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CONNECTICUT MUTUAL INVESTMENT ACCOUNTS, INC.
140 GARDEN STREET - HARTFORD, CONNECTICUT 06154
1-800-322-CMIA
March 31, 1995
Connecticut Mutual Investment Accounts, Inc. (Company) is an open-end
management investment company consisting of ten separate mutual funds. The
Accounts being offered hereby are: CMIA National Municipals Account (National
Account), CMIA California Municipals Account (California Account), CMIA
Massachusetts Municipals Account (Massachusetts Account), CMIA New York
Municipals Account (New York Account) and CMIA Ohio Municipals Account (Ohio
Account) (each, an Account and collectively, the Accounts). Shares of the
Accounts are available only where they may be legally sold.
The National Account is designed for investors seeking current income exempt
from regular federal income tax. The California, Massachusetts, New York and
Ohio Accounts are designed for investors seeking current income exempt from both
regular federal income tax and from personal income tax of their respective
states (and in the case of the New York Account, New York City personal income
taxes). In seeking current income, each Account invests its assets in a
corresponding open-end investment company (Portfolio) having the same investment
objective as the Account, rather than directly investing in and managing its own
portfolio of securities as an historically structured mutual fund would.
Each Portfolio has engaged the services of Boston Management and Research, a
wholly owned subsidiary of Eaton Vance Management, as its investment adviser
(Investment Adviser). The shares of each Account are distributed and
underwritten by G.R. Phelps & Co., Inc., (G.R. Phelps) an indirect wholly owned
subsidiary of Connecticut Mutual Life Insurance Company.
The Prospectus contains important information, including how the Accounts
invest and the services available to shareholders. A Statement of Additional
Information (SAI), dated March 31, 1995, has been filed with the Securities and
Exchange Commission (SEC). The SAI is incorporated herein by reference and is
legally considered a part of this Prospectus. The SAI is available free upon
request by calling 1-800-322-CMIA.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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SHARES OF THE ACCOUNTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE ACCOUNTS INVOLVE INVESTMENT RISKS,
INCLUDING FLUCTUATIONS IN VALUE AND THE POSSIBLE LOSS OF SOME OR ALL OF THE
PRINCIPAL INVESTMENT.
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PLEASE READ THIS PROSPECTUS BEFORE INVESTING AND KEEP IT ON FILE
FOR FUTURE REFERENCE.
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CONNECTICUT MUTUAL INVESTMENT ACCOUNTS, INC.
---------------
PROSPECTUS
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
EXPENSE INFORMATION.............................................................. 3
FINANCIAL HIGHLIGHTS............................................................. 5
THE COMPANY IN DETAIL............................................................ 6
INVESTMENT OBJECTIVE AND POLICIES............................................ 6
THE PORTFOLIOS' INVESTMENTS.................................................. 8
THE PORTFOLIOS' INVESTMENT TECHNIQUES........................................ 13
OTHER INFORMATION CONCERNING THE PORTFOLIOS.................................. 15
THE COMPANY AND ITS ACCOUNTS................................................. 16
THE PORTFOLIOS............................................................... 17
THE PORTFOLIOS' MANAGER...................................................... 18
BREAKDOWN OF EXPENSES........................................................ 19
DIVIDENDS, CAPITAL GAINS AND TAXES........................................... 21
PERFORMANCE.................................................................. 25
YOUR ACCOUNT..................................................................... 27
HOW TO BUY SHARES............................................................ 27
SHARE PRICE.................................................................. 29
REINSTATEMENT PRIVILEGE...................................................... 31
HOW TO SELL SHARES........................................................... 31
INVESTOR SERVICES............................................................ 34
SHAREHOLDER AND ACCOUNT POLICIES................................................. 36
TRANSACTION DETAILS.......................................................... 36
EXCHANGE RESTRICTIONS........................................................ 37
APPENDIX A....................................................................... A-1
APPENDIX B....................................................................... B-1
APPENDIX C....................................................................... C-1
</TABLE>
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EXPENSE INFORMATION
EXPENSES
The following table lists transaction and estimated operating expenses for
the current fiscal year related to an investment in each of the Accounts.
