Opinions........................... 47
Experts.................................. 47
Additional Information................... 48
Table of Contents for the Statement of
Additional Information................. 48
Trustees of the Trust.................... 49
Glossary................................. 50
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE TRUST NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE TRUST NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
iii
<PAGE> 4
(This page intentionally left blank)
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Certain of the
capitalized terms used herein are defined in the Glossary that appears at the
end of this Prospectus.
THE TRUST..................... Eaton Vance Municipal Income Trust, Inc. (the
"Trust") is a recently organized closed-end
fund. The Trust was organized as a
Massachusetts business trust on December 10,
1998, and has registered under the Investment
Company Act of 1940, as amended (the "1940
Act"). The Trust's principal office is located
at 24 Federal Street, Boston, MA 02110, and its
telephone number is 1-800-225-6265.
The Trust commenced operations on January 29,
1999 upon the closing of an initial public
offering of its common shares of beneficial
interest, par value $0.01 per share (the
"Common Shares"). In connection with the
initial public offering of the Trust's Common
Shares, the underwriters were granted an option
to purchase additional shares to cover
over-allotments. The Trust is offering pursuant
to this Prospectus 2,620 preferred shares of
beneficial interest, par value $0.01 per share,
designated Series A Auction Preferred Shares
("Series A APS") and 2,620 preferred shares of
beneficial interest, par value $0.01 per share,
designated Series B Auction Preferred Shares
("Series B APS" and collectively with Series A
APS, the "APS"). See "The Trust."
INVESTMENT OBJECTIVE AND
POLICIES.................... The Trust's investment objective is to provide
current income exempt from regular federal
income tax. An investment in the APS of the
Trust may not be appropriate for all investors,
and there is no assurance that the Trust will
achieve its investment objective.
During normal market conditions substantially
all of the Trust's total assets (at least 80%)
will be invested in debt obligations issued by
or on behalf of states, territories and
possessions of the United States, and the
District of Columbia and their political
subdivisions, agencies or instrumentalities,
the interest on which is exempt from federal
income tax ("Municipal Obligations"). At least
65% of the Trust's total assets normally will
be invested in Municipal Obligations rated at
least investment grade at the time of
investment (which are those rated Baa or higher
by Moody's Investors Service, Inc. ("Moody's")
or BBB or higher by either Standard & Poor's
Ratings Group ("S&P") or by Fitch IBCA
("Fitch")), or, if unrated, determined by Eaton
Vance Management ("Eaton Vance" or the
"Adviser") to be of at least investment grade
quality. From time to time, the Trust may hold
a significant number of Municipal Obligations
not rated by a nationally recognized
statistical rating organization ("Rating
Agency"). When the Trust invests in unrated
Municipal Obligations it may be more dependent
on Eaton Vance's research capabilities than
when it invests in rated Municipal Obligations.
PRINCIPAL INVESTMENT RISKS.... The Trust may invest up to 35% of its total
assets in Municipal Obligations rated below
investment grade (but not, with respect to more
than 30% of the Trust's total assets, lower
than B by all
1
<PAGE> 6
Rating Agencies rating the obligation) and
unrated Municipal Obligations considered to be
of comparable quality by Eaton Vance.
Investment in Municipal Obligations of below
investment grade quality involves special risks
as compared with investment in higher grade
Municipal Obligations. These risks include
greater sensitivity to a general economic
downturn, greater market price volatility and
less secondary market trading. Securities rated
below investment grade are commonly known as
"junk bonds." Such securities are regarded, on
balance, as predominantly speculative with
respect to the issuer's ability to pay interest
and repay principal owed.
INVESTMENT ADVISER AND
ADMINISTRATOR............... Eaton Vance, a wholly-owned subsidiary of Eaton
Vance Corp., is the Trust's investment adviser
and administrator. The Adviser manages 4
national municipal funds, 40 single state
municipal funds, 10 limited maturity municipal
funds and 1 money market municipal fund. See
"Investment Advisory and Management
Arrangements."
THE OFFERING.................. The Trust is offering an aggregate of 2,620
Series A APS and 2,620 Series B APS, each at a
purchase price of $25,000 per share plus
accumulated dividends, if any, from the Date of
Original Issue. The APS are being offered by a
group of underwriters (the "Underwriters") led
by PaineWebber Incorporated, Prudential
Securities, Salomon Smith Barney Inc. and A.G.
Edwards & Sons, Inc. See "Underwriting."
DIVIDENDS ON APS.............. The APS will be Preferred Shares of the Trust
that entitle their holders to receive cash
dividends at a rate per annum that may vary for
the successive Dividend Periods for such
shares. In general, except as described below,
each Dividend Period for each series of APS
subsequent to the Initial Dividend Period will
be seven days in length. The Applicable Rate
for a particular Dividend Period will be
determined by an Auction conducted on the
Business Day next preceding the start of such
Dividend Period.
Through their Broker-Dealers, Beneficial Owners
and Potential Beneficial Owners of APS may
participate in Auctions therefor, although,
except in the case of certain Special Dividend
Periods, Beneficial Owners desiring to continue
to hold all of their APS regardless of the
Applicable Rate resulting from Auctions need
not participate. For an explanation of Auctions
and the method of determining the Applicable
Rate, see "Description of APS--The Auction."
Except as described herein, investors in APS
will not receive certificates representing
ownership of their shares. Ownership of APS
will be maintained in book-entry form by the
Securities Depository or its nominee for the
account of the investor's Agent Member. The
investor's Agent Member, in turn, will maintain
records of such investor's beneficial ownership
of APS. Accordingly, references herein to an
investor's investment in or purchase, sale or
ownership of APS are to purchases, sales or
ownership of those shares by Beneficial Owners.
2
<PAGE> 7
After the Initial Dividend Period, each
Subsequent Dividend period for each series of
APS will generally consist of seven days (a
"7-day Dividend Period"); provided, however,
that prior to any Auction, the Trust may elect,
subject to certain limitations described
herein, upon giving notice to holders thereof,
a Special Dividend Period for either or both
series. A Special Dividend Period is a 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 (a
"Short Term Dividend Period") or a Dividend
Period consisting of a specified period of one
whole year or more but not greater than five
years (a "Long Term Dividend Period").
Dividends on the APS offered hereby are
cumulative from the Date of Original Issue and
are payable when, as and if declared by the
Board of Trustees of the Trust, out of funds
legally available therefor, commencing on the
Initial Dividend Payment Date and, in the case
of Dividend Periods that are not Special
Dividend Periods, dividends will be payable
generally on each succeeding Wednesday for
Series A APS and on each succeeding Friday for
Series B APS, subject to certain exceptions.
Dividends for the APS will be paid through the
Securities Depository (The Depository Trust
Company or a successor securities depository)
on each Dividend Payment Date. The Securities
Depository's normal procedures provide for it
to distribute dividends in same-day funds to
Agent Members, who are in turn expected to
distribute such dividends to the person for
whom they are acting as agent in accordance
with the instructions of such person. See
"Description of APS -- Dividends."
For each Subsequent Dividend Period, the cash
dividend rate on each series of the APS will be
the Applicable Rate that the Auction Agent
(Bankers Trust Corporation ("Bankers Trust") or
any successor) advises the Trust has resulted
from an Auction. See "Description of
APS -- Dividends." The first Auction for each
series of the APS is scheduled to be held on
the ending date for the Initial Dividend Period
as set forth above.
The Amended By-Laws provide that until the
Trust gives a Request for Special Dividend
Period and the related Notice of Special
Dividend Period, only 7-Day Dividend Periods
will be applicable to each series of the APS.
While the Trust does not currently intend to
give a Request for Special Dividend Period with
respect to either series of the APS, it may so
elect in the future subject to, and on, the
conditions discussed under "Description of the
APS -- Dividends -- Notification of Dividend
Period."
A Special Dividend Period will not be effective
for a series of APS unless Sufficient Clearing
Bids exist at the Auction in respect of such
Special Dividend Period. If Sufficient Clearing
Bids do not exist at such Auction for the APS,
the Dividend Period commencing on the Business
Day succeeding such Auction will be a 7-Day
Dividend Period, and the holders of the APS
outstanding prior to such Auction will be
required to continue to hold such shares for
such Dividend Period. In addition, the Trust
may not give a Notice of Special Dividend
Period with respect to the APS, or if the Trust
3
<PAGE> 8
has given a Notice of Special Dividend Period
for the APS, the Trust will be required to give
a Notice of Revocation in respect thereof if
(i) either the 1940 Act APS Asset Coverage is
not satisfied or the Trust fails to maintain
S&P Eligible Assets with an aggregate
Discounted Value at least equal to the APS
Basic Maintenance Amount, in each case on each
of the two Valuation Dates immediately
preceding the Business Day prior to the related
Auction Date for the APS, (ii) 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 (iii) the Broker-Dealers have
given the Trust notice that it is not advisable
to hold an Auction in respect of a Special
Dividend Period. In such event, the next
succeeding Dividend Period will be a 7-Day
Dividend Period.
ADVANCE NOTICE OF ALLOCATION
OF TAXABLE INCOME; INCLUSION
OF TAXABLE INCOME IN
DIVIDENDS................... Dividends paid by the Trust, to the extent paid
from tax-exempt income earned on Municipal
Obligations, 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. However, the
Trust is required to allocate net capital gains
and other income subject to federal income tax,
if any, proportionately among the Trust's
Common Shares and APS. The Trust will notify
the Auction Agent of the amount of any net
capital gains or other income subject to
federal income tax ("taxable income") to be
included in any dividend on the APS prior to
the Auction establishing the Applicable Rate
for such dividend. The Auction Agent in turn
will notify each Broker-Dealer whenever it
receives any such notice from the Trust, and
each Broker-Dealer will notify its Beneficial
Owners and Potential Beneficial Owners, as
provided in its Broker-Dealer Agreement. In the
alternative, the Trust also may include such
taxable income in a dividend on the APS without
giving advance notice thereof if it increases
the dividend by an amount sufficient to offset
substantially the tax effect thereof. The
amount of taxable income allocable to the APS
will depend upon the amount of such income
realized by the Trust and other factors but
generally is not expected to be significant.
See "Taxes" and "Description of APS -- The
Auction -- Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends."
ADDITIONAL DIVIDENDS.......... If the Trust retroactively allocates any net
capital gains or other taxable income to the
APS without having given advance notice thereof
as described above, the Trust will make certain
payments to holders of the APS to which such
allocation was made to offset substantially the
tax effect thereof. Such a retroactive
allocation may happen when such allocation is
made as a result of (i) the redemption of all
or a portion of the outstanding APS (ii) the
liquidation of the Trust or (iii) a debt
obligation believed to be a Municipal
Obligation unexpectedly turns out to be an
obligation
4
<PAGE> 9
subject to federal income tax. The Trust does
not expect to make payments to holders of the
APS to offset the tax effect of any
reallocation of net capital gains or other
taxable income. See "Description of
APS--Dividends--Additional Dividends" and
"Taxes."
DETERMINATION OF MAXIMUM
APPLICABLE RATES............ Except during a Non-Payment Period, the
Applicable Rate for any Dividend Period for the
APS will not be more than the Maximum
Applicable Rate applicable to such shares. The
Maximum Applicable Rate for each series of the
APS will depend on the credit rating assigned
to such shares and on the duration of the
Dividend Period. The Maximum Applicable Rate
will be the Applicable Percentage of the
Reference Rate. The Reference Rate is (i) with
respect to any 7-Day Dividend Period or any
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. The
Applicable Percentage will be determined based
on (i) the credit rating assigned on such date
to the APS by S&P (or, if S&P shall not make
such rating available, the equivalent of such
rating by a Substitute Rating Agency) and (ii)
whether the Trust has provided notification to
the Auction Agent prior to the Auction
establishing the Applicable Rate for any
dividend that net capital gains or other
taxable income will be included in such
dividend on the APS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
PERCENTAGE OF PERCENTAGE OF
REFERENCE RATE -- REFERENCE RATE --
S&P CREDIT RATINGS NO NOTIFICATION NOTIFICATION
------------------ ------------------ ------------------
<S> <C> <C>
AA- or higher..... 110% 150%
A- to A+.......... 125 160
BBB- to BBB+...... 150 250
Below BBB-........ 200 275
</TABLE>
There is no minimum Applicable Rate in respect
of any Dividend Period.
The Applicable Rate for any Dividend Period
commencing during any Non-Payment Period, and
the rate used to calculate the late charge
described under "Description of
APS--Dividends--Non-Payment Period; Late
Charge," initially will be 200% of the
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 that net
capital gains or other taxable income will be
included in such dividend on APS).
AUCTION PROCEDURES............ Separate auctions will be conducted for each
series of APS. Unless otherwise permitted by
the Trust, Beneficial Owners and Potential
5
<PAGE> 10
Beneficial Owners of APS 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. On or
prior to each Auction Date for the APS (the
Business Day next preceding the first day of
each Dividend Period), each Beneficial Owner
may submit Orders to its Broker-Dealer as
follows:
- Hold Order--indicating its desire to hold
the APS without regard to the Applicable
Rate for the next Dividend Period for such
shares.
- Bid--indicating its desire to hold the APS,
provided that the Applicable Rate for the
next Dividend Period for such shares is not
less than the rate per annum specified in
such Bid.
- Sell Order--indicating its desire to sell
the APS without regard to the Applicable
Rate for the next Dividend Period for such
shares.
A Beneficial Owner may submit different types
of Orders to its Broker-Dealer with respect to
the APS then held by such Beneficial Owner,
provided that the total number of APS covered
by such Orders does not exceed the number of
APS held by such Beneficial Owner. If, however,
a Beneficial Owner offers through its Broker-
Dealer to purchase additional APS in such
Auction, such Beneficial Owner, for purposes of
such offer to purchase additional shares, will
be treated as a Potential Beneficial Owner as
described below. Bids by Beneficial Owners
through their Broker-Dealers with rates per
annum higher than the Maximum Applicable Rate
will be treated as Sell Orders. 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)
shall be deemed to have been submitted on
behalf of a Beneficial Owner if an Order with
respect to the APS then held by such Beneficial
Owner is not submitted on behalf of such
Beneficial Owner for any reason, including the
failure of a Broker-Dealer to submit such
Beneficial Owner's Order to the Auction Agent.
Potential Beneficial Owners of APS may submit
Bids through their Broker-Dealers in which they
offer to purchase APS, provided that the
Applicable Rate for the next Dividend Period
for such shares is not less than the rate per
annum specified in such Bid. A Bid by a
Potential Beneficial Owner with a rate per
annum higher than the Maximum Applicable Rate
will not be considered.
Neither the Trust nor the Auction Agent will be
responsible for a Broker-Dealer's failure to
comply with any of the foregoing.
A Broker-Dealer also may hold APS for 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
6
<PAGE> 11
Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on
behalf of both itself and its customers. An
Order placed with the Auction Agent by a
Broker-Dealer as an Existing Holder or a
Potential Holder as or on behalf of a
Beneficial Owner or a Potential Beneficial
Owner, as the case may be, 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 above. 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 a
customer or itself, all discussion herein
relating to the consequences of an Auction for
Existing Holders and Potential Holders also
applies to the underlying beneficial ownership
interests represented thereby.
If Sufficient Clearing Bids exist in an Auction
for a series of APS (that is, in general, the
number of APS subject to Bids by Potential
Holders with rates equal to or lower than the
Maximum Applicable Rate is at least equal to
the number of APS subject to Sell Orders by
Existing Holders), the Applicable Rate will be
the lowest rate per annum specified in the
Submitted Bids which, taking into account such
rate per annum and all lower rates per annum
bid by Existing Holders and Potential Holders,
would result in Existing Holders and Potential
Holders owning all of the APS available for
purchase in the Auction. If Sufficient Clearing
Bids do not exist, the Dividend Period next
following the Auction automatically will be a
7-Day Dividend Period and the Applicable Rate
will be the Maximum Applicable Rate, and in
such event, Existing Holders that have
submitted Sell Orders will not be able to sell
in the Auction all, and may not be able to sell
any, APS subject to such Sell Orders. Thus, in
certain circumstances, Existing Holders and,
thus, the Beneficial Owners they represent may
not have liquidity of investment. If all
Existing Holders submit (or are deemed to have
submitted) Hold Orders in an Auction, the
Dividend Period next following the Auction
automatically shall be the same length as the
immediately preceding Dividend Period, and the
Applicable Rate will be 40% of the Reference
Rate (as defined under "Determination of
Maximum Applicable Rates" above) in effect on
the date of the Auction (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 that net
capital gains or other taxable income will be
included in such dividend on APS).
The Auction Procedures include a pro rata
allocation of shares for purchase and sale,
which may result in an Existing Holder selling
or holding, or a Potential Holder purchasing, a
number of APS that is less than the number of
APS specified in its Order. To the extent the
allocation has this result, a Broker-Dealer
will be required to
7
<PAGE> 12
make appropriate pro rata allocations among its
customers and itself.
A Sell Order by an Existing Holder will
constitute an irrevocable offer to sell the APS
subject thereto, and a Bid placed by an
Existing Holder also will constitute an
irrevocable offer to sell the APS subject
thereto if the rate per annum specified in the
Bid is higher than the Applicable Rate
determined in the Auction, in each case at a
price per share equal to $25,000. A Bid placed
by a Potential Holder will constitute an
irrevocable offer to purchase the APS subject
thereto if the rate per annum specified in such
Bid is less than or equal to the Applicable
Rate determined in the Auction. Settlement of
purchases and sales will be made on the next
Business Day (also a Dividend Payment Date)
after the Auction Date through the Securities
Depository. Purchasers will make payment
through their Agent Members in same-day funds
to the Securities Depository against delivery
by book-entry to their Agent Members. The
Securities Depository will make payment to the
sellers' Agent Members in accordance with the
Securities Depository's normal procedures,
which now provide for payment in same-day
funds. See "Description of APS--The Auction."