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA MASSACHUSETTS NEW YORK OHIO
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4.00% 4.00% 4.00% 4.00% 4.00%
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable)(1)............. None None None None None
Exchange Fee(2)........................... None None None None None
ANNUAL OPERATING EXPENSES OF EACH ACCOUNT
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees........................... .45% .50% .46% .48% .46%
12b-1 Fees(3)............................. .00 .00 .00 .00 .00
Other Expenses(4)
(after expense limitation).............. .35 .30 .34 .32 .34
--- --- --- --- ---
Total Operating Expenses of each
Account................................. .80% .80% .80% .80% .80%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
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(1) Purchases of $500,000 or more are not subject to an initial sales charge
but may be subject to a contingent deferred sales charge of 1% if the
shares are redeemed within 12 months after the calendar month of purchase.
See SHARE PRICE--CONTINGENT DEFERRED SALES CHARGE.
(2) All exchanges in excess of 12 exchanges in a 12-month period are subject to
an exchange fee of .75% of the net asset value of the shares redeemed. See
"Exchange Restrictions."
(3) The Fund's distributor, G.R. Phelps, has voluntarily agreed not to impose
any reimbursement to which it may be entitled pursuant to each Account's
Rule 12b-1 distribution plan. No Account is expected to pay any amounts
pursuant to a Rule 12b-1 distribution plan during the fiscal year ending
September 30, 1995. In the absence of such a voluntary agreement, each
Account would pay up to .25% of the Account's average daily net assets.
(4) G.R. Phelps has voluntarily and temporarily agreed to limit or otherwise
absorb each Account's operating expenses except taxes and interest on
borrowed money, if any, to limit the operating expenses of each Account to
.80% of the Account's average daily net assets. In the absence of such an
agreement by G.R. Phelps, the estimated total operating expenses of the
National Account, California Account, Massachusetts Account, New York
Account and Ohio Account for the period from October 3, 1994 (inception) to
December 31, 1994 would have been 1.71%, 1.43%, 1.42%, 1.44% and 1.35%,
respectively.
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EXAMPLE: Assuming that an Account's annual return is 5% and that its operating
expenses are exactly as described above, if you closed your account after the
number of years indicated below, for every $1,000 invested, your investment
would bear the following amounts in total expenses:
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA MASSACHUSETTS NEW YORK OHIO
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
----------- ------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
After 1 year.......................... $48 $48 $48 $48 $48
After 3 years......................... 65 65 65 65 65
</TABLE>
The purpose of the above table and Example is to summarize the aggregate
expenses of each Account and its corresponding Portfolio and to assist investors
in understanding the various costs and expenses that investors in an Account
will bear directly or indirectly. See, "Breakdown of Expenses." THESE EXAMPLES
ILLUSTRATE THE EFFECT OF EXPENSES, AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Directors of the Company believe that over time the aggregate per share
expenses of an Account and its corresponding Portfolio should be approximately
equal to the per share expenses which each Account would incur if the Company
retained the services of an investment adviser on behalf of each Account and the
assets of an Account were invested directly in the type of securities being held
by its corresponding Portfolio. Other investment companies with different
distribution arrangements and fees are investing in the Portfolios and
additional such companies may do so in the future. See "The Portfolios--Special
Information on the Account/Portfolio Investment Structure." Since the Accounts
do not yet have operating histories, the percentages indicated as ANNUAL
OPERATING EXPENSES OF EACH ACCOUNT and the amounts included in the Examples
above are based on each Account's and its corresponding Portfolio's projected
fees and expenses for the Account's current fiscal year.
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CONNECTICUT MUTUAL INVESTMENT ACCOUNTS, INC.
FINANCIAL HIGHLIGHTS
For the period from October 3, 1994 (Inception) to December 31, 1994
(Unaudited)
The following information has been derived from the Accounts' unaudited
financial statements as of December 31, 1994 which are included in the
Statement of Additional Information.