ASSET MAINTENANCE............. Under the Amended By-Laws, the Trust must
maintain (i) S&P Eligible Assets having in the
aggregate a Discounted Value at least equal to
the APS Basic Maintenance Amount and (ii) 1940
Act APS Asset Coverage of at least 200%. See
"Description of APS--Asset Maintenance."
The Trust estimates that, based on the
composition of its portfolio at February 19,
1999, 1940 Act APS Asset Coverage with respect
to APS would be approximately 277% immediately
after the issuance of the APS offered hereby in
an amount representing approximately 36% of the
Trust's capital (including the capital
attributable to the APS).
The Discount Factors and guidelines for
calculating the Discounted Value of the Trust's
portfolio for purposes of determining whether
the APS Basic Maintenance Amount has been
satisfied have been established by S&P in
connection with the Trust's receipt of ratings
on the APS on their Date of Original Issue of
AAA from S&P. See "Investment Objective and
Policies--Rating Agency Guidelines."
MANDATORY REDEMPTION.......... If the APS Basic Maintenance Amount or the 1940
Act APS Asset Coverage is not maintained or
restored as specified herein, the APS will be
subject to mandatory redemption, out of funds
legally available therefor, at the Mandatory
Redemption Price of $25,000 per share plus an
amount equal to dividends thereon (whether or
not earned or declared) accumulated but unpaid
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 as described herein. See
"Description of APS--Dividends--Additional
Dividends." Any such redemption will be limited
to the minimum number of APS necessary to
restore the APS Basic Maintenance Amount or the
1940 Act APS
8
<PAGE> 13
Asset Coverage, as the case may be. The Trust's
ability to make such a mandatory redemption may
be restricted by the provisions of the
Investment Company Act of 1940, as amended (the
"1940 Act"). See "Description of
APS--Redemption--Mandatory Redemption."
OPTIONAL REDEMPTION........... The APS are redeemable at the option of the
Trust, as a whole or in part, on any Dividend
Payment Date (except during the Initial
Dividend Period or a Non-Call Period) at the
Optional Redemption Price of $25,000 per share,
plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated
but unpaid to the date fixed for redemption
plus the premium, if any, resulting from the
designation of a Premium Call Period. See
"Description of APS--Redemption-- Optional
Redemption." In addition, holders of APS may be
entitled to receive Additional Dividends in the
event of redemption of such APS as described
herein. See "Description of
APS--Dividends--Additional Dividends."
LIQUIDATION PREFERENCE........ The liquidation preference of the APS will be
$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
the Trust as provided herein. See "Description
of APS--Dividends--Additional Dividends."
RATING........................ It is a condition to their issuance that the
APS be issued with a credit quality rating of
AAA from S&P. The Trust may at some future time
seek to have the APS rated by an additional
Rating Agency. See "Investment Objective and
Policies--Rating Agency Guidelines."
VOTING RIGHTS................. The 1940 Act requires that the holders of APS
and any other Preferred Shares, voting as a
separate class, have the right to elect at
least two trustees 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 will vote as a
separate class on certain other matters as
required under the Trust's Agreement and
Declaration of Trust and the 1940 Act. See
"Description of APS--Voting Rights" and
"Description of Capital Stock--Certain
Provisions of the Declaration of Trust."
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<PAGE> 14
THE TRUST
Eaton Vance Municipal Income Trust (the "Trust") is a closed-end fund. The
Trust was organized as a Massachusetts business trust on December 10, 1998, and
has registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Trust's principal office is located at 24 Federal Street, Boston, MA
02110, and its telephone number is 1-800-225-6265.
The Trust commenced operations on January 29, 1999 upon the closing of an
initial public offering of shares of its Common Shares. The proceeds of such
offering were approximately $209,680,000 after the payment of organizational and
offering expenses. In connection with the initial public offering of the Trust's
Common Shares, the underwriters were granted an option to purchase up to an
additional 2,100,000 Common Shares to cover over-allotments. On February 26,
1999, the underwriters purchased, at a price of $15.00 per Common Share, an
additional 1,500,000 Common Shares of the Trust pursuant to a partial exercise
of the over-allotment option (the "Over-allotment Common Shares").
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 estimated net proceeds of this offering will be $129,590,000 after the
payment of offering expenses (not expected to exceed $100,000) and the sales
load. See "Underwriting."
The net proceeds of the offering will be invested in accordance with the
Trust's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such APS depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as
of February 19, 1999 as if the Over-allotment Common Shares were issued on that
date and as adjusted to give effect to the issuance of the APS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' equity:
Preferred Shares, par value $0.01 per share (no shares
issued; 5,420 APS, as adjusted, at $25,000 per share
liquidation preference).............................. -- $131,000,000
Common Shares, par value, $0.01 per share (15,506,667
shares issued and outstanding)....................... $ 155,067 155,067
Capital in excess of par value attributable to Common
Stock..................................................... 231,979,933 231,979,933
Undistributed investment income -- net...................... 216,959 216,959
Accumulated realized gain (loss) -- net..................... 923 923
Unrealized appreciation on investments--net................. 288,166 288,166
------------ ------------
Net assets.................................................. $232,641,048 $363,641,048
============ ============
</TABLE>
10
<PAGE> 15
PORTFOLIO COMPOSITION
As of February 19, 1999, approximately 88.8% of the market value of the
Trust's portfolio was invested in long-term Municipal Obligations and
approximately none of the market value of the Trust's portfolio was invested in
short-term Municipal Obligations. The following table sets forth certain
information with respect to the composition of the Trust's investment portfolio
as of February 19, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
- ---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 18 $129,179 50.6%
AA Aa1, Aa 6 52,855 20.7
A A1 1 10,405 4.1
BBB Baa1 3 13,364 5.2
BB Ba1 1 8,838 3.5
NR+ NR+ 6 11,988 4.7
Cash 28,580 11.2
Total 35 $255,209 100.0%
== ======== =====
</TABLE>
- ---------------
* Ratings: Using the higher of S&P's or Moody's ratings on the Trust's Municipal
Obligations. See "Schedule of Investments." S&P 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 or Moody's. 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 the Trust's assets invested in such securities,
Eaton Vance Management ("Eaton Vance" or the "Adviser") believes that 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 or Moody's
if either were to rate the securities.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide current income exempt from
regular federal income tax. This income will be earned by investing primarily in
investment grade Municipal Obligations. Securities will be purchased and sold in
an effort to maintain a competitive yield on the Common Shares 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 research specialists examine
credit histories, revenue sources, total debt histories, capital structures and
other data. This research capability is important because many obligations in
which the Trust will invest will not be rated or listed on a national securities
exchange, and the amount of public information available about such securities
will be limited. The Trust intends to emphasize the research that is critical to
discovering value while avoiding undue credit risk. The Trust will attempt to
enhance performance opportunities by seeking to remain fully invested.
INVESTMENT POLICIES -- GENERAL COMPOSITION OF THE TRUST
During normal market conditions, substantially all of the Trust's total
assets (at least 80%) will be invested in debt obligations issued by or on
behalf of states, territories and possessions of the United States, and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Obligations"). At least 65% of the Trust's total assets
11
<PAGE> 16
will normally be invested in Municipal Obligations rated at least investment
grade at the time of investment (which are those rated Baa or higher by Moody's
or BBB or higher by either S&P or by Fitch), or, if unrated, determined by Eaton
Vance to be of at least investment grade quality. From time to time, the Trust
may hold a significant amount of Municipal Obligations not rated by a nationally
recognized statistical rating organization ("Rating Agency"). When the Trust
invests in unrated Municipal Obligations, it may be more dependent on Eaton
Vance's research capabilities than when it invests in rated Municipal
Obligations.
The Trust may invest up to 35% of its total assets in Municipal Obligations
rated below investment grade (but not, with respect to more than 30% of the
Trust's total assets, lower than B by all Rating Agencies rating the obligation)
and unrated Municipal Obligations considered to be of comparable quality by
Eaton Vance. No such securities will be in default at the time of purchase.
Investment in Municipal Obligations of below investment grade quality involves
special risks as compared with investment in higher grade Municipal Obligations.
These risks include greater sensitivity to a general economic downturn, greater
market price volatility and less secondary market trading. Securities rated
below investment grade are commonly known as "junk bonds." Such securities are
regarded, on balance, as predominantly speculative with respect to the issuer's
ability to pay interest and repay principal owed. See "-- Additional Risk
Considerations." For a description of municipal obligation ratings, see Appendix
A to the Statement of Additional Information.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Trust 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. 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.
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. Public purpose
municipal obligations 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 which 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 the Trust may invest include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. The Trust is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Trust is required to distribute substantially all of its income
for each taxable year. Thus, the Trust may have to sell other investments to
obtain cash needed to make income distributions.
The Trust may invest in residual interest municipal bonds 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 the Trust when short-term interest rates rise,
and increase the interest paid to the Trust when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market for these
securities is relatively new and 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, coupon,
call provisions and maturity. These securities usually permit the investor to
12
<PAGE> 17
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. Although the Trust is not limited with respect
to its investment in residual interest municipal bonds, the Trust does not
intend initially to invest more than 10% of its assets in such bonds.
The Trust may purchase Municipal Obligations that are additionally secured
by insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Trust'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 feature does not guarantee the market value of the insured
obligations or the Trust's net asset value.
The Trust has adopted certain fundamental investment restrictions set forth
in the Statement of Additional Information which may not be changed without a
vote of holders of Common Shares and APS voting together as a single class.
Except for such restrictions and the 80% requirement set forth above, the
investment objective and policies of the Trust may be changed by the Board of
Trustees without action by holders of Common Shares and APS.
ADDITIONAL INVESTMENT PRACTICES
When-Issued Securities. The Trust 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 the Trust agreed to pay for them. The Trust may be required to
maintain a segregated account of liquid assets equal to outstanding purchase
commitments. The Trust may also purchase instruments that give the Trust the
option to purchase a municipal obligation when and if issued.
Futures Transactions. The Trust may purchase and sell various kinds of
financial futures contracts and options thereon to seek to hedge against changes
in interest rates or as a substitute for the purchase of securities. For
example, futures contracts may sometimes be used to reduce the additional
long-term interest rate risk the Trust bears by holding residual interest bonds.
Futures contracts may be based on various debt securities and securities indices
(such as the Municipal Bond Index traded on the Chicago Board of Trade). Such
transactions involve a risk of loss or depreciation due to unanticipated adverse
changes in securities prices, which may exceed the Trust's initial investment in
these contracts. The Trust 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 the Eaton Vance's use of futures will be advantageous to the
Trust. Distributions by the Trust of any gains realized on the Trust's
transactions in futures and options on futures will be taxable. The rating
agency guidelines with respect to the APS limit the use of these transactions.
See "Investment Objective, Policies and Risks -- Rating Agency Guidelines."
Investment Company Securities. The Trust may purchase common shares of
closed-end investment companies that have a similar investment objective and
policies to the Trust. 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 Trust, will not exceed 10% of
total assets, and no such company will be affiliated with Eaton Vance. These
companies bear fees and expenses that the Trust will incur indirectly.
ADDITIONAL RISK CONSIDERATIONS
Interest Rate and Market Risk. The prices of Municipal Obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. This
risk is usually greater among Municipal Obligations with longer maturities or
durations and when residual interest municipal bonds are held by the Trust.
Although the Trust has no policy governing the
13
<PAGE> 18
maturities or durations of its investments, the Trust expects that it will
invest in a portfolio of longer-term securities. This means that the Trust will
be subject to greater market risk (other things being equal) than a fund
investing solely in shorter-term securities. Market risk is often greater among
certain types of income securities, such as zero-coupon bonds, which do not make
regular interest payments. As interest rates change, these bonds often fluctuate
in price more than higher quality bonds that make regular interest payments.
Because the Trust may invest in these types of income securities, it may be
subject to greater market risk than a fund that invests only in current interest
paying securities.
The Trust may invest to a significant extent in residual interest municipal
bonds known as inverse floaters. Compared to similar fixed-rate municipal bonds,
the value of these bonds will fluctuate to a greater extent in response to
changes in prevailing long-term interest rates. Moreover, the income earned on
residual interest municipal bonds will fluctuate in response to changes in
prevailing short-term interest rates. Thus, when such bonds are held by the
Trust, an increase in short- or long-term market interest rates will adversely
affect the income received from such bonds.
Income Risk. The Trust's income is based primarily on the interest it
earns from its investments, which can vary widely over the short- and long-term.
If interest rates drop, the Trust's income available over time to make dividend
payments with respect to the APS could drop as well if the Trust purchases
securities with lower interest coupons. This risk is magnified when prevailing
short-term interest rates increase and the Trust holds residual interest
municipal bonds.
Call Risk. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Trust is likely to replace such called security
with a lower yielding security.
Credit Risk. Municipal debt obligations are subject to the risk of
non-payment of scheduled interest and/or principal. Such non-payment would
result in a reduction of income to the Trust and a reduction in the value of the
security experiencing non-payment. Securities rated below investment grade or
unrated securities of comparable quality ("lower quality securities") 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 price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity ("market
risk"). The prices of lower quality securities are also more likely to react to
real or perceived developments affecting market and credit risk than are prices
of investment grade quality securities ("higher quality securities"), which
react primarily to movements in the general level of interest rates. The
investments in the Trust's portfolio will have speculative characteristics.
As indicated above, the Trust may invest up to 35% of its total assets in
Municipal Obligations rated below investment grade (but not, with respect to
more than 30% of its total assets, lower than B by all Rating Agencies rating
the obligation) and comparable unrated obligations. Such obligations are
commonly called "junk bonds" and will have speculative characteristics in
varying degrees. While such 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. Eaton
Vance seeks to minimize the risks of investing in below investment grade
securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification (if practicable). When the Trust invests in lower
rated or unrated Municipal Obligations, the achievement of the Trust's goals is
more dependent on the Eaton Vance's ability than would be the case if the Trust
were investing in Municipal Obligations in the higher rating categories. In
evaluating the credit quality of a particular issue, whether rated or unrated,
Eaton Vance will normally take into consideration, among other things, the
financial resources of the issuer (or, as appropriate, of the underlying source
of funds for debt service), its sensitivity to economic conditions and trends,
any operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters. Eaton
Vance will attempt to reduce the risks of investing in the lowest investment
grade, below investment grade and comparable unrated obligations through active
portfolio management, credit analysis and attention to current developments and
trends in the economy and the financial markets.
14
<PAGE> 19
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of lower grade municipal securities to pay interest and
to repay principal, to meet projected financial goals and to obtain additional
financing. In the event that an issuer of securities held by the Trust
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Trust may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Trust's portfolio
securities relate. Further, the Trust may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
interest or the repayment of principal on its portfolio holdings, and the Trust
may be unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
lower grade municipal securities in which the Trust may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Trust, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Trust's portfolio, the ability of the Adviser to value
the Trust's securities becomes more difficult and the Adviser's use of judgment
may play a greater role in the valuation of the Trust's securities due to the
reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Trust may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist.
Municipal Obligations held by the Trust that are of below investment grade
quality but which, subsequent to the assignment of such rating, are backed by
escrow accounts containing U.S. Government obligations may be determined by
Eaton Vance to be of investment grade quality for purposes of the Trust's
investment policies. The Trust may retain in its portfolio an obligation that
declines in quality, including defaulted obligations, if such retention is
considered desirable by Eaton Vance. In the case of a defaulted obligation, the
Trust may incur additional expense seeking recovery of its investment.
Changes in the credit quality of the issuers of Municipal Obligations held
by the Trust will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the value of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Trust's investments. The amount of
information about the financial condition of an issuer of Municipal Obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
The Trust 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.
Concentration. The Trust may invest 25% or more of its total assets in
Municipal Obligations of issuers located in the same state (or 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 state's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals or life care facilities; or industrial development or
pollution control bonds issued for electric utility systems, steel companies,
paper companies or other purposes. This may make the Trust more susceptible to
adverse economic, political, or regulatory occurrences affecting a particular
state or economic sector. For example, health care related issuers are
susceptible to Medicaid reimbursement policies, and national and state health
care legislation.
Liquidity Risk. At times, a substantial portion of the Trust's assets may
be invested in securities as to which the Trust, by itself or together with
other accounts managed by Eaton Vance and its affiliates, holds a
15
<PAGE> 20
major portion of 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 Trust could find it more difficult to sell such securities when
Eaton Vance 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.
In such circumstances, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Trust's net asset value.
The secondary market for some Municipal Obligations (including issues which
are privately placed with the Trust) is less liquid than that for taxable debt
obligations or other more widely traded Municipal Obligations. These include
residual interest municipal bonds. No established resale market exists for
certain of the Municipal Obligations in which the Trust 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 Trust 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.
A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Trust has no
limitation on the amount of its assets which may be invested in securities which
are not readily marketable or are subject to restrictions on resale. The risks
associated with illiquidity are particularly acute in situations where the
Trust's operations require cash, such as if the Trust tenders for its Common
Shares, and may result in the Trust borrowing to meet short-term cash
requirements.
Non-Diversification. The Trust has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Trust invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Trust will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
Year 2000 Compliance. The Trust could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." Eaton Vance is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Trust's other major
service providers. At this time, there can be no assurance that these steps will
be sufficient to avoid any adverse impact to the Trust.
In addition, it is possible that the markets for municipal securities in
which the Trust invests may be detrimentally affected by computer failures
throughout the financial services industry beginning on or before January 1,
2000. Improperly functioning trading systems may result in settlement problems
and liquidity issues. In addition, corporate and governmental data processing
errors may result in production problems for individual issuers and overall
economic uncertainties. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in financial statements. Accordingly, the Trust's investments may be adversely
affected. The statements above are subject to the Year 2000 Information and
Readiness Disclosure Act, which may limit the legal rights regarding the use of
such statements in the case of a dispute.
RATING AGENCY GUIDELINES
The Trust intends that, so long as APS are outstanding, the composition of
its portfolio will reflect guidelines established by S&P in connection with the
Trust's receipt of a rating for such shares on or prior to their Date of
Original Issue of at least AAA from S&P. S&P, which is a Rating Agency, issues
ratings for various securities reflecting the perceived creditworthiness of such
securities. The guidelines described below have been developed by S&P in
connection with issuances of asset-backed and similar securities, including debt
obligations and variable rate Preferred Shares, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or Preferred
Shares will be varied sufficiently and will be of sufficient quality and amount
to justify investment
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<PAGE> 21
grade ratings. The guidelines do not have the force of law but have been adopted
by the Trust in order to satisfy current requirements necessary for S&P to issue
the above-described ratings for APS, which ratings generally are relied upon by
institutional investors in purchasing such securities. The guidelines provide a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
1940 Act. See "Description of APS--Asset Maintenance."
The Trust intends to maintain a Discounted Value for its portfolio at least
equal to the APS Basic Maintenance Amount. S&P has established guidelines for
determining Discounted Value. 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 the Trust's portfolio
assets. The S&P guidelines do not impose any limitations on the percentage of
Trust assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Trust's portfolio.
Upon any failure to maintain the required aggregate Discounted Value, the
Trust 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--Asset Maintenance" and
"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 the Trust. See "Description
of APS--Asset Maintenance."
The Trust may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the shares of APS, at any time, may change or withdraw any such
rating. As set forth in the Amended By-Laws, the Trust's Board of Trustees
("Board of Trustees"), without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Trust pursuant to the
rating agency guidelines, provided the Board of Trustees has obtained written
confirmation from S&P that any such change would not impair the ratings then
assigned by S&P to the APS.
As described by S&P, a Preferred Shares rating is an assessment of the
capacity and willingness of an issuer to pay Preferred Shares obligations. The
ratings on the APS are not recommendations to purchase, hold or sell APS,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor, nor do the rating agency guidelines described above address
the likelihood that a holder of APS will be able to sell such shares in an
Auction. The ratings are based on current information furnished to S&P by the
Trust 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.
S&P AAA Rating Guidelines. The Discounted Value of the Trust's S&P
Eligible Assets is calculated on each Valuation Date. See "Description of
APS--Asset Maintenance--APS Basic Maintenance Amount." S&P Eligible Assets
include cash, Receivables for Municipal Obligations Sold (as defined below) and
Municipal Obligations eligible for consideration under S&P's current guidelines.
For purposes of calculating the Discounted Value of the Trust's portfolio under
current S&P guidelines, the fair market value of Municipal Obligations eligible
for consideration under such guidelines must be discounted by the applicable S&P
Discount Factor set forth in the table below. The Discounted Value of a
Municipal Obligation eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount Factor
used to discount a particular Municipal Obligation will be determined by
reference to (a) the rating by S&P on such Municipal Obligation and (b) the S&P
Exposure Period. The S&P Exposure Period is the maximum period of time following
a Valuation Date, including the Valuation Date and the APS Basic Maintenance
Cure Date, that the Trust has to cure any failure to maintain, as of such
Valuation Date, a Discounted Value for its portfolio at least equal to the APS
Basic Maintenance Amount.
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S&P Discount Factors applicable to Municipal Obligations for a range of S&P
Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS RATING CATEGORY
---------------------------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
45 Business Days...................................... 190% 195% 210% 250%
25 Business Days...................................... 170 175 190 230
10 Business Days...................................... 155 160 175 215
7 Business Days...................................... 150 155 170 210
3 Business Days...................................... 130 135 150 190
</TABLE>
Since the S&P Exposure Period currently applicable to the Trust is three
Business Days, the S&P Discount Factors currently applicable to Municipal
Obligations eligible for consideration under S&P guidelines will be determined
by reference to the factors set forth opposite the exposure period line entitled
"3 Business Days." 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 125% if such Municipal Obligations are not
rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however,
such short-term Municipal Obligations rated by Moody's but not rated by S&P
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 short-term Municipal Obligations rated by Moody's but not
rated by S&P may comprise no more than 50% of short-term Municipal Obligations
that qualify as S&P Eligible Assets and (ii) no S&P Discount Factor will be
applied to cash or to Receivables for Municipal Obligations Sold. "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 if such receivables are
due within five Business Days of such Valuation Date. For purposes of the
foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1
by Moody's, which do not mature or have a demand feature exercisable in 30 days
and which do not have a long-term rating, shall be considered to be short-term
Municipal Obligations.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal
Obligations must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S.
dollars;
(iii) be 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, be 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 fair market value of such
Municipal Obligations does not exceed 50% of the aggregate fair market
value of the S&P Eligible Assets. For purposes of determining the S&P
Discount Factors applicable to any such Moody's-rated Municipal
Obligations, such Municipal Obligations will be deemed to have an S&P
rating that is one full rating category lower than its Moody's rating);
(iv) not be subject to a covered call or covered put option written by
the Trust; and
(v) be part of an issue 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), be issued by an issuer with a total of
at least $50 million of securities outstanding.
Notwithstanding the foregoing:
(i) Municipal Obligations of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such obligations does not exceed 10% of the
aggregate fair market value of the S&P Eligible Assets, provided that 2% is
added to
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<PAGE> 23
the applicable S&P Discount Factor for every 1% by which the fair market
value of such Municipal Obligations exceeds 5% of the aggregate fair market
value of the S&P Eligible Assets; and
(ii) Municipal Obligations issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent the
fair market value of such Municipal Obligations does not exceed 20% of the
aggregate fair market value of S&P Eligible Assets.
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 Trusts 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.
Residual interest bonds will qualify as S&P Eligible assets provided that
the ratio of aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed a ratio of
one-to-one at their time of original issuance. Leveraged residual interest bonds
will not qualify as S&P Eligible Assets unless the leveraged bond has only one
reset remaining before its maturity.
The Trust may include Municipal Obligations as S&P Eligible Assets pursuant
to guidelines and restrictions to be established by S&P, provided that S&P
advises the Trust in writing that such action will not adversely affect its
then-current rating on the APS.
As discussed herein, the Trust may engage in options or futures
transactions. For so long as any APS are rated by S&P, the Trust will not
purchase or sell financial futures contracts, write, purchase or sell options on
financial 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 APS by S&P, except that the Trust
may purchase or sell financial futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (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 that terminate a financial
futures contract or option held by the Trust by the Trust's taking an
opposite position thereto ("Closing Transactions")), that would cause the
Trust at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding financial futures contracts based on the
Municipal Index, (B) outstanding financial futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Trust's total assets divided by $1,000 or (C) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial 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) that would cause the Trust
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the fair 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 financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial 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 financial futures contract that 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 with an aggregate Discounted Value
equal to or
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<PAGE> 24
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 financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Trust holds the securities deliverable under such
terms; and
(v) when the Trust writes a financial futures contract or an 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
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Trust writes a
financial futures contract or option thereon that 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 financial futures
contracts based on the Municipal Index that are owned by the Trust plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on Treasury Bonds which contracts are owned by
the Trust.
For so long as the APS are rated by S&P, the Trust, unless it has received
written confirmation from S&P that such action would not impair the ratings then
assigned to the APS by S&P will not (i) borrow money except for the purpose of
clearing transactions in portfolio securities (which borrowings under any
circumstances shall be limited to the lesser of $10 million and an amount equal
to 5% of the fair market value of the Trust's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of S&P
Eligible Assets to be less than the APS Basic Maintenance Amount), (ii) engage
in short sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Trust, (v) reissue any APS previously purchased or redeemed
by the Trust, (vi) merge or consolidate into or with any other corporation or
entity, (vii) change the Trust's pricing service or (vii) engage in reverse
repurchase agreements.
For so long as the APS are rated by S&P, the Trust will not purchase or
sell financial futures contracts, write, purchase or sell options on financial
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 APS by S&P, except that the Trust may engage in
S&P Hedging Transactions subject to the limitations described herein. See
"Investment Objective and Policies--Rating Agency Guidelines" and "--Options and
Futures Transactions."
RISKS OF INVESTING IN APS
There are a number of specific factors investors in the APS should
consider:
- The credit ratings of the APS could be reduced while an investor holds
the APS.
- Neither Broker-Dealers nor the Trust are obligated to purchase the APS
in an Auction or otherwise nor is the Trust required to redeem the APS
in the event of a failed Auction.
- If in an Auction for the APS Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable Rate, and in such event,
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, the APS
subject to such Sell Orders. Thus, under certain circumstances,
Beneficial Owners may not have liquidity of investment.
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<PAGE> 25
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.
The Trust's Agreement and Declaration of Trust (the "Declaration of Trust")
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Trust or to change the composition
of its Board of Trustees. See "Description of Capital Stock-- Certain Provisions
of the Declaration of Trust."
DESCRIPTION OF APS
Each series of APS will be Preferred Shares that entitle their holders to
receive dividends when, as and if declared by the Board of Trustees, out of
funds legally available therefor, at a rate per annum that may vary for the
successive Dividend Periods for each such series. After the Initial Dividend
Period, each Subsequent Dividend Period for each series of APS generally will be
a 7-Day Dividend Period; provided, however, that prior to any Auction, the Trust
may elect, subject to certain limitations described herein, upon giving notice
to holders thereof, a Special Dividend Period. The Applicable Rate for a
particular Dividend Period for a series of APS will be determined by an Auction
conducted on the Business Day before the start of such Dividend Period.
Beneficial Owners and Potential Beneficial Owners of APS may participate in
Auctions therefor, although, except in the case of a Special Dividend Period,
Beneficial Owners desiring to continue to hold all of their APS regardless of
the Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"Description of APS--The Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding APS of each series will be represented by one or
more certificates registered in the name of the nominee of the Securities
Depository (initially expected to be Cede & Co.), and no person acquiring APS
will be entitled to receive a certificate representing such shares. See Appendix
D to the Statement of Additional Information (Auction Procedures). As a result,
the nominee of the Securities Depository is expected to be the sole holder of
record of each series of APS. Accordingly, each purchaser of APS must rely on
(i) the procedures of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and when
applicable) and (ii) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to evidence its beneficial ownership of the APS.
When issued and sold, the APS of each series 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) and will be fully paid and
non-assessable. See "Description of APS--Liquidation Rights." The APS will not
be convertible into Common Shares or other shares of beneficial interest of the
Trust, and the holders thereof will have no preemptive rights. The APS will not
be subject to any sinking fund but will be subject to redemption at the option
of the Trust at the Optional Redemption Price on any Dividend Payment Date for
such series (except during the Initial Dividend Period and during a Non-Call
Period) and, in certain circumstances, will be subject to mandatory redemption
by the Trust at the Mandatory Redemption Price stated herein. See "Description
of APS--Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, Bankers Trust Corporation ("Bankers Trust") will be
the transfer agent, registrar, dividend disbursing agent and redemption agent
for each series of APS. The Auction Agent, however, will serve merely as the
agent of the Trust, acting in accordance with the Trust's instructions, and will
not be responsible for any evaluation or verification of any matters certified
to it.
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Except in an Auction, the Trust will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any APS so long as
the Trust is current in the payment of dividends on APS and on any other shares
of beneficial interest of the Trust ranking on a parity with the APS with
respect to the payment of dividends or upon liquidation.
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 the Trust's Declaration of Trust and Amended
By-Laws, including the provisions thereof establishing the APS. The Trust's
Declaration of Trust and the form of Amended By-Laws establishing the terms of
the APS have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
THE AUCTION
General. Holders of the APS of each series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the Board
of Trustees of the Trust, out of the funds legally available therefor, on the
Initial Dividend Payment Date with respect to the Initial Dividend Period for
each series and, thereafter, on each Dividend Payment Date with respect to a
Subsequent Dividend Period for each series (generally a period of seven days
subject to certain exceptions set forth under "Description of
APS--Dividends--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 for each series 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 Auction
Procedures are attached as Appendix D to the Statement of Additional
Information. Each periodic operation of such procedures with respect to the APS
is referred to hereinafter as an "Auction." If, however, the Trust 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--Determination of
Dividend Rate."
Auction Agent Agreement. The Trust will enter into an agreement (the
"Auction Agent Agreement") with Bankers Trust (together with any successor bank
or trust company or other entity entering into a similar agreement with this
Trust, 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 each series of APS. The Trust will pay the Auction Agent
compensation for its services under the Auction Agent Agreement.
The Auction Agent will act as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the Auction
Agent Agreement, and will not be liable for any error of judgment made in good
faith unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Trust is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection with
the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Trust, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Trust 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. The
Trust may terminate the Auction Agent Agreement, provided that prior to such
termination the Trust shall have entered into such an agreement with respect
thereto with a successor Auction Agent.
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with
PaineWebber Incorporated, Prudential Securities, Salomon
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<PAGE> 27
Smith Barney Inc. and A.G. Edwards & Sons, 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 the Trust, 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 PaineWebber Incorporated, Prudential Securities, Salomon Smith Barney Inc.
and A.G. Edwards & Sons, Inc. may not be terminated without the prior written
consent of the Trust, which consent may not be unreasonably withheld.
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 of the series to which it relates contained in the Amended By-Laws. Cede
& Co. initially will be the holder of record of all shares of APS, and
Beneficial Owners will not be entitled to receive certificates representing
their ownership interest in such shares. See Appendix D (Auction Procedures) to
the Statement of Additional Information. 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 the Trust 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
Auction Procedures set forth in Appendix D to the Statement of Additional
Information. The Settlement Procedures to be used with respect to Auctions are
set forth in Appendix C to the Statement of Additional Information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
the APS offered hereby for each Dividend Period for such shares (other than the
Initial Dividend Period therefor) will be held on the last Business Day
preceding the first day of such Dividend Period, which first day is also the
Dividend Payment Date for the preceding Dividend Period (the date of each
Auction being referred to herein as an "Auction Date"). The initial Auction Date
will be March 16, 1999 for Series A APS and March 11, 1999 for Series B APS.
Auctions for the APS for Dividend Periods after the Initial Dividend Period
normally will be held every Tuesday after the preceding Dividend Payment Date
for Series A APS and every such Thursday for Series B APS; and each subsequent
Dividend Period normally will begin on the following Wednesday for Series A APS
and on the following Friday for Series B APS (also a Dividend Payment Date). The
Auction Date and the first day of the related Dividend Period for a series of
APS (both of which must be Business Days) need not be consecutive calendar days.
See "Description of APS--Dividends" 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 the Trust intends to include any net
capital gain or other income subject to federal income tax in any dividend on
the APS, the Trust 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 the Trust, 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. The Trust 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
the Trust 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--Additional Dividends."