Selected data for a share of capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
NET REALIZED RATIO OF
DIVIDENDS & UNREALIZED DISTRIBUTIONS NET ASSET NET ASSET OPERATING
FROM NET GAIN (LOSS) FROM NET REALIZED VALUE AT VALUE AT EXPENSES TO
YEAR ENDED NET INVESTMENT INVESTMENT ON GAIN ON BEGINNING END AVERAGE
DECEMBER 31 INCOME INCOME INVESTMENTS INVESTMENTS OF PERIOD OF PERIOD NET ASSETS(B)
- ------------- --------------- ------------- --------------- ----------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NATIONAL MUNICIPALS ACCOUNT
1994(a) $.09 $(.09) $(.07) $-- $10.00 $9.93 .77%
CALIFORNIA MUNICIPALS ACCOUNT
1994(a) $.12 $(.12) $(.50) $-- $10.00 $9.50 .75%
MASSACHUSETTS MUNICIPALS ACCOUNT
1994(a) $.13 $(.13) $(.40) $-- $10.00 $9.60 .77%
NEW YORK MUNICIPALS ACCOUNT
1994(a) $.10 $(.10) $(.39) $-- $10.00 $9.61 .80%
OHIO MUNICIPALS ACCOUNT
1994(a) $.08 $(.08) $(.32) $-- $10.00 $9.68 .80%
<CAPTION>
RATIO OF NET
RATIO OF INTEREST INVESTMENT INCOME NET ASSETS
EXPENSES TO TO AT END OF ANNUAL
YEAR ENDED AVERAGE AVERAGE PERIOD (IN TOTAL
DECEMBER 31 NET ASSETS(B) NET ASSETS(B) THOUSANDS) RETURN(C)
- ------------- ------------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
NATIONAL MUNICIPALS ACCOUNT
1994(a) .04% 6.08% $ 777 0.20%
CALIFORNIA MUNICIPALS ACCOUNT
1994(a) .03% 5.89% $1,299 -3.84%
MASSACHUSETTS MUNICIPALS ACCOUNT
1994(a) .07% 5.85% $ 35 -2.68%
NEW YORK MUNICIPALS ACCOUNT
1994(a) .10% 5.67% $ 83 -2.86%
OHIO MUNICIPALS ACCOUNT
1994(a) .02% 5.68% $ 86 -2.36%
</TABLE>
- ----------
(a) For the period from October 3, 1994 (Inception) to December 31, 1994
(b) Annualized
(c) Annual total returns do not include the effect of sales charges
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THE COMPANY IN DETAIL
INVESTMENT OBJECTIVE AND POLICIES
Each Account has its own investment objective and policies which are designed
to meet specific investment goals and, except as noted below, can be changed
without shareholder approval. There can be no guarantee, however, that the
Accounts will meet their goals.
NATIONAL ACCOUNT
THE NATIONAL ACCOUNT IS A DIVERSIFIED SERIES OF THE COMPANY. THE NATIONAL
ACCOUNT'S INVESTMENT OBJECTIVE IS TO PROVIDE CURRENT INCOME EXEMPT FROM REGULAR
FEDERAL INCOME TAX. The National Account seeks to achieve its investment
objective by investing its assets in the National Municipals Portfolio (National
Portfolio), a separate registered investment company sponsored by Eaton Vance
Management (Eaton Vance). Under normal market conditions and as a matter of
fundamental policy, the National Account (either directly or indirectly through
another open-end management investment company with substantially the same
investment objective, policies and restrictions) and the National Portfolio will
invest at least 80% of their respective assets 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 regular Federal income
tax.
At least 65% of the National Portfolio's net assets will normally be invested
in obligations which are rated Baa or higher by Moody's Investors Service, Inc.
(Moody's) or BBB by Standard & Poor's Ratings Group (S&P) or Fitch Investors
Service, Inc. (Fitch) or, if unrated, determined by the Investment Adviser to be
of investment grade quality (investment grade obligations). Up to 35% of the
National Portfolio's net assets may be invested in obligations which are rated
below Baa by Moody's or BBB by S&P and Fitch (but not rated lower than B) or, if
unrated, determined by the Investment Adviser to be of comparable quality (below
investment grade obligations). Securities rated below BBB or Baa are commonly
known as "junk bonds" and are subject to greater credit and market risks as
described under the caption, "--The Portfolios' Investments--Portfolio
Quality--Risk Factors."