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<PAGE> 28
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
a:
(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.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. For information concerning the priority given to different types
of Orders placed by Beneficial Owners, see "Submission of Orders by
Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for a series of 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 a series of APS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the credit rating assigned on such date to such shares
by S&P (or if S&P shall not make such rating available, the equivalent of such
rating by a Substitute Rating Agency), and (ii) whether the Trust has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on the APS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
PERCENTAGE OF PERCENTAGE OF
REFERENCE REFERENCE
RATE -- RATE --
S&P CREDIT RATINGS NO NOTIFICATION NOTIFICATION
------------------ --------------- -------------
<S> <C> <C>
AA- or higher......................................... 110% 150%
A- to A+.............................................. 125 160
BBB- to BBB+.......................................... 150 250
Below BBB-............................................ 200 275
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
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<PAGE> 29
The Trust will take all reasonable action necessary to enable S&P to
provide a rating for each series of APS. If S&P shall not make such a rating
available, the Underwriters or their affiliates and successors, after
consultation with the Trust, 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 the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. A Broker-Dealer also may
hold APS in its own account as a Beneficial Owner. A Broker-Dealer thus may
submit Orders to the Auction Agent as a Beneficial Owner or a Potential
Beneficial Owner and therefore participate in an Auction as an Existing Holder
or Potential Holder on behalf of both itself and its customers. Any Order placed
with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner
or a Potential Beneficial Owner will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent
an Order in respect of any APS held by it or its customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of APS held by it, as described
in the next paragraph. Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the priority
given to different types of Orders placed by Existing Holders, see "Submission
of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an
Auction will be settled on the Business Day next succeeding the Auction Date at
a price per share equal to $25,000. See "Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding APS
held by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period of 91 days or less) and a Sell
Order (in the case of an Auction relating to a Special Dividend Period of longer
than 91 days) to have been submitted on behalf of such Beneficial Owner covering
the number of outstanding the APS held by such Beneficial Owner and not subject
to Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the
Dividend Period next succeeding the Auction automatically shall be the same
length as the immediately preceding Dividend Period, and the Applicable Rate for
the next Dividend Period for all the APS will be 40% of the Reference Rate on
the date of the applicable Auction (or 60% of such rate if the Trust 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 the Trust shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust or segregated in an account at the Trust'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 Trust, the Trust will be
prohibited from reissuing and its affiliates (other than the Underwriter) will
be prohibited from transferring (other than to the Trust) any APS they may
acquire. Neither the Trust nor any affiliate of the Trust (other than the
Underwriter) may submit an Order in any Auction, except that an affiliate of the
Trust 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
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<PAGE> 30
by it for the Auction for a series of APS to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) 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 shares of APS held by such
Existing Holder, such Orders will be considered valid in the following order of
priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding APS held by such Existing Holder, provided that if
more than one Hold Order is submitted by such Existing Holder and the
number of APS subject to such Hold Orders exceeds the number of outstanding
APS held by such Existing Holder, the number of APS subject to each of such
Hold Orders will be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of outstanding APS held by such
Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding APS held by such Existing Holder over the number of outstanding
APS subject to any Hold Order referred to in clause (i) above (and if more
than one Bid submitted by such Existing Holder specifies the same rate per
annum and together they cover more than the remaining number of shares that
can be the subject of valid Bids after application of clause (i) above and
of the foregoing portion of this clause (ii) to any Bid or Bids specifying
a lower rate or rates per annum, the number of shares subject to each of
such Bids will be reduced pro rata so that such Bids, in the aggregate,
cover exactly such remaining number of outstanding shares); and the number
of outstanding shares, if any, subject to Bids not valid under this clause
(ii) shall be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over
the sum of the number of APS subject to Hold Orders referred to in clause
(i) above and the number of APS subject to valid Bids by such Existing
Holder referred to in clause (ii) above; provided that, if more than one
Sell Order is submitted by any Existing Holder and the number of APS
subject to such Sell Orders is greater than such excess, the number of APS
subject to each of such Sell Orders will be reduced pro rata so that such
Sell Orders, in the aggregate, will cover exactly the number of APS equal
to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of APS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS") and
whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of 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
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<PAGE> 31
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, 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 as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in
the order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of a series of APS will sell, continue to
hold and/or purchase APS as set forth below. Existing Holders that submit or are
deemed to have submitted Hold Orders will continue to hold the APS subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will
sell the outstanding APS subject to such Submitted Bid or Submitted Sell
Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the
outstanding APS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number of
APS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of APS subject to such Submitted Bids, unless the number
of outstanding APS subject to all such Submitted Bids of Existing Holders
is greater than the excess of the Available APS over the number of APS
accounted for in clauses (b) and (c) above, in which event each Existing
Holder with such a Submitted Bid will sell a number of outstanding APS
determined on a pro rata basis based on the number of outstanding APS
subject to all such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
APS not accounted for in clause (b), (c) or (d) above on a pro rata basis
based on the APS subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding APS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue
to hold the outstanding APS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of APS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
will sell a number of outstanding APS determined on a pro rata basis based
on the outstanding APS subject to all such Submitted Bids and Submitted
Sell Orders. If as a result of the Auction Procedures described above any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of APS, the
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<PAGE> 32
Auction Agent, in such manner as, in its sole discretion, it shall
determine, will round up or down the number of APS being sold or purchased
on such Auction Date so that each share sold or purchased by each Existing
Holder or Potential Holder will be a whole APS. If any Potential Holder
would be entitled or required to purchase less than a whole APS, the
Auction Agent, in such manner as, in its sole discretion, it shall
determine, will allocate APS for purchase among Potential Holders so that
only whole APS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any APS.
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. If a
customer selling APS as a result of an Auction shall fail to instruct its Agent
Member to deliver such shares, the Broker-Dealer that submitted such customer's
Bid or Sell Order will instruct such Agent Member to deliver such shares against
payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction
on behalf of a customer also will advise such customer of the Applicable Rate
for the next Dividend Period for the APS. The Auction Agent will record each
transfer of APS on the record book of Existing Holders to be maintained by the
Auction Agent.
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.
If any Existing Holder selling APS in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased APS in such
Auction may deliver to such person a number of whole APS that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of APS to be so delivered will be determined by such
Broker-Dealer. Delivery of such lesser number of shares will constitute good
delivery. Each Broker-Dealer Agreement also will provide that neither the Trust
nor the Auction Agent will have responsibility or liability with respect to the
failure of a Potential Beneficial Owner, Beneficial Owner or their respective
Agent Members to deliver APS or to pay for APS purchased or sold pursuant to an
Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Trust to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of
the Trust 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
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<PAGE> 33
(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 the Trust 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.
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 for a series of APS, likely
will have an adverse effect on the secondary market price of such APS, and a
selling shareholder may sell APS between Auctions at a price per share of less
than $25,000.
DIVIDENDS
General. The holders of APS of each series will be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares, 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 so declared and
payable shall be paid (i) in preference to and in priority over any dividends so
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. 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 federal minimum tax ("Preference Item"). See
"Taxes."
Dividends on each series of APS will accumulate from the date on which the
Trust originally issues the APS (the "Date of Original Issue") and will be
payable on the APS on the dates described below. Dividends on a series APS with
respect to the Initial Dividend Period shall be payable on the Initial Dividend
Payment Date for that series. Following the Initial Dividend Payment Date,
dividends on each series of APS will be payable, at the option of the Trust,
either (i) with respect to any 7-Day Dividend Period and any Short Term Dividend
Period of 35 or fewer days, on the day next succeeding the last day thereof or
(ii) with respect to any Short Term Dividend Period of more than 35 days and
with respect to any Long Term Dividend Period, monthly on the first Business Day
of each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and on the day next succeeding the last day thereof (each such
date referred to in clause (i) or (ii) being 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 shares of APS set forth in the
Charter. 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."
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<PAGE> 34
Prior to each Dividend Payment Date, the Trust is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Trust does 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 "Description of
APS--The Auction--Securities Depository." The Securities Depository will credit
the accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in same-day
funds. The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the nominee
of the Securities Depository. Any dividend payment made on the APS first shall
be credited against the earliest declared but unpaid dividends accumulated with
respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends except as
described under "Additional Dividends" and "Non-Payment Period; Late Charge"
below. No interest will be payable in respect of any dividend payment or
payments on the APS which may be in arrears.
The amount of cash dividends per share of APS of each series 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, the Trust, 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 a series of 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 the Trust may not give a Request for
Special Dividend Period (and any such request shall be null and void) unless,
for any Auction occurring after the initial Auction, Sufficient Clearing Bids
were made in the last occurring Auction and unless full cumulative dividends,
any amounts due with respect to redemptions, and any Additional Dividends
payable prior to such date have been paid in full. Such Request for Special
Dividend Period, in the case of a Short Term Dividend Period, shall be given on
or prior to the second Business Day but not more than seven Business Days prior
to an Auction Date for the APS of that series 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 of that series. 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
the Trust issue a Notice of Special Dividend Period as contemplated by such
Request for Special Dividend Period and the Optional Redemption Price of the APS
of that series 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-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
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<PAGE> 35
securities comparable to the APS, (iv) industry and financial conditions which
may affect the APS of that series, (v) the investment objective of the Trust 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 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 APS of that series, 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 APS of that series,
the Trust, 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,
if any, as specified in the related Response and (iii) the Specific Redemption
Provisions, if any, as specified in the related Response. The Trust also shall
provide a copy of such Notice of Special Dividend Period to S&P. The Trust shall
not give a Notice of Special Dividend Period, and, if such Notice of Special
Dividend Period shall have been given already, shall give telephonic and written
notice of its revocation (a "Notice of Revocation") to the Auction Agent, each
Broker-Dealer, and the Securities Depository on or prior to the Business Day
prior to the relevant Auction Date if (x) either the 1940 Act APS Asset Coverage
is not satisfied or the Trust shall fail to maintain S&P Eligible Assets with an
aggregate Discounted Value at least equal to the APS Basic Maintenance Amount,
on each of the two Valuation Dates immediately preceding the Business Day prior
to the relevant Auction Date on an actual basis and on a pro forma basis giving
effect to the proposed Special Dividend Period (using as a pro forma dividend
rate with respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Trust is an approximately equal rate for
securities similar to the APS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the related Auction
Date or (z) the Broker-Dealers jointly advise the Trust that, after
consideration of the factors listed above, they have concluded that it is
advisable to give a Notice of Revocation. The Trust also shall provide a copy of
such Notice of Revocation to S&P. If the Trust is prohibited from giving a
Notice of Special Dividend Period as a result of 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, 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 Trust 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 a series of APS
during the period from and including the Date of Original Issue for the APS to
but excluding the Initial Dividend Payment Date for that series of 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 a series
of APS, the Applicable Rate on that series of 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 each series of 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 for a series of APS
will commence if the Trust 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
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<PAGE> 36
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 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, the
Securities Depository and all holders of the APS of such series. 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 below, shall not constitute a "Non-Payment Period." The Applicable
Rate for each Dividend Period for the APS of any series, commencing during a
Non-Payment Period, will be equal to the Non-Payment Period Rate; and each
Dividend Period commencing after the first day of, and during, a Non-Payment
Period shall be a 7-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, the Trust 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 the Trust 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 the Trust
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 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 (or any Substitute Rating Agency in
lieu of S&P in the event such party shall not rate the APS) advises the Trust 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, the
Trust 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). The
Trust estimates that, based on the composition of its portfolio at February 19,
1999, asset coverage with respect to the APS would be approximately 277%
immediately after the issuance of the APS offered hereby. Under the Code, the
Trust 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 the Trust's ability to
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<PAGE> 37
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, the Trust 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 Trust 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 Trust 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 Trust ranking junior to
or on a parity with APS as to dividends and upon liquidation), unless (A)
immediately after such transaction, the Trust would have S&P Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount, and the 1940 Act APS Asset Coverage (see "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 Trust 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 the Trust 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 above under "The Auction--Auction
Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividends," the Trust, 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, 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 Trust. Such a retroactive allocation may
happen when such allocation is made as a result of (i) the redemption of all or
a portion of the outstanding APS, (ii) the liquidation of the Trust (the amount
of such allocation referred to herein as a "Retroactive Taxable Allocation") or
(iii) a debt obligation believed to be a Municipal Obligation unexpectedly turns
out to be an obligation subject to federal income tax. The Trust, 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 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
the Trust is a Preference Item; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable to each holder of APS at the maximum marginal
federal 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 state and local taxes and the phase out of, or provision limiting,
personal exemptions, itemized deductions, or the benefit of lower tax brackets).
Although the Trust 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." The Trust
will not pay a further Additional Dividend with respect to any taxable portion
of an Additional Dividend.
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If the Trust 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
above under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends," the Trust 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.
ASSET MAINTENANCE
The Trust 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. The Trust 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 Trust,
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 the Trust 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 Trust 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 the Trust's net assets as of
February 19, 1999 and assuming the Over-allotment Common Shares and the APS had
been issued as of such date will be as follows:
<TABLE>
<C> <C> <S> <C> <C>
Value of Trust assets less liabilities not
constituting senior securities $362,231,048
- --------------------------------------------------- ------------
Senior securities representing indebtedness plus = $131,000,000 = 277%
liquidation value of the shares of APS
</TABLE>
APS Basic Maintenance Amount. So long as the APS are outstanding, the
Trust will be required under the Amended By-Laws to maintain as of each Business
Day (a "Valuation Date") S&P Eligible Assets and having in the aggregate a
Discounted Value at least equal to the APS Basic Maintenance Amount. If the
Trust fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the sixth Business Day after such Valuation Date (the
"APS Basic Maintenance Cure Date"), the Trust will be required in certain
circumstances to redeem certain of the APS. 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.
See "Redemption."
The APS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of APS
outstanding on such Valuation Date multiplied by the sum of $25,000 and 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 APS outstanding to (but not
including) the end of the current Dividend Period that follows such Valuation
Date in the event the then-current Dividend Period will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date in
the event the then-current Dividend Period for the APS will not end within 49
calendar days of such Valuation Date; (C) in the event the then-current Dividend
Period will end within 49 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 APS outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the S&P Volatility Factor determined from time to time by S&P
(except that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation
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would accumulate at the then-current Non-Payment Period Rate); (D) the amount of
anticipated Trust expenses for the 90 days subsequent to such Valuation Date;
(E) the amount of the Trust's Maximum Potential Additional Dividend Liability as
of such Valuation Date; and (F) any current liabilities as of such Valuation
Date to the extent not reflected in any of (i) (A) through (i) (E) (including,
without limitation, and immediately upon determination, any amounts due and
payable by the Trust pursuant to repurchase agreements, any amounts payable for
Municipal Obligations purchased as of such Valuation Date) less (ii) either (A)
the Discounted Value of any Trust 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
the 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 the APS
subject to redemption or to satisfy any of (i) (B) through (i) (F). For purposes
of the foregoing, "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.
The Discount Factors and guidelines for determining the market value of the
Trust's portfolio holdings have been based on criteria established in connection
with rating the APS. These factors include, but are not limited to, the
sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with which
the relevant asset is marked to market. In no event shall the Discounted Value
of any asset of the Trust exceed its unpaid principal balance or face amount as
of the date of calculation. The Discount Factor relating to any asset of the
Trust and the APS Basic Maintenance Amount, the assets eligible for inclusion in
the calculation of the Discounted Value of the Trust's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Trust, without shareholder approval, but only in the event the
Trust receives written confirmation from S&P, and any Substitute Rating Agency
that any such changes would not impair the ratings then assigned to the APS by
S&P or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the
Trust fails to maintain S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount, the Trust is required
to deliver to the Auction Agent and S&P a report with respect to the calculation
of the APS Basic Maintenance Amount and the value of its portfolio holdings as
of the date of such failure (an "APS Basic Maintenance Report"). Additionally,
on or before 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 and the
Auction Agent. The Trust also will deliver an APS Basic Maintenance Report as of
the last Business Day of the last month of each fiscal quarter of the Trust on
or before the third Business Day after such day. Within ten Business Days after
delivery of such report relating to the last Business Day of the last month of
each fiscal quarter of the Trust, the Trust will deliver a letter prepared by
the Trust's independent accountants regarding the accuracy of the calculations
made by the Trust in its most recent APS Basic Maintenance Report. Also, on or
before 5:00 p.m., New York City time, on the first Business Day after Common
Shares are repurchased by the Trust, the Trust will complete and deliver to S&P
an APS Basic Maintenance Report as of the close of business on such date that
Common Shares is repurchased. If any such letter prepared by the Trust's
independent accountants shows that an error was made in the most recent APS
Basic Maintenance Report, the calculation or determination made by the Trust's
independent accountants will be conclusive and binding on the Trust.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and under
Massachusetts law, upon giving a Notice of Redemption, as provided below, the
Trust, 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
Trust during (a) the Initial
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<PAGE> 40
Dividend Period with respect to the APS or (b) a Non-Call Period to which such
share is subject. "Optional Redemption Price" means $25,000 per share of APS
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed for redemption plus any applicable redemption
premium, if any, attributable to the designation of a Premium Call Period. In
addition, holders of APS may be entitled to receive Additional Dividends in the
event of redemption of such APS to the extent provided herein. See "Description
of APS--Dividends--Additional Dividends." The Trust 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 Trust'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.
Mandatory Redemption. The Trust 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 Trust fails to maintain S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount or to satisfy the 1940 Act APS Asset Coverage and such
failure is not cured on or before the APS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. "Mandatory Redemption Price" for each series 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--Additional Dividends." The number of APS to be redeemed will be
equal to the lesser of (a) the minimum number 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 other shares of the Preferred Shares subject to
redemption or retirement, would result in the Trust having S&P Eligible Assets
each 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 the redemption of which would have such result, all APS then
outstanding will be redeemed), and (b) the maximum number of APS, together with
all other shares of 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 APS required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number required to
be redeemed which would result in the Trust having S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount or satisfaction of the 1940 Act APS Asset Coverage, as the case may be,
pro rata among APS and other Preferred Shares subject to redemption pursuant to
provisions similar to those set forth below; provided that, APS that may not be
redeemed at the option of the Trust due to the designation of a Non-Call Period
applicable to such shares (A) will be subject to mandatory redemption only to
the extent that other shares are not available to satisfy the number of shares
required to be redeemed and (B) will be selected for redemption in an ascending
order of outstanding number of days in the Non-Call Period (with shares with the
lowest number of days to be redeemed first) and by lot in the event of shares
having an equal number of days in such Non-Call Period. The Trust is required to
effect such a mandatory redemption 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 APS 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 will redeem those APS which it
was unable to redeem on the earliest practicable date on which it is able to
effect such redemption.
General. If the APS are to be redeemed, a notice of redemption will be
mailed to each record holder of such APS (initially Cede & Co. as nominee of the
Securities Depository) and to the Auction Agent not less than 17 nor more than
30 days prior to the date fixed for the redemption thereof. Each notice of
redemption will include a statement setting forth: (i) the redemption date, (ii)
the aggregate number of APS to be redeemed, (iii) the redemption price, (iv) the
place or places where APS are to be surrendered for payment of the redemption
price, (v) a statement that dividends on the shares to be redeemed will cease to
accumulate on such redemption date (except that holders may be entitled to
Additional Dividends) and (vi) the provision of the Amended By-Laws pursuant to
which such shares are being redeemed. The notice also will be published
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<PAGE> 41
in The Wall Street Journal. No defect in the notice of redemption or in the
mailing or publication thereof will affect the validity of the redemption
proceedings, except as required by applicable law.
If less than all of the outstanding APS are to be redeemed, the shares to
be redeemed will be selected by lot or such other method as the Trust shall deem
fair and equitable, and the results thereof will be communicated to the Auction
Agent. The Auction Agent will give notice to the Securities Depository, whose
nominee will be the record holder of all APS, and the Securities Depository will
determine the number of shares to be redeemed from the account of the Agent
Member of each Existing Holder. Each Agent Member will determine the number of
shares to be redeemed from the account of each Existing Holder for which it acts
as agent. An Agent Member may select for redemption shares from the accounts of
some Existing Holders without selecting for redemption any shares from the
accounts of other Existing Holders. Notwithstanding the foregoing, if neither
the Securities Depository nor its nominee is the record holder of all of the APS
series, the particular shares to be redeemed shall be selected by the Trust by
lot or by such other method as the Trust shall deem fair and equitable.
If the Trust gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Trust's custodian bank for the benefit of the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value (utilizing
an S&P Exposure Period of 3 Business Days) equal to the redemption payment for
the APS as to which notice of redemption has been given, with irrevocable
instructions and authority to pay the redemption price to the record holders
thereof, then upon the date of such deposit or, if no such deposit is made, upon
such date fixed for redemption (unless the Trust shall default in making payment
of the redemption price), all rights of the holders of such shares called for
redemption will cease and terminate, except the right of such holders to receive
the redemption price thereof and any Additional Dividends, but without interest,
and such shares no longer will be deemed to be outstanding. The Trust will be
entitled to receive, from time to time, the interest, if any, earned on such
Deposit Securities deposited with the Auction Agent, and the holders of any
shares so redeemed will have no claim to any such interest. Any funds so
deposited which are unclaimed at the end of one year from such redemption date
will be repaid, upon demand, to the Trust, after which the holders of the APS of
such series so called for redemption may look only to the Trust for payment
thereof.
So long as any APS are held of record by the nominee of the Securities
Depository (initially Cede & Co.), the redemption price for such shares will be
paid on the redemption date to the nominee of the Securities Depository. The
Securities Depository's normal procedures now provide for it to distribute the
amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no APS shall
be subject to optional redemption (i) unless all dividends in arrears on the
outstanding APS, and all capital stock of the Trust 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 the Trust's failure to maintain S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Trust, whether
voluntary or involuntary, the holders of APS of each series will 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 of the Trust 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 the Trust 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 Trust 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
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<PAGE> 42
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 the Trust except for any
Additional Dividends. A consolidation, merger or share exchange of the Trust
with or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of the
assets of the Trust shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Trust.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS 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 as a single class.
In connection with the election of the Trust'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 Trust's trustees, and the remaining trustees will
be elected by holders of Common Shares and APS and any other Preferred Shares,
voting together as a single class. In addition, if at any time dividends on
outstanding APS shall be unpaid in an amount equal to at least two full years'
dividends thereon or if at any time holders of any shares of Preferred Shares
are entitled, together with the holders of APS, to elect a majority of the
trustees of the Trust 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 Trust as so increased. The terms of office of the persons who
are trustees at the time of that election will continue. If the Trust 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, 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 or
the Amended By-Laws 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 the APS
of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The 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 the Trust
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 "Description of Capital
Stock--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
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<PAGE> 43
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
Trust's investment objective or changes in the investment restrictions described
as fundamental policies under "Investment Objective 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.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The management of the Trust, including general supervision of the duties
performed by the Adviser under the Investment Advisory Agreement, is the
responsibility of the Trust's Board of Trustees under the laws of The
Commonwealth of Massachusetts.
THE ADVISER
Eaton Vance Management acts as the Trust's investment adviser under an
Investment Advisory Agreement ("Advisory Agreement"). The Adviser's principal
office is located at 24 Federal Street, Boston, MA 02110. Eaton Vance, its
affiliates and predecessor companies have been managing assets of individuals
and institutions since 1924 and of investment companies since 1931. Eaton Vance
(or its affiliates) currently serves as the investment adviser to investment
companies and various individual and institutional clients with combined assets
under management of over $34 billion, of which approximately $32 billion is in
investment companies. Eaton Vance is a 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 24 personnel in its municipal obligations department,
including six portfolio managers, two traders and eleven credit analysts. Eaton
Vance was one of the first advisory firms to manage a registered municipal
obligations investment company, and has done so continuously since 1978. Eaton
Vance currently manages 4 national municipal investment companies, 40 single
state municipal investment companies, 10 limited maturity municipal investment
companies and 1 money market municipal investment company, with assets of over
$8 billion.
Under the general supervision of the Trust's Board of Trustees, the Adviser
will carry out the investment and reinvestment of the assets of the Trust, will
furnish continuously an investment program with respect to the Trust, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to the Trust investment
advice and office facilities, equipment and personnel for servicing the
investments of the Trust. The Adviser will compensate all Trustees and officers
of the Trust who are members of the Adviser's organization and who render
investment services to the Trust, and will also compensate all other Adviser
personnel who provide research and investment services to the Trust. In return
for these services, facilities and payments, the Trust has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of .70%
of the average weekly gross assets of the Trust. Gross assets of the Trust shall
be calculated by deducting accrued liabilities of the Trust not including the
amount of any Preferred Shares outstanding.
Thomas M. Metzold is the portfolio manager of the Trust and is responsible
for day-to-day management of the Trust's investments. Mr. Metzold has been an
employee of Eaton Vance since 1987 and a Vice President of Eaton Vance since
1991. Mr. Metzold, a Chartered Financial Analyst, is a member of the Boston
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<PAGE> 44
Security Analysts Society, the Association for Investment Management & Research,
the Boston Municipal Analysts Forum, and the National Federation of Municipal
Analysts. He currently manages four municipal bond investment companies with
combined assets of over $3 billion.
The Trust 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 the Trust) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
The Trust has engaged Eaton Vance to act as its administrator under an
Administration Agreement (the "Administration Agreement"). Under the
Administration Agreement, Eaton Vance is responsible for managing the business
affairs of the Trust, subject to the supervision of the Trust's Board of
Trustees. Eaton Vance will furnish to the Trust all office facilities, equipment
and personnel for administering the affairs of the Trust. Eaton Vance's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Trust's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing service
in connection with any repurchase offers and other administrative services
necessary to conduct the Trust's business. In return for these services,
facilities and payments, the Trust is authorized to pay Eaton Vance as
compensation under the Administration Agreement a fee in the amount of .20% of
the average weekly gross assets of the Trust.
Eaton Vance has agreed to bear all ordinary and organizational expenses of
the Trust that exceed 5% of average weekly net assets (taking into account the
deduction of any Preferred Shares and related expenses) for the first year of
operations. In return for this arrangement, the Trust will reimburse Eaton Vance
over the first year of operations for organizational expenses of the Trust borne
by Eaton Vance at the onset of operations.
TAXES
GENERAL
The Trust intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as the
Trust so qualifies, in any taxable year in which it distributes at least 90% of
the sum of its investment company taxable income (consisting generally of
taxable net investment income, net short-term capital gain and net realized
gains from certain hedging transactions) and its net tax-exempt income (see
below), the Trust (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). The Trust intends to distribute substantially all of
such income and gain each year.
The APS will constitute stock of the Trust and distributions with respect
to 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 the Trust'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 the Trust. If this
position were upheld, the discussion of the treatment of distributions below
would not apply. Instead, distributions by the Trust to holders of APS would
constitute interest, whether or not they exceeded the earnings and profits of
the Trust, would be included in full in the income of the recipient and would be
taxed as ordinary income. Kirkpatrick & Lockhart LLP, counsel to the Trust,
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
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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 the Trust'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 the Trust'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 the Trust 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 Trust and
received by the shareholders on December 31 of that year if the distributions
are paid by the Trust during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
The Trust 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 long-term 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
that was paid to the class. Thus, the Trust is required to allocate a portion of
its net capital gains and other taxable income to the APS. The Trust 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 Trust 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 APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Trust and the
total dividends paid by the Trust 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
Trust'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 the Trust, under current law the manner in which the Trust intends to
allocate items of tax-exempt income, net capital gain, and other taxable income,
if any, among the Trust's Common Shares and the 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 Trust's net capital gain or
other taxable income. In the event of such a reallocation, some of the dividends
identified by the Trust as exempt-interest dividends to holders of APS may be
recharacterized as additional net capital gain or other taxable income. In the
event of such recharacterization, however, the Trust would not be required to
make payments to such shareholders to offset the tax effect of such
reallocation. Kirkpatrick & Lockhart LLP has advised the Trust that, in its
opinion, if the IRS were to challenge in court the Trust'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 Trust.
If at any time when APS are outstanding the Trust does not meet the asset
coverage requirements of the 1940 Act, the Trust will be required to suspend
distributions to holders of Common Shares until the asset coverage is restored.
See "Description of APS--Restrictions on Dividends and Other Payments." Such a
suspension may prevent the Trust from distributing at least 90% of its net
income, and may, therefore, jeopardize the Trust's qualification for taxation as
a RIC. Upon any failure to meet the asset coverage
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<PAGE> 46
requirements of the 1940 Act, the Trust, in its sole discretion, may redeem APS
in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Trust 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 the Trust's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of securities held by the Trust and the
character of the gains or losses realized by the Trust. These provisions may
also require the Trust to recognize income or gain without receiving cash with
which to make distributions in the amounts necessary to satisfy the requirements
for maintaining RIC status and for avoiding income and excise taxes. The Trust
will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Trust as
a RIC.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Trust makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of APS who are subject to the Retroactive Taxable
Allocation. See "Description of APS--Dividends--Additional Dividends." The
federal income tax consequences of Additional Dividends under existing law are
uncertain. An Additional Dividend generally will be designated by the Trust as
an exempt-interest dividend except to the extent net capital gain or other
taxable income is allocated thereto as described above.
SALES OF APS
The sale of APS (including transfers in connection with a redemption or
repurchase of APS) will be a taxable transaction for federal income tax
purposes. A selling shareholder generally will recognize gain or loss equal to
the difference between the holder's adjusted tax basis in the APS and the amount
received. If the APS are held as a capital asset, the gain or loss will be a
capital loss and will be long-term if the APS have been held for more than one
year. Any loss realized on a disposition of APS held for six months or less will
be disallowed to the extent of any exempt-interest dividends received with
respect to those APS, and any such loss that is not disallowed will be treated
as a long-term, rather than a short-term, capital loss to the extent of any
capital gain distributions received with respect to those APS. A shareholder's
holding period is suspended for any periods during which the shareholder's risk
of loss is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of APS will be disallowed to the
extent those APS are replaced by other APS within a period of 61 days beginning
30 days before and ending 30 days after the date of disposition of the original
APS. In that event, the basis of the replacement APS will be adjusted to reflect
the disallowed loss.
BACKUP WITHHOLDING
The Trust is required to withhold 31% of all taxable dividends, capital
gain dividends and repurchase proceeds payable to any individuals and certain
other non-corporate shareholders who do not provide the Trust with a correct
taxpayer identification number. Withholding at that rate from taxable dividends
and capital gain distributions is also required for such shareholders who
otherwise are subject to backup withholding.
------------------------------
The foregoing briefly summarizes some of the important federal income tax
consequences of investing in the APS, reflects the federal tax law, 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
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
December 10, 1998 (the "Declaration of Trust"). The Declaration of Trust
provides that the Trustees of the Trust may authorize separate classes of
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<PAGE> 47
shares of beneficial interest. The Trustees 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
the Trust for its own account and (iii) shares outstanding, for each class of
authorized securities of the Trust as of March 1, 1999.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
TRUST FOR ITS OWN TRUST FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Common Shares................................. Unlimited -0- 15,506,667
Auction Preferred Shares
Series A................................. 2,620 -0- -0-
Series B................................. 2,620 -0- -0-
</TABLE>
Holders of Common Shares are entitled to share equally in dividends
declared by the Board of Trustees payable to holders of Common Shares and in the
net assets of the Trust 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 the Trust, after paying or adequately providing
for the payment of all liabilities of the Trust 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 Trust among
the holders of the Shares. The Declaration of Trust provides that Shareholders
are not liable for any liabilities of the Trust, requires inclusion of a clause
to that effect in every agreement entered into by the Trust and indemnifies
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
Trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.
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 shares of 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 shares of 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 the Trust, 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 the Trust's total assets (determined after deducting
the amount of such dividend or other distribution), less all liabilities and
indebtedness of the Trust not represented by senior securities, is at least 300%
of the aggregate amount of such securities representing indebtedness and at
least 200% of the aggregate amount of securities representing indebtedness plus
the aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, the Trust is required to comply
with other asset coverage requirements as a condition of the Trust obtaining a
rating of the
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<PAGE> 48
preferred shares from a Rating Agency. These requirements include an asset
coverage test more stringent than under the 1940 Act. See "Description of
APS--Restrictions on Dividends and Other Payments."
The Trust will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of Common Shares commenced trading on the NYSE on January 27,
1999. At February 19, 1999, the net asset value per share of Common Shares was
$15.01, and the closing price per share of Common Shares on the NYSE was $15.00.
PREFERRED SHARES
Under the 1940 Act, the Trust 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 Trust 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 DECLARATION OF TRUST
Anti-Takeover Provisions in the Declaration of Trust. The Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Trust 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 Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Trust. These provisions may have the effect of
discouraging attempts to acquire control of the Trust, which attempts could have
the effect of increasing the expenses of the Trust and interfering with the
normal operation of the Trust. The 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 the Trust that elected such Trustee and is entitled to vote
on the matter.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the Trust,
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 the Trust. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Trust or any subsidiary of the Trust with or into any
Principal Shareholder; (ii) the issuance of any securities of the Trust to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Trust 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 the Trust or any subsidiary thereof, in
exchange for securities of the Trust, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
The Board 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
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<PAGE> 49
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. The Trust may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Trust'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
Shares and Preferred Shares (if any), voting separately as a class if such
conversion is recommended by at least 75% of the Trustees then in office. If
approved in the foregoing manner, conversion of the Trust could not occur until
90 days after the Shareholders' meeting at which such conversion was approved
and would also require at least 30 days' prior notice to all Shareholders. The
composition of the Trust's portfolio likely would prohibit the Trust from
complying with regulations of the SEC applicable to open-end investment
companies. Accordingly, conversion likely would require significant changes in
the Trust's investment policies and liquidation of a substantial portion of its
relatively illiquid portfolio. Conversion of the Trust to an open-end investment
company also would require the redemption of any outstanding Preferred Shares
and could require the repayment of borrowings. The Board of Trustees believes,
however, that the closed-end structure is desirable, given the Trust's
investment objective and policies. Investors should assume, therefore, that it
is unlikely that the Board of Trustees would vote to convert the Trust to an
open-end investment company.
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<PAGE> 50
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019,
as lead representative, and Prudential Securities Incorporated, Salomon Smith
Barney Inc. and A.G. Edwards & Sons, Inc., as their representatives (together
with PaineWebber Incorporated, the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement with the Trust
and Eaton Vance (the "Underwriting Agreement"), to purchase from the Trust the
number of shares set forth opposite the respective names. The Underwriters are
committed to purchase all of such Shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF
UNDERWRITER SERIES A APS SERIES B APS
----------- ------------ ------------
<S> <C> <C>
PaineWebber Incorporated................................... 1,310 1,310
Prudential Securities Incorporated......................... 524 524
Salomon Smith Barney Inc. ................................. 524 524
A.G. Edwards & Sons, Inc. ................................. 262 262
----- -----
Total................................................. 2,620 2,620
===== =====
</TABLE>
The Underwriters have advised the Trust that they propose initially to
offer the APS to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $150 per share. The Underwriters may allow, and such dealers
may reallow, a discount not in excess of $100 per share to other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed. Investors must pay for any APS purchased in the initial public
offering on or before March 4, 1999.
The Underwriters will act in Auctions as a Broker-Dealer as set forth under
"Description of APS--The Auction--General--Broker-Dealer Agreements" and will be
entitled to fees for services as a Broker-Dealer as set forth under "Description
of APS--Broker-Dealers." The Underwriters also may provide information to be
used in ascertaining the Reference Rate.
The Trust anticipates that the Underwriters from time to time may act as
dealers in connection with the execution of the Trust's portfolio transactions.
See "Investment Restrictions" and "Portfolio Transactions."
The Trust and the Adviser have agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.
As described below under "Shareholder Servicing Agent, Custodian and
Transfer Agency," PaineWebber Incorporated will provide shareholder services to
the Trust pursuant to a Shareholder Servicing Agreement with Eaton Vance. Eaton
Vance will pay a monthly fee for such services on an annual basis equal to .10%
of the average weekly gross assets of the Trust.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
Pursuant to a Shareholder Servicing Agreement between PaineWebber
Incorporated (the "Shareholder Servicing Agent") and Eaton Vance, the
Shareholder Servicing Agent will (i) undertake to make public information
pertaining to the Trust on an ongoing basis and to communicate holders of Common
Shares and prospective investors in Common Shares the Trust's features and
benefits (including periodic seminars or conference calls, responses to
questions from current or prospective shareholders and specific shareholder
contact where appropriate); (ii) make available to investors and prospective
investors in Common Shares market price, net asset value, yield and other
information regarding the Trust, if reasonably obtainable, for the purpose of
maintaining the visibility of the Trust in the investor community; (iii) at the
request of Eaton Vance, provide certain economic research and statistical
information and reports, if reasonably obtainable, on behalf of the Trust, and
consult with representatives and Trustees of the Trust in connection therewith.