CALIFORNIA ACCOUNT
THE CALIFORNIA ACCOUNT IS A DIVERSIFIED SERIES OF THE COMPANY. THE CALIFORNIA
ACCOUNT'S INVESTMENT OBJECTIVE IS TO PROVIDE CURRENT INCOME EXEMPT FROM BOTH
REGULAR FEDERAL INCOME TAX AND CALIFORNIA PERSONAL INCOME TAX. The California
Account seeks to achieve its investment objective by investing its assets in the
California Tax Free Portfolio (California Portfolio), a separate registered
investment company sponsored by Eaton Vance. Under normal market conditions and
as a matter of fundamental policy, the California Account (either directly or
indirectly through another open-end management investment company with
substantially the same investment objective, policies and restrictions) and the
California Portfolio will invest at least 80% of their respective assets in debt
obligations issued by or on behalf of the State of California and its political
subdivisions, the interest on which is exempt from the regular Federal income
tax, is not a tax preference item under the Federal alternative minimum tax, and
is exempt from California personal income tax.
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At least 75% of the California Portfolio's net assets will normally be
invested in investment grade obligations and up to 25% of the California
Portfolio's net assets may be invested in below investment grade obligations.
MASSACHUSETTS ACCOUNT
THE MASSACHUSETTS ACCOUNT IS A NON-DIVERSIFIED SERIES OF THE COMPANY. THE
MASSACHUSETTS ACCOUNT'S INVESTMENT OBJECTIVE IS TO PROVIDE CURRENT INCOME EXEMPT
FROM REGULAR FEDERAL INCOME TAX AND MASSACHUSETTS STATE PERSONAL INCOME TAXES.
The Massachusetts Account seeks to achieve its investment objective by investing
its assets in the Massachusetts Tax Free Portfolio (Massachusetts Portfolio), a
separate registered investment company sponsored by Eaton Vance. Under normal
market conditions and as a matter of fundamental policy, the Massachusetts
Account (either directly or indirectly through another open-end management
investment company with substantially the same investment objective, policies
and restrictions) and the Massachusetts Portfolio will invest at least 80% of
their respective net assets in debt obligations issued by or on behalf of the
Commonwealth of Massachusetts and its political subdivisions, and the
governments of Puerto Rico, the U.S. Virgin Islands and Guam (the
"Territories"), the interest on which is exempt from regular Federal income tax,
is not a tax preference item under the Federal alternative minimum tax and is
exempt from Massachusetts state personal income taxes.
At least 70% of the Massachusetts Portfolio's net assets will normally be
invested in investment grade obligations and up to 30% of the Massachusetts
Portfolio's assets may be invested in below investment grade obligations.
NEW YORK ACCOUNT
THE NEW YORK ACCOUNT IS A NON-DIVERSIFIED SERIES OF THE COMPANY. THE NEW YORK
ACCOUNT'S INVESTMENT OBJECTIVE IS TO PROVIDE CURRENT INCOME EXEMPT FROM REGULAR
FEDERAL INCOME TAX AND NEW YORK STATE AND NEW YORK CITY PERSONAL INCOME TAXES.
The New York Account seeks to meet its investment objective by investing its
assets in the New York Tax Free Portfolio (New York Portfolio), a separate
registered investment company sponsored by Eaton Vance. Under normal market
conditions and as a matter of fundamental policy, the New York Account (either
directly or indirectly through another open-end management investment company
with substantially the same investment objective, policies and restrictions) and
the New York Portfolio will invest at least 80% of their respective net assets
in debt obligations issued by or on behalf of the State of New York and its
political subdivisions, and the governments of the Territories, the interest on
which is exempt from regular Federal income tax, is not a tax preference item
under the Federal alternative minimum tax and is exempt from New York State and
New York City personal income taxes.
At least 70% of the New York Portfolio's net assets will normally be invested
in investment grade obligations and up to 30% of the New York Portfolio's assets
may be invested in below investment grade obligations.
OHIO ACCOUNT
THE OHIO ACCOUNT IS A NON-DIVERSIFIED SERIES OF THE COMPANY. THE OHIO
ACCOUNT'S INVESTMENT OBJECTIVE IS TO PROVIDE CURRENT INCOME EXEMPT FROM REGULAR
FEDERAL INCOME TAX AND OHIO STATE
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PERSONAL INCOME TAX. The Ohio Account seeks to achieve its investment objective
by investing its assets in the Ohio Tax Free Portfolio (Ohio Portfolio), a
separate registered investment company sponsored by Eaton Vance. Under normal
market conditions and as a matter of fundamental policy, the Ohio Account
(either directly or indirectly through another open-end management investment
company with substantially the same investment objective, policies and
restrictions) and the Ohio Portfolio will invest at least 80% of their
respective net assets in debt obligations issued by or on behalf of the State of
Ohio and its political subdivisions, and the governments of the Territories, the
interest on which is exempt from regular Federal income tax, is not a tax
preference item under the Federal alternative minimum tax and is exempt from
Ohio State personal income tax.