For these services, Eaton Vance will pay the Shareholder Servicing Agent a fee
equal on an annual basis to .10% of the Trust's average weekly gross assets,
payable in arrears at the end of each calendar month. Under the terms
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<PAGE> 51
of the Shareholder Servicing Agreement, the Shareholder Servicing Agent is
relieved from liability to Eaton Vance for any act or omission in the course of
its performances under the Shareholder Servicing Agreement in the absence of
gross negligence or willful misconduct by the Shareholder Servicing Agent. The
Shareholder Servicing Agreement will continue for an initial term of two years
and thereafter for successive one-year periods unless terminated by either party
upon 60 days written notice.
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116 is
the custodian of the Trust and will maintain custody of the securities and cash
of the Trust. IBT maintains the Trust's general ledger and computes net asset
value per share at least weekly. IBT also attends to details in connection with
the sale, exchange, substitution, transfer and other dealings with the Trust'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.
First Data Investor Services Group, P.O. Box 5123, Westborough, MA
01581-5123 is the transfer agent and dividend disbursing agent of the Trust.
LEGAL OPINIONS
It is expected that certain legal matters in connection with the APS
offered hereby will be passed upon for the Trust by Kirkpatrick & Lockhart LLP,
and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and its
affiliated entities.
EXPERTS
The statement of assets, liabilities and capital of the Trust as of January
21, 1999 included in this Prospectus and the Registration Statement has been
audited by Deloitte & Touche LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The selection of independent auditors is subject to ratification by
shareholders of the Trust.
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<PAGE> 52
ADDITIONAL INFORMATION
The Trust 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 Commission. Any
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Regional Office, at Seven World Trade
Center, 61 Suite 1300, New York, New York 10048; Pacific Regional Office, at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Trust, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Trust can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Trust and the APS is contained in the
Registration Statement on Form N-2, including amendments, exhibits and schedules
thereto, relating to such shares filed by the Trust with the SEC in Washington,
D.C. This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Trust and the APS offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Additional Investment Information and Restrictions.......... B-2
Trustees and Officers....................................... B-7
Investment Advisory and Other Services...................... B-10
Portfolio Trading........................................... B-11
Taxes....................................................... B-13
Other Information........................................... B-15
Auditors.................................................... B-15
Financial Statements........................................ B-16
Independent Auditors' Report................................ B-17
Unaudited Portfolios of Investments Owned................... B-19
Appendix A: Ratings of Municipal Obligations................ B-21
Appendix B: Tax Equivalent Yield Table...................... B-27
Appendix C: Settlement Procedures........................... B-28
Appendix D: Auction Procedures.............................. B-31
</TABLE>
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<PAGE> 53
TRUSTEES OF THE TRUST
JESSICA M. BIBLIOWICZ
President and Chief Operating Officer of John A. Levin & Co.
DONALD R. DWIGHT
President of Dwight Partners, Inc.
JAMES B. HAWKES
Chairman, President and Chief Executive Officer of Eaton Vance Corp.
SAMUEL L. HAYES, III*
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration
NORTON H. REAMER*
Chairman and Chief Executive Officer of United Asset Management Corporation
LYNN A. STOUT
Professor of Law, Georgetown University Law Center
JACK L. TREYNOR
Investment Adviser and Consultant
* Trustees to be elected by holders of Preferred Shares
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<PAGE> 54
GLOSSARY
"'AA' (AA) Composite Commercial Paper Rate" on any Valuation Date, 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 statistical rating
organization, 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 PaineWebber Incorporated or its
successors that are Commercial Paper Dealers, to the Auction Agent for the close
of business on the Business Day immediately preceding such date. If one of the
Commercial Paper Dealers does not quote a rate required to determine the "AA"
Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will
be determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or
more but fewer than 49 days, such rate shall be the Interest Equivalent of the
30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days,
such rate shall be the Interest Equivalent of the 60-day rate on such commercial
paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the
arithmetic average of the Interest Equivalent of 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.
"Additional Dividend" has the meaning set forth on page 33 of this
Prospectus.
"Adviser" means Eaton Vance Management.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more APS or on behalf of a Potential
Beneficial Owner.
"Amended By-Laws" means the By-laws of the Trust as amended February 22,
1999, specifying the powers, preferences and rights of the APS.
"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
the Trust.
"APS Basic Maintenance Amount" has the meaning set forth on page 34 of this
Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page 34 of
this Prospectus.
"APS Basic Maintenance Report" has the meaning set forth on page 35 of this
Prospectus.
"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 24 of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on APS for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Corporation 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
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<PAGE> 55
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.
"Auction Agent Agreement" means the agreement entered into between the
Trust 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 23 of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix D to the Statement of Additional Information.
"Available APS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of APS or a Broker-Dealer that holds APS for its own account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust.
"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 the Trust 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 PaineWebber Incorporated,
Prudential Securities, Salomon Smith Barney Inc. and A.G. Edwards & Sons, 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" means Cede & Co., 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.
"Commercial Paper Dealers" means PaineWebber Incorporated and such other
commercial paper dealer or dealers as the Trust from time to time may appoint
or, in lieu thereof, their respective affiliates and successors.
"Common Shares" means the Common Shares, par value $0.01 per share, of the
Trust.
"Date of Original Issue" means, with respect to each APS, the date on which
such share first is issued by the Trust.
"Declaration of Trust" means the Agreement and Declaration of Trust of the
Trust dated December 10, 1998.
"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.
"Discount Factor" means a S&P Discount Factor.
"Discounted Value" of any asset of the Trust means with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor.
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<PAGE> 56
"Dividend Payment Date" has the meaning set forth on page 29 of this
Prospectus.
"Dividend Periods" has the meaning set forth on page 29 of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means S&P Eligible Assets.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Trust that is listed as the holder of record of APS in the
records of the Auction Agent.
"Fitch" means Fitch IBCA or its successors.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"IBT" means Investors Bank & Trust Company, the custodian of the Trust's
assets.
"Initial Dividend Payment Date" has the meaning set forth on page ii 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.
"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 financial
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.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page 3 of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 36 of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal federal individual 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 "Description of
APS--The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders" in the Prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 35 of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Municipal Obligations" has the meaning set forth on page 11 of this
Prospectus.
"Municipal Index" has the meaning set forth on page 19 of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act APS Asset Coverage" has the meaning set forth on page 34 of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page 34 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 31 of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page 32 of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page 31 of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 31 of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page 36 of this
Prospectus.
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<PAGE> 57
"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
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 APS (or, in the case of an Existing Holder, additional APS).
"Preference Item" has the meaning set forth on page 29 of this Prospectus.
"Preferred Shares" means preferred shares of beneficial interest, par value
$.01 per share, of the Trust.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables For Municipal Obligations Sold" has the meaning set forth on
page 18 of this Prospectus.
"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 30
of this Prospectus.
"Response" has the meaning set forth on page 30 of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 33 of
this Prospectus.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P Discount Factor" has the meaning set forth on page 17 of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on page 18 of this
Prospectus.
"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 the Amended By-Laws to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the APS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page 19 of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust 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.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page 3 of this
Prospectus.
"Special Dividend Period" has the meaning set forth on page 3 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 the Trust, 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 the Trust
and (ii) a period (a "Premium Call
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<PAGE> 58
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 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.
"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 the Trust, 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). 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 on page 19 of this Prospectus.
"Trust" means Eaton Vance Municipal Income Trust, a Massachusetts business
trust that that is the issuer of the APS.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "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.
54
<PAGE> 59
"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 34 of this Prospectus.
"Variation Margin" means, in connection with an outstanding financial
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 financial futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
55
<PAGE> 60
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EATON VANCE
MUNICIPAL INCOME TRUST
2,620 SHARES SERIES A
2,620 SHARES SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
---------------------
[EATON VANCE LOGO]
----------------------
PROSPECTUS
----------------------
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
------------------------
MARCH 1, 1999
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<PAGE> 61
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
EATON VANCE MUNICIPAL INCOME TRUST
24 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(800) 225-6265
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Investment Information and Restrictions.......... B-2
Trustees and Officers....................................... B-7
Investment Advisory and Other Services...................... B-10
Portfolio Trading........................................... B-11
Taxes....................................................... B-13
Other Information........................................... B-15
Auditors.................................................... B-15
Financial Statements........................................ B-16
Independent Auditors' Report................................ B-18
Unaudited Portfolio of Investments Owned.................... B-19
Appendix A: Ratings of Municipal Bonds...................... B-21
Appendix B: Tax Equivalent Yield Table...................... B-27
Appendix C: Settlement Procedures........................... B-28
Appendix D: Auction Procedures.............................. B-31
</TABLE>
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE MUNICIPAL INCOME TRUST (THE
"TRUST") DATED MARCH 1, 1999 AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS
INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION
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
TRUST AT 1-800-225-6265.
<PAGE> 62
Capitalized terms used in this Statement of Additional Information and not
otherwise defined herein have the meanings given them in the Trust'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 taxable securities. While most municipal bonds pay a
fixed rate of interest semi-annually in cash, some bonds pay no periodic cash
interest but instead make a single payment at maturity representing both
principal and interest. Municipal Obligations may be issued or subsequently
offered with interest coupons materially greater or less than those then
prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of Municipal Obligations the
interest on which is exempt from federal income tax and is not a tax preference
item for purposes of the federal alternative minimum tax ("AMT") ("Preference
Items"): (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 obligations in the last
category is exempt from federal income tax but is treated as a Preference Item
that could subject the recipient to, or increase the recipient's liability for,
the AMT. For corporate shareholders, the Trust's distributions derived from
interest on all Municipal Obligations (whenever issued) is included in "adjusted
current earnings" for purposes of the AMT (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 Trust will rely on an opinion of the issuer's counsel (when
available) obtained by the issuer or other reliable authority and will not
undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual lease rental payments from the
state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality. Industrial development and pollution
control
B-2
<PAGE> 63
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 Trust 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 Trust
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 Trust 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 Trust as a result of any such event, and the Trust may also manage (or
engage other persons to manage) or otherwise deal with any real estate,
facilities or other assets so acquired. The Trust 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 Trust. The Trust 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 Trust 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
Trust. Any income derived from the ownership of operation of such assets may not
be tax-exempt. In addition, the Trust's intention to qualify as a "regulated
investment company" ("RIC") under the Code may limit the extent to which the
Trust may exercise its rights by taking possession of such assets, because as a
RIC the Trust is subject to certain limitations on its investments and on the
nature of its income. See "Taxes".
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 Trust will be affected by such
changes.
State Concentration. The Trust may invest 25% or more of its total assets
in Municipal Obligations of issuers located in the same state. When the Trust
does so, it will be sensitive to factors affecting that state, such as changes
in the economy, decreases in tax collection or the tax base, legislation which
limits taxes and changes in issuer credit ratings.
Economic Sector Concentration. The Trust 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
B-3
<PAGE> 64
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.
Municipal Leases. The Trust may invest in municipal leases and
participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease or installment purchase
arrangement which is issued by state or local governments to acquire equipment
and facilities. Interest income from such obligations is generally exempt from
local and state taxes in the state of issuance. "Participations" in such leases
are undivided interests in a portion of the total obligation. Participations
entitle their holders to receive a pro rata share of all payments under the
lease. The obligation of the issuer to meet its obligations under such leases is
often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation. Certain municipal lease obligations are
illiquid.
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 Trust's commitment and are subject to certain conditions such as the
issuance of satisfactory legal opinions. The Trust 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 Trust to buy such securities on a
settlement date that could be several months or several years in the future. The
Trust may also purchase instruments that give the Trust the option to purchase a
Municipal Obligation when and if issued.
The Trust 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 Trust enters into the
purchase commitment. When the Trust 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 Trust 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 Trust 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 Trust's net asset value than if it set aside cash to pay for when-issued
securities.
B-4
<PAGE> 65
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 Trust during a time of declining interest rates, the
Trust 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.
Liquidity and Protective Put Options. The Trust may also enter into a
separate agreement with the seller of a security or some other person granting
the Trust 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 Trust intends to limit this type of
transaction to institutions (such as banks or securities dealers) which the
Adviser believes present minimal credit risks. The Trust 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 Trust or that selling institutions
will be willing to permit the Trust to exercise a put to hedge against rising
interest rates. The Trust does not expect to assign any value to any separate
put option which may be acquired to facilitate portfolio liquidity, inasmuch as
the value (if any) of the put will be reflected in the value assigned to the
associated security; any put acquired for hedging purposes would be valued in
good faith under methods or procedures established by the Trustees of the Trust
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 Trust's
assets may be invested in securities as to which the Trust, 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 Trust 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 Trust's net asset value.
The secondary market for some Municipal Obligations issued within a state
(including issues which are privately placed with the Trust) 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 Trust 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 Trust 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.
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 Trust (or
of securities that the Trust expects to purchase). To hedge against changes in
rates or as a substitute for the purchase of securities, the Trust 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 Trust 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 Trust may purchase and write call and put
options on futures contracts which are traded on a U.S. or foreign exchange or
board of trade. The Trust 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 Trust's custodian for the benefit of the
futures commission merchant through whom the Trust 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.
B-5
<PAGE> 66
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 Trust from closing out
positions and limiting its losses.
The Trust 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 Trust 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 Trust or which it
expects to purchase. The Trust 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.
Investment Restrictions. The following investment restrictions of the
Trust are designated as fundamental policies and as such cannot be changed
without the approval of the holders of a majority of the Trust's outstanding
voting securities, which as used in this Statement of Additional Information
means the lesser of (a) 67% of the shares of the Trust 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 Trust. As a matter of fundamental policy, the Trust 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 Trust may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of investment assets with the proceeds
of a permitted borrowing or securities offering will not be deemed to be
the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as
it may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Trust 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 Trust reserves the freedom
of action to hold and to sell real estate acquired as a result of the
ownership of securities; or
(7) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices or
other financial instruments.
(8) Invest more than 25% of its total assets in securities of issuers
in any one industry.*
- ---------------
* Securities of the U.S. Government, its agencies, or instrumentalities, and
securities, including Municipal Obligations, backed by the credit of a
governmental entity are 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. Thus, the 25% limitation would apply to such obligations. As discussed
previously in this section and in the Prospectus, it is nonetheless possible
that the Trust may invest more than 25% of its total assets in a broader
economic sector of the market for Municipal Obligations, such as revenue
obligations of hospitals and other health care facilities or electrical utility
revenue obligations. The Trust reserves the right to invest more than 25% of its
assets in industrial development bonds and private activity securities.
B-6
<PAGE> 67
For purposes of the Trust's investment restrictions, the determination of
the "issuer" of a Municipal Obligation that 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 Trust has adopted the following nonfundamental investment policy, which
may be changed by its Trustees without approval of the Trust's shareholders. As
a matter of nonfundamental policy, the Trust 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 Trust 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 Statement of Additional Information 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 Trust's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances will
not compel the Trust to dispose of such security or other asset. Notwithstanding
the foregoing, the Trust must always be in compliance with the borrowing
policies set forth above.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers 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. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110. Those
Trustees who are "interested persons" of the Trust as defined in the 1940 Act by
virtue of their affiliation with Eaton Vance, BMR, EVC or EV, are indicated by
an asterisk(*).
JESSICA M. BIBLIOWICZ (38), TRUSTEE (1)
President and Chief Operating Officer of John A. Levin & Co. (a registered
investment advisor) (since July 1997) and a Director of Baker, Fentress &
Company which owns John A. Levin & Co. (since July 1997). Formerly Executive
Vice President of Smith Barney Mutual Funds (from July 1994 to June 1997).
Trustee of various investment companies managed by Eaton Vance or BMR since
October 30, 1998.
Address: One Rockefeller Plaza, New York, New York 10020
DONALD R. DWIGHT (67), TRUSTEE (1)
President of Dwight Partners, Inc. (a corporate relations and communications
company). Trustee of various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (57), VICE PRESIDENT AND TRUSTEE* (2)
Chairman, President and Chief Executive Officer of Eaton Vance, BMR and their
corporate parent and trustee (EVC and EV). Director of EVC and EV. Trustee and
officer of various investment companies managed by Eaton Vance or BMR.
SAMUEL L. HAYES, III (63), TRUSTEE (2)(4)
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration. Trustee of Kobrick-Cendant
Investment Trust (mutual funds). Trustee of various investment companies managed
by Eaton Vance or BMR.
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Address: 345 Nahatan Road, Westwood, Massachusetts 02090
NORTON H. REAMER (63), TRUSTEE (3)(4)
Chairman of the Board and Chief Executive Officer, United Asset Management
Corporation (a holding company owning institutional investment management
firms); Chairman, President and Director of UAM Funds (mutual funds). Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
LYNN A. STOUT (41), TRUSTEE (3)
Professor of Law, Georgetown University Law Center. Elected Trustee October 30,
1998. Trustee of various investment companies managed by Eaton Vance or BMR
since October 30, 1998.
Address: 600 New Jersey, NW, Washington, DC 20001.
JACK L. TREYNOR (68), TRUSTEE (3)
Investment Adviser and Consultant. Trustee of various investment companies
managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
THOMAS J. FETTER (55), PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ROBERT B. MACINTOSH (42), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
THOMAS M. METZOLD (40), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (53), TREASURER
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ALAN R. DYNNER (58), SECRETARY
Vice President and Chief Legal Officer of Eaton Vance, BMR, EVC and EV since
November 1, 1996. Previously, he was a Partner of the law firm of Kirkpatrick &
Lockhart LLP, New York and Washington, D.C., and was Executive Vice President of
Neuberger & Berman Management, Inc., a mutual fund management company. Officer
of various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (62), ASSISTANT TREASURER AND ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
A. JOHN MURPHY (35), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ERIC G. WOODBURY (41), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
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(1) Class I Trustee whose term expires in 1999.
(2) Class II Trustee whose term expires in 2000.
(3) Class III Trustee whose term expires in 2001.
(4) Trustee to be elected exclusively by holders of Preferred Shares as
described in the Prospectus.
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Messrs. Hayes (Chairman), Dwight and Reamer and Ms. Stout are members of
the Special Committee of the Board of Trustees of the Trust. 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 Trust, 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 Trust or its shareholders.
The Nominating Committee of the Board of Trustees of the Trust is comprised
of all Trustees who are not "interested persons" 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 independent of Eaton
Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight and Ms. Bibliowicz are members of the
Audit Committee of the Board of Trustees of the Trust. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent certified public accountants, and reviewing matters relative
to trading and brokerage policies and practices, accounting and auditing
practices and procedures, accounting records, internal accounting controls, and
the functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust.
Trustees of the Trust 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 Trust 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
Trust's assets, liabilities, and net income per share, and will not obligate the
Trust to retain the services of any Trustee or obligate the Trust to pay any
particular level of compensation to the Trustee. The Trust does not have a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Trust are paid
by the Trust. (The Trustees of the Trust who are members of the Eaton Vance
organization receive no compensation from the Trust.) During the year ended
December 31, 1998, the noninterested Trustees of the Trust earned the
compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex(1). It is estimated that the noninterested Trustees
will receive from the Trust the amounts set forth below for the fiscal year
ending November 30, 1999.
<TABLE>
<CAPTION>
ESTIMATED TOTAL COMPENSATION
COMPENSATION FROM TRUST AND
NAME FROM TRUST FUND COMPLEX
- ---- ------------ ------------------
<S> <C> <C>
Jessica M. Bibliowicz................................ $385 N/A
Donald R. Dwight..................................... 385 $156,250(2)
Samuel L. Hayes, III................................. 381 166,250(3)
Norton H. Reamer..................................... 374 156,250
Lynn A. Stout........................................ 385 N/A
Jack L. Treynor...................................... 422 165,000
</TABLE>
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(1) As of January 1, 1999 the Eaton Vance fund complex consists of 143
registered investment companies or series thereof.
(2) Includes $56,250 of deferred compensation.
(3) Includes $41,563 of deferred compensation.
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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 Trust 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 Trust
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 Trust shares;
and investment advisory and administration fees. The Trust will also bear
expenses incurred in connection with any litigation in which the Trust 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 February 28,
2000 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
Trust 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
Trust or by vote of a majority of the outstanding interests of the Trust. The
Trust'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 Trust's Trustees. Each agreement may be terminated at any time without
penalty on sixty (60) days' written notice by the Trustees of the Trust or Eaton
Vance, as applicable, or by vote of the majority of the outstanding shares of
the Trust. 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 Trust under such agreements on the part of Eaton Vance, Eaton Vance shall
not be liable to the Trust for any loss incurred, to the extent not covered by
insurance.
BMR and Eaton Vance are business trusts organized under Massachusetts law.
Eaton Vance, Inc. ("EV") serves as trustee of BMR and Eaton Vance. BMR, Eaton
Vance and EV are wholly-owned subsidiaries of Eaton Vance Corporation ("EVC"), a
Maryland corporation and publicly-held holding company. EVC through its
subsidiaries and affiliates engages primarily in investment management,
administration and marketing activities. The Directors of EVC are James B.
Hawkes, Benjamin A. Rowland, Jr., John G.L. Cabot, John M. Nelson, Vincent M.
O'Reilly and Ralph Z. Sorenson. All of the issued and outstanding shares of
Eaton Vance are owned by EVC. All of the issued and outstanding shares of BMR
are owned by Eaton Vance. All shares of the outstanding Voting Common Stock of
EVC are deposited in a Voting Trust, the Voting Trustees of which are Messrs.
Hawkes, Rowland, and Alan R. Dynner, Thomas E. Faust, Jr., Thomas J. Fetter,
Duncan Richardson, William M. Steul and Wharton P. Whitaker. 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 Trust (as well as Mr. Hawkes who is also a
Trustee) hold positions in the Eaton Vance organization.
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EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Trust, 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 Trust and such banks.
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 Trust 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 Trust
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 Trust 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 Trust 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 Trust 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
Trust 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 Trust 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 transac-
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tions 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 Trust's transactions and from third parties with which these
broker-dealers have arrangements. These Research Services include such matters
as general economic, political, business and market information, industry and
company reviews, evaluations of securities and portfolio strategies and
transactions, proxy voting data and analysis services, technical analysis of
various aspects of the securities market, recommendations as to the purchase and
sale of securities and other portfolio transactions, financial, industry and
trade publications, news and information services, pricing and quotation
equipment and services, and research oriented computer hardware, software, data
bases and services. Any particular Research Service obtained through a
broker-dealer may be used by the Adviser in connection with client accounts
other than those accounts which pay commissions to such broker-dealer. Any such
Research Service may be broadly useful and of value to the Adviser in rendering
investment advisory services to all or a significant portion of its clients, or
may be relevant and useful for the management of only one client's account or of
a few clients' accounts, or may be useful for the management of merely a segment
of certain clients' accounts, regardless of whether any such account or accounts
paid commissions to the broker-dealer through which such Research Service was
obtained. The advisory fee paid by the Trust 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 Trust 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 BMR 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 Trust 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 Trust 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 Trust
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 Trust 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
Trust from time to time, it is the opinion of the Trustees of the Trust that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
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TAXES
The Trust has elected to be, and intends to qualify for treatment each
year, as a RIC under the Code. Accordingly, the Trust intends to satisfy certain
requirements relating to sources of its income and diversification of its assets
and to distribute substantially all of its net investment income (including tax-
exempt income) and net capital gains in accordance with the timing requirements
imposed by the Code, so as to maintain its RIC status. By doing so, the Trust
will avoid any federal income tax on any income and gains it distributes to its
shareholders. If the Trust failed to qualify for treatment as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all distributions, including those
that otherwise would qualify as "exempt-interest dividends" (described below),
as dividends (that is, ordinary income) to the extent of the Trusts' earnings
and profits.
To avoid incurring a federal excise tax obligation, the Trust must
distribute (or be deemed to have distributed) each calendar year (i) at least
98% of its ordinary income (not including tax-exempt income) for that 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 November 30 of that year, after reduction by
any available capital loss carryforwards and (iii) 100% of certain other
amounts. Under current law, provided that the Trust qualifies as a RIC, it
should not be liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
The Trust'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. The Trust may be required to liquidate securities that it
might otherwise have continued to hold in order to generate cash to enable it to
distribute that income to its shareholders and thereby remain qualified for
treatment as a RIC and avoid imposition of the excise tax described above.
Investments in lower-rated or unrated securities may present special tax
issues for the Trust to the extent that the issuers of these securities default
on their obligations pertaining thereto. The federal tax law is not entirely
clear regarding the consequences of the Trust's taking certain positions in
connection with ownership of distressed securities. For example, there is
uncertainty regarding: (i) when the Trust may or must cease to accrue interest,
original issue discount or market discount on these securities; (ii) when and to
what extent deductions may be taken for bad debts or worthless securities; (iii)
how payments received on obligations in default should be allocated between
principal and income; and (iv) whether exchanges of debt obligations in a
workout context are taxable.
Distributions by the Trust 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. For the Trust to be able to pay exempt-interest dividends, the Trust
must, and the Trust intends to, satisfy 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 federal income tax
under Section 103(a). The portion of exempt-interest dividends attributable to
interest on certain Municipal Obligations is treated as a Preference Item.
Shareholders are required to report tax-exempt-interest dividends on their
federal income tax returns.
The Trust will designate distributions made to holders of Common Shares and
to holders of Preferred Shares, including the APS, in accordance with each
class's proportionate share of each item of Trust income (such as tax-exempt
interest, net capital gains and other taxable income).
A portion of the exempt-interest dividends paid by the Trust will not be
tax-exempt to any shareholder who is a "substantial user" of the facilities
financed by tax-exempt obligations held by the Trust or "related persons" of
such substantial users.
Any recognized gain or other income attributable to market discount on
long-term tax-exempt Municipal Obligations (i.e., obligations with a term of
more than one year) purchased other than, in general, at their original issue,
is taxable as ordinary income. Such an 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
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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. If any such proposals were
enacted, the availability of Municipal Obligations for investment by the Trust
and the value of the securities it held may be affected.
The Trust may realize some capital gains (and/or losses) as a result of
market transactions, including sales of portfolio securities and rights to
when-issued securities and options and futures transactions. The Trust may also
realize taxable income from certain short-term taxable obligations, securities
loans, a portion of discount with respect to certain stripped Municipal
Obligations or their stripped coupons, and certain realized gains or income
attributable to accrued market discount. Any distributions by the Trust of those
capital gains or taxable income would be taxable to its shareholders. However,
it is expected that those amounts, if any, would normally be insubstantial in
relation to the tax-exempt interest earned by the Trust. Certain distributions
declared in October, November or December and paid the following January may be
taxed to shareholders as if received on December 31 of the year in which they
are declared.
The Trust's transactions in options and futures contracts will be subject
to special tax rules that may affect the amount, timing and character of
distributions to its shareholders. For example, certain positions held by the
Trust on the last business day of each taxable year will be "marked to market"
(i.e., treated as if closed out on that day), and any resulting gain or loss (in
addition to gain or loss from actual dispositions of such positions) will
generally be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Trust that substantially diminish the Trust's risk
of loss with respect to other positions in its portfolio may constitute
"straddles," which are subject to tax rules that may cause deferral of Trust
losses, adjustments in the holding period of portfolio securities and conversion
of short-term capital losses into long-term capital losses. The Trust may have
to limit its activities in options and futures contracts to enable it to
maintain its RIC status.
On a sale or exchange of APS, the holder will recognize taxable gain or
loss equal to the difference between the holder's adjusted basis for the APS and
the amount realized. Any such gain or loss will be treated as capital gain or
loss if the APS are capital assets in the holder's hands and as long-term
capital gain or loss if the APS are held for more than one year. Any loss
realized on the sale or exchange of APS held by a Shareholder for six months or
less will be disallowed to the extent the shareholder has received exempt-
interest dividends with respect to those APS, and any such loss that exceeds the
disallowed amount will be treated as a long-term capital loss to the extent of
any distribution of net capital gain with respect to those APS. In addition, a
loss realized on a sale of APS will be disallowed to the extent the Shareholder
acquires other APS within the period beginning 30 days before, and ending 30
days after, the sale.
Taxable dividends (including capital gain dividends) payable by the Trust
to individuals and certain other non-corporate shareholders who have not
provided the Trust with their correct taxpayer identification number ("TIN") and
certain certifications required by the Internal Revenue Service ("IRS"), as well
as shareholders with respect to whom the Trust has received certain
notifications from the IRS, are subject to "backup" withholding of federal
income tax at a rate of 31%. An individual's TIN is generally his or her social
security number.
Investments in APS 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 Trust 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 Trust will report annually to
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shareholders the percentages representing the proportionate ratio of its net
tax-exempt income earned in each state.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as insurance companies and financial
institutions. Shareholders should consult their own tax advisers with respect to
special tax rules that may apply in their particular situations, as well as the
state or local tax consequences of investing in the Trust.
OTHER INFORMATION
The Trust 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 Trust property or the acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust 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's incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Trust itself is unable to meet its
obligations. The Trust believes the risk of any holder of APS incurring any
liability for the obligations of the Trust 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 Trust 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
of the Trust if shareholders holding two-thirds of the outstanding shares have
removed him from that office either by a written declaration filed with the
Trust's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that the Trustees of the Trust 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% of the outstanding shares.
The Trust's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Trust has filed with the SEC. The complete Registration Statement may be
obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
AUDITORS
Deloitte & Touche LLP, Boston, Massachusetts, are the independent
accountants for the Trust, providing audit services, tax return preparation, and
assistance and consultation with respect to the preparation of filings with the
SEC.
B-15
<PAGE> 76
EATON VANCE MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 21, 1999
<TABLE>
<S> <C>
ASSETS:
Cash................................................... $100,000
Deferred initial offering expenses..................... $100,000
Receivable from Investment Adviser for expenses subject
to expense reimbursement plan......................... $ 24,411
Receivable from Investment Adviser for expenses assumed
by Investment Adviser................................. $ 589
--------
Total assets...................................... $225,000
LIABILITIES:
Initial offering expenses accrued...................... $100,000
Accrued expenses....................................... $ 25,000
--------
Total liabilities................................. $125,000
--------
Net assets applicable to 6,666.67 common shares of
beneficial interest issued and outstanding................ $100,000
--------
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 15.00
========
</TABLE>
NOTE TO FINANCIAL STATEMENT
Eaton Vance Municipal Income Trust was formed under an Agreement and
Declaration of Trust dated December 10, 1998 and has been inactive since that
date except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the sale of
6,666.67 shares of its beneficial interest to Eaton Vance Management, the Fund's
administrator. The initial offering expenses, including federal and state
registration and qualification fees, will be deducted from net proceeds, and
will not exceed $0.03 per share, as Eaton Vance Management or an affiliate will
pay any such expenses in excess of $0.03 per share. The initial offering
expenses reflected above assume the initial sale of 3,333,333.33 shares.
B-16
<PAGE> 77
EATON VANCE MUNICIPAL INCOME TRUST
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM THE DATE OF ORGANIZATION
DECEMBER 10, 1998 TO JANUARY 21, 1999
<TABLE>
<S> <C>
INCOME:..................................................... $ 0
--------
EXPENSES:
Organization expenses.................................. $ 25,000
--------
Total Expenses.................................... $ 25,000
--------
Preliminary reduction of expenses reimbursement plan........ $(24,411)
--------
Assumption of expenses by Investment Adviser................ (589)
Net expenses................................................ $ 0
--------
Net investment loss......................................... $ 0
--------
</TABLE>
NOTE OF FINANCIAL STATEMENT
Eaton Vance Management, the Trust's administrator, has agreed to bear all
ordinary and organizational expenses of the Trust that exceed 5% of average
weekly net assets (taking into account the deduction of any preferred shares and
related expenses) for the first fiscal year of operations. In return for this
arrangement, the Trust will reimburse Eaton Vance over the first year of
operations for organizational expenses of the Trust initially borne by the
administrator. In addition, for the period from the date of organization,
December 10, 1998, to January 21, 1999, Eaton Vance has agreed to voluntarily
assume any expenses not covered by the expense reimbursement plan.
B-17
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Municipal Income Trust:
We have audited the accompanying statement of assets and liabilities of
Eaton Vance Municipal Income Trust (the "Fund") as of January 21, 1999 and the
related statement of operations for the period from the date of organization,
December 10, 1999 to January 21, 1999. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements referred to above presents
fairly, in all material respects, the financial position of Eaton Vance
Municipal Income Trust as of January 21, 1999, and the results of its operations
for the stated period, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Boston, Massachusetts
January 22, 1999
B-18
<PAGE> 79
MUNICIPAL INCOME TRUST
UNAUDITED PORTFOLIO OF INVESTMENTS OWNED
(AS OF FEBRUARY 19, 1999)
<TABLE>
<CAPTION>
CUSIP SECURITY TITLE RATE
----- -------------- ----
<S> <C> <C>
EDUCATION
649837M73 N.Y. State Dormitory Auth. -- N.Y. &
Presbyterian Hospital........................... 4.75%
840555CA2 South Texas Higher Education Authority.......... 3.00%
ELECTRIC
011908BE9 Alaska Industrial Development &
Export -- Snettisham............................ 5.38%
720175PT9 Piedmont SC Municipal Power Agency Electric
Revenue......................................... 2.10%
GAS
18681NAA5 Cliff House PA Trust Certificates............... 6.63%
GENERAL OBLIGATIONS
167501XC4 Chicago IL Board of Education................... 0.00%
35571LAB4 Frederick County MD Special Obligation.......... 6.63%
57585KAZ1 MA State Health & Educational Authority......... 7.65%
649668RM4 New York City NY Government Obligation.......... 5.00%
HEALTH
45200L5A0 Illinois Health Authority -- Alexian Brothers
Health System................................... 5.13%
45200L5R3 Illinois Health Authority -- Alexian Brothers
Health System................................... 5.00%
566820HW9 Maricopa County AZ IDA -- Mayo Foundation....... 7.28%
INDUSTRIAL
71781EAX3 Philadelphia PA Transportation Center School Bld
Corp............................................ 5.13%
MISCELLANEOUS
413893AH1 Harris County TX -- Houston Sports Authority.... 5.00%
451913AH0 Illinois Development Finance Authority -- United
Community & Housing.............................
490296GS3 Kent County MI Airport Facility Revenue......... 5.00%
544712MR0 Los Angeles County CA Metropolitan Trans.
Authority....................................... 6.51%
57420RAC6 Maryland State Energy Financing
Administration.................................. 7.40%
60635RXL6 MO Health & Educational Facilities -- BJC Health
System.......................................... 5.00%
659154H35 North East TX Independent School District....... 4.50%
67756AKC5 Ohio State Higher Educational
Commission -- Oberlin College................... 5.00%
87638LAH3 Tarrant County TX Health Facilities............. 10.25%
924160N91 VT Educational & Health Buildings -- Middlebury
College......................................... 5.00%
944314JJ3 Wayne Charter County MI Airport Revenue......... 7.35%
947648CB5 Weber County UT Hospital -- IHC Health
Service......................................... 5.00%
<CAPTION>
% OF
SHARES/ NET
CUSIP SECURITY TITLE MATURITY PRINCIPAL MARKET VALUE ASSETS
----- -------------- -------- --------- ------------ ------
<S> <C> <C> <C> <C>
EDUCATION
649837M73 N.Y. State Dormitory Auth. -- N.Y. &
Presbyterian Hospital........................... 08/01/2027 $ 6,750,000 $ 6,440,985.00 3.06%
840555CA2 South Texas Higher Education Authority.......... 12/01/2003 5,500,000 5,500,000.00 2.62%
--------------- -------
11,940,985.00 5.68%
--------------- -------
ELECTRIC
011908BE9 Alaska Industrial Development &
Export -- Snettisham............................ 01/01/2034 10,000,000 10,095,500.00 4.80%
720175PT9 Piedmont SC Municipal Power Agency Electric
Revenue......................................... 01/01/2022 8,800,000 8,800,000.00 4.19%
--------------- -------
18,895,500.00 8.99%
--------------- -------
GAS
18681NAA5 Cliff House PA Trust Certificates............... 06/01/2027 2,000,000 2,000,000.00 0.96%
--------------- -------
GENERAL OBLIGATIONS
167501XC4 Chicago IL Board of Education................... 12/01/2027 20,000,000 4,418,800.00 2.10%
35571LAB4 Frederick County MD Special Obligation.......... 07/01/2025 2,330,000 2,384,988.00 1.13%
57585KAZ1 MA State Health & Educational Authority......... 10/01/2027 3,000,000 2,999,670.00 1.43%
649668RM4 New York City NY Government Obligation.......... 08/01/2022 10,500,000 10,378,305.00 4.94%
--------------- -------
20,181,763.00 9.60%
--------------- -------
HEALTH
45200L5A0 Illinois Health Authority -- Alexian Brothers
Health System................................... 01/01/2028 4,000,000 3,940,440.00 1.87%
45200L5R3 Illinois Health Authority -- Alexian Brothers
Health System................................... 01/01/2025 6,000,000 5,842,500.00 2.78%
566820HW9 Maricopa County AZ IDA -- Mayo Foundation....... 11/15/2037 3,750,000 3,768,300.00 1.79%
--------------- -------
13,551,240.00 6.44%
--------------- -------
INDUSTRIAL
71781EAX3 Philadelphia PA Transportation Center School Bld
Corp............................................ 07/01/2028 10,000,000 9,879,600.00 4.71%
--------------- -------
MISCELLANEOUS
413893AH1 Harris County TX -- Houston Sports Authority.... 11/15/2028 7,105,000 7,001,622.25 3.33%
451913AH0 Illinois Development Finance Authority -- United
Community & Housing............................. 07/15/2025 35,000,000 8,385,650.00 3.99%
490296GS3 Kent County MI Airport Facility Revenue......... 01/01/2025 8,000,000 7,938,160.00 3.78%
544712MR0 Los Angeles County CA Metropolitan Trans.
Authority....................................... 07/01/2028 5,000,000 4,616,700.00 2.20%
57420RAC6 Maryland State Energy Financing
Administration.................................. 09/01/2019 2,100,000 2,229,297.00 1.06%
60635RXL6 MO Health & Educational Facilities -- BJC Health
System.......................................... 05/15/2038 10,100,000 9,657,014.00 4.59%
659154H35 North East TX Independent School District....... 10/01/2028 10,000,000 9,180,600.00 4.37%
67756AKC5 Ohio State Higher Educational
Commission -- Oberlin College................... 10/01/2029 10,000,000 9,883,500.00 4.70%
87638LAH3 Tarrant County TX Health Facilities............. 09/01/2019 2,000,000 2,089,240.00 0.99%
924160N91 VT Educational & Health Buildings -- Middlebury
College......................................... 11/01/2038 10,000,000 9,705,600.00 4.62%
944314JJ3 Wayne Charter County MI Airport Revenue......... 12/01/2028 5,575,000 5,254,716.25 2.50%
947648CB5 Weber County UT Hospital -- IHC Health
Service......................................... 08/15/2030 10,000,000 9,669,200.00 4.60%
</TABLE>
B-19
<PAGE> 80
<TABLE>
<CAPTION>
CUSIP SECURITY TITLE RATE
----- -------------- ----
<S> <C> <C>
976595CK2 Wisconsin Center District Tax Revenue........... 5.25%
MULTIPLE UTILITIES
10727XCN6 Brentwood CA Infrastructure Financing
Authority....................................... 5.63%
PUBLIC FACILITIES
155048BB6 Central Puget Sound WA Transportation
Authority....................................... 4.75%
167590DN5 Chicago IL O'Hare International
Airport -- United Airlines...................... 5.35%
799049FX4 San Mateo County CA Joint Power Authority....... 7.63%
TRANSPORTATION
011842GM7 Alaska State International Airports Revenues.... 5.00%
6460383C1 NJ State Office of Public Finance............... 4.50%
592596UV0 NY Metropolitan Transportation Authority........ 5.25%
WATER AND SEWER
106213CR0 Brazos River TX -- Texas Utilities Electric
Co.............................................. 5.55%
438701AM6 Honolulu HI City & County Waste Water System.... 5.00%
576049RU6 MA State Water Resource Authority............... 2.15%
Total Investments.......................................
Other Assets, Less Liabilities..........................
Net Assets..............................................
<CAPTION>
% OF
SHARES/ NET
CUSIP SECURITY TITLE MATURITY PRINCIPAL MARKET VALUE ASSETS
----- -------------- -------- --------- ------------ ------
<S> <C> <C> <C> <C>
976595CK2 Wisconsin Center District Tax Revenue........... 12/15/2027 $10,000,000 $ 10,560,500.00 5.02%
--------------- -------
96,171,799.50 45.75%
--------------- -------
MULTIPLE UTILITIES
10727XCN6 Brentwood CA Infrastructure Financing
Authority....................................... 09/02/2029 2,100,000 2,066,820.00 0.99%
--------------- -------
PUBLIC FACILITIES
155048BB6 Central Puget Sound WA Transportation
Authority....................................... 02/01/2028 10,000,000 9,480,400.00 4.51%
167590DN5 Chicago IL O'Hare International
Airport -- United Airlines...................... 09/01/2016 8,800,000 8,814,784.00 4.19%
799049FX4 San Mateo County CA Joint Power Authority....... 07/15/2029 5,000,000 4,953,000.00 2.36%
--------------- -------
23,248,184.00 11.06%
--------------- -------
TRANSPORTATION
011842GM7 Alaska State International Airports Revenues.... 10/01/2024 8,460,000 8,215,675.20 3.91%
6460383C1 NJ State Office of Public Finance............... 02/01/2019 10,250,000, 9,775,527.50 4.65%
592596UV0 NY Metropolitan Transportation Authority........ 07/01/2028 4,455,000 4,498,391.70 2.14%
--------------- -------
22,489,594.40 10.70%
--------------- -------
WATER AND SEWER
106213CR0 Brazos River TX -- Texas Utilities Electric
Co.............................................. 06/01/2030 6,250,000 6,251,625.00 2.97%
438701AM6 Honolulu HI City & County Waste Water System.... 07/01/2023 9,000,000 8,918,100.00 4.24%
576049RU6 MA State Water Resource Authority............... 08/01/2028 10,000,000 10,000,000.00 4.76%
--------------- -------
25,169,725.00 11.97%
--------------- -------
Total Investments............................... 245,595,210.90 116.85%
--------------- -------
Other Assets, Less Liabilities.................. (35,409,163.10) (16.85)%
--------------- -------
Net Assets...................................... 210,186,047.80 100.00%
=============== =======
</TABLE>
B-20
<PAGE> 81
APPENDIX A
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S") MUNICIPAL BOND RATINGS
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 edge." 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 risks appear somewhat larger than in 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 payment 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 both 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.
Note -- Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes -- The four ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/ VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes
"best quality . . . strong protection by established cash flows"; MIG 2/VMIG2
denotes "high quality" with ample margins of protection; MIG 3/ VMIG3 notes are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . . [p]rotection
commonly regarded as required of an investment security is present . . . there
is specific risk."
B-21
<PAGE> 82
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on Trusts
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL
COMPANIES, INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- Debt rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
B-22
<PAGE> 83
A -- Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB -- Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment to the
obligation.
BB, B, CCC, CC and C -- Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
D -- Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's 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 or the taking of a similar action
if payments on an obligation 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.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE RATINGS
A Standard & Poor's note rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
A-1-- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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 Standard & Poor's
believes that such payments will be made during such grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
B-23
<PAGE> 84
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source 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. An issue determined
to possess a very strong capacity to pay debt service is 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.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
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 obligor's 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.
B-24
<PAGE> 85
Plus (+) or Minus (-) -- Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" 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.
Suspended -- A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn -- A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert -- Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
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 which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD and DD -- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
D ultimate recovery value in liquidation or reor-
B-25
<PAGE> 86
ganization of the obligor. "DDD" represents the highest potential for recovery
on these bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-) -- Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
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 assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 -- Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below in investment grade.
F-S -- Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
D -- Default. Issues assigned this rating are in actual or imminent
payment default.
LOC -- The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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<PAGE> 87
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 6% under the regular federal income tax law
and tax rates applicable to individuals for 1999.
<TABLE>
<CAPTION>
A FEDERAL TAX EXEMPT YIELD OF:
(TAXABLE INCOME*) MARGINAL
- ---------------------------------------- INCOME --4%------4.5%------5%------5.5%------6%--
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
------------- ------------ ----------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to $25,750 Up to $43,050 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
$25,751 - $62,450 $43,051 - $104,050 28.00 5.56 6.25 6.94 7.64 8.33
$62,451 - $130,250 $104,051 - $158,550 31.00 5.80 6.52 7.25 7.97 8.70
$130,251 - $283,150 $158,551 - $283,150 36.00 6.25 7.03 7.81 8.59 9.38
Over $283,150 Over $283,150 39.60 6.62 7.45 8.28 9.11 9.93
</TABLE>
- ---------------
* 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 for
individual taxpayers with adjusted gross income in excess of $126,600. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
Yields shown are for illustration purposes only and are not meant to
represent the Trust's actual yield. No assurance can be given that the Trust
will achieve any specific tax-exempt yield. While it is expected that the Trust
will invest principally in obligations the interest from which is exempt from
the regular federal income tax, other income received by the Trust may be
taxable. The table does not take into account state or local taxes, if any,
payable on Trust 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 Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax-equivalent yields
set forth above. Investors should consult their tax adviser for additional
information.
B-27
<PAGE> 88
APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a
representation by the Trust that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix C hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of shares,
if any, of APS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Beneficial Owner, the number of shares, if any, of
APS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of APS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of APS to be purchased by
all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's
Broker-Dealer) acting for one or more purchasers of such excess number of
shares of APS and the number of such shares to be purchased from one or
more Beneficial Owners on whose behalf such Broker-Dealer acted by one or
more Potential Beneficial Owners on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the aggregate number of shares of APS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of APS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess number of shares of APS and
the number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to
the APS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of APS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner
of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent
Member to deliver
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<PAGE> 89
to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of shares of APS to be sold pursuant to such Order
against payment therefor and advise any such Beneficial Owner that will
continue to hold shares of APS of the Applicable Rate for the next
succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any Trusts received
by it pursuant to (b)(i) above and any shares of APS received by it pursuant to
(b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf
such Broker-Dealer submitted Bids, the Beneficial Owners, if any, on whose
behalf such Broker-Dealer submitted Bids that were accepted or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the case
may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(iii)
above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of APS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of APS that is less than the number of shares
that otherwise was to be purchased by such Potential Beneficial Owner. In such
event, the number of shares of APS to be so delivered shall be determined solely
by such Broker-Dealer. Delivery of such lesser number of shares shall
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<PAGE> 90
constitute good delivery. Notwithstanding the foregoing terms of this paragraph
(f), any delivery or non-delivery of shares which shall represent any departure
from the results of an Auction, as determined by the Auction Agent, shall be of
no effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the provisions of the Auction Agent
Agreement and the Broker-Dealer Agreements.
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<PAGE> 91
APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Amended
By-Laws relating to the APS, and will be incorporated by reference in the
Auction Agent Agreement and each Broker-Dealer Agreement. The terms not defined
below are defined in the forepart of this Prospectus. Nothing contained in this
Appendix D constitutes a representation by the Trust that in each Auction each
party referred to herein actually will perform the procedures described herein
to be performed by such party.
PARAGRAPH 10(a) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "APS" shall mean the shares of APS being auctioned pursuant to
this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available APS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i)
below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vi) "Hold Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the credit rating assigned on such date to such
shares by S&P (or if S&P shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency), and (ii) whether
the Trust has provided modification 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 APS as
follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
PERCENTAGE OF PERCENTAGE OF
CREDIT RATINGS REFERENCE RATE -- REFERENCE RATE --
- -------------- NO NOTIFICATION NOTIFICATION
S&P ----------------- -----------------
<S> <C> <C>
AA- or Higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 150% 250%
Below BBB- 200% 275%
</TABLE>
The Trust shall take all reasonable action necessary to enable S&P to
provide a rating for the APS. If S&P shall not make such a rating
available, Painewebber Incorporated 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" shall have the meaning specified in Paragraph 10(b)(i)
below.
(ix) "Sell Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(x) "Submission Deadline" shall mean 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" shall have the meaning specified in Paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
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<PAGE> 92
(xiv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
10(d)(i) below.
PARAGRAPH 10(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 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 APS, if any, 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 APS, if any, held by such Beneficial
Owner which such Beneficial Owner desires to continue to hold, provided
that the Applicable Rate for the next succeeding Dividend Period shall
not be less than the rate per annum specified by such Beneficial Owner,
and/or
(3) the number of outstanding APS, if any, 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 APS, if any, 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.
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<PAGE> 93
(ii)(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding 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
(2) such number or a lesser number of outstanding 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
(3) a lesser number of outstanding 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 APS specified in such Sell Order, or
(2) such number or a lesser number of outstanding 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 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 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.
PARAGRAPH 10(c) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of outstanding APS that are the subject of
such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding APS, if any, subject to any Hold
Order placed by such Existing Holder;
(2) the number of outstanding APS, if any, subject to any Bid
placed by such Existing Holder and the rate per annum specified in such
Bid; and
(3) the number of outstanding APS, if any, 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 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
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<PAGE> 94
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 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 APS held by such Existing Holder
are submitted to the Auction Agent, such Orders 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 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 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
shall be reduced pro rata so that such Hold Orders, in the aggregate, cover
exactly the number of outstanding 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 APS held by
such Existing Holder over the number of shares of APS subject to any Hold
Order referred to in Paragraph 10(c)(iv)(A) above (and if more than one Bid
submitted on behalf of such Existing Holder specifies the same rate per
annum and together they cover more than the remaining number of shares that
can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over
the number 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 APS subject to such Sell Orders is greater than such
excess, the number 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 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
APS therein specified.
(vi) 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.
PARAGRAPH 10(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 APS over the number
of outstanding APS that are the subject of Submitted Hold Orders (such
excess being hereinafter referred to as the "Available APS");
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(B) from the Submitted Orders whether the number of outstanding 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 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 APS that are subject to Submitted
Sell Orders (if such excess or such equality exists (other than because
the number of outstanding APS in clauses (1) and (2) above are each zero
because all of the outstanding APS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders hereinafter being
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 APS that are the subject of such
Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per annum
being at least equal to the Available APS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to Paragraph 10(d)(i), the Auction Agent shall advise the Trust of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the outstanding 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 APS are the subject of Submitted Hold
Orders, that 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 succeeding Dividend Period shall be equal
to 59% of the Reference Rate (or 90% of such rate if the Trust 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 APS) on the date of the
Auction.
PARAGRAPH 10(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
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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 Holder 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 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 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 APS ("Remaining Shares")
equal to the excess of the Available APS over the number of outstanding
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 APS then
held by such Existing Holder subject to such Submitted Bid and (2) the
number 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 APS held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the sum of the numbers of
outstanding APS subject to such Submitted Bids made by all such Existing
Holders that specified a rate per annum equal to the Winning Bid Rate;
and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of outstanding APS obtained by
multiplying (x) the difference between the Available APS and the number
of outstanding 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 APS
subject to such Submitted Bid and the denominator of which shall be the
sum of the number of outstanding APS subject to such 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 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 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 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 APS then held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and (2) the
number of APS obtained by multiplying (x) the difference between the
Available APS and the aggregate number of outstanding 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 APS held by such Existing Holder subject to
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such Submitted Bid or Submitted Sell Order and the denominator of which
shall be the number of outstanding 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 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 APS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each outstanding APS
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole 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, in
such manner as in its sole discretion it shall determine, shall allocate
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 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 the outstanding APS to be purchased and the aggregate number of
outstanding APS to be sold by such Potential Holders and Existing Holders
and, to the extent that such aggregate number of outstanding shares to be
purchased and such aggregate number of outstanding shares to be sold
differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one
or more sellers such Broker-Dealer shall receive, as the case may be,
outstanding APS.
PARAGRAPH 10(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 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 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 APS to any Person other than
the Trust. All of the outstanding 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 APS may be registered
in the Stock Register in the name of the Beneficial Owner thereof and such
Beneficial Owner thereupon will be entitled to receive certificates therefor and
required to deliver certificates thereof or upon transfer or exchange thereof.
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EATON VANCE MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
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INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
24 Federal Street
Boston, MA 02110
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