At least 80% of the Ohio Portfolio's net assets will normally be invested in
investment grade obligations and up to 20% of the Ohio Portfolio's assets may be
invested in below investment grade obligations.
THE PORTFOLIOS' INVESTMENTS
TYPES OF MUNICIPAL OBLIGATIONS. Municipal obligations eligible for the
exemption from state and/ or federal taxes are issued for a wide variety of both
governmental and private undertakings. In general, there are three categories of
debt obligations the interest on which is exempt from all types of federal
income taxes applicable to individuals: (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. Each
Portfolio will treat all obligations included in the foregoing three categories
and (except the California Portfolio) similar obligations issued by the
governments of the Territories as tax-exempt municipal obligations for purposes
of complying with the requirement to invest 80% of its assets in certain
tax-free obligations. Under normal market conditions, each State Portfolio will
invest at least 65% of its total assets in obligations issued by the respective
State or its political subdivisions. It should be noted that, for corporate
shareholders of an Account, an Account's distributions derived from interest on
all state obligations (whenever issued) are included in "adjusted current
earnings" for purposes of computing the alternative minimum tax applicable to
corporations.
A fourth category of municipal obligations consisting of certain "private
activity bonds" issued after August 7, 1986 is exempt from regular federal
income tax applicable to individuals (and corporations), but the interest earned
on such obligations (including a distribution by an Account derived from such
interest) is treated as a tax preference item which could subject the recipient
to or increase his liability for the Federal alternative minimum tax. No State
Portfolio may invest more than 20% of its net assets in these obligations and
obligations subject to regular federal income tax and/or state (and, in the case
of the New York Portfolio, city) personal income taxes.
Public purpose municipal bonds include general obligation bonds and revenue
bonds. General obligation bonds are backed by the taxing power of the issuing
municipality and are considered one of the safest type of bonds. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Municipal notes include bond anticipation notes, tax anticipation
notes,
8
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revenue anticipation notes, and construction loan 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. Construction loan notes are short-term obligations that will be
retired with the proceeds of long-term mortgage financing.
PORTFOLIO QUALITY. Each Portfolio invests a significant portion of its
respective assets in investment grade obligations, as described above in the
discussion of each Portfolio's investment objective. Obligations rated in the
lowest investment grade (BBB or Baa) and unrated obligations may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. The Portfolios
will not invest in obligations which are rated below B at the time of purchase.
See "Downgrade and Default" below, for a discussion of the Portfolios' holdings
of obligations whose ratings drop below B.
RISK FACTORS. Obligations rated below investment grade may provide greater
opportunities for investment income and higher yield than investment grade
obligations but are subject to risks not generally associated with an investment
in investment grade obligations. The market for high yield obligations is
relatively new and has not been exposed for a long period of time to the effects
of cyclical and sometimes adverse changes in the economy. The prices of high
yield obligations have been less sensitive to interest rate changes than higher
rated investments, but are more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, issuers may experience financial stress that
adversely affects their ability to meet principal and interest payment
obligations. If an issuer of a high yield obligation defaulted, a Portfolio may
incur additional expense to seek recovery of its investment. High yield
obligations may contain redemption or call provisions that, if exercised, may
require the Portfolio to replace the security with a lower yielding security,
resulting in a decreased return for investors. The market for high yield
obligations is likely to be less liquid than the market for higher rated
obligations and the judgment of the Portfolio's Investment Adviser may play a
greater role in the valuation of high yield obligations. Market conditions may
restrict the availability of high yield obligations and may affect the choice of
securities to be sold when a Portfolio attempts to meet redemption requests.
A Portfolio is dependent on the Investment Adviser's judgment, analysis and
experience in evaluating the quality of high yield obligations. In evaluating
the credit quality of a particular issue, whether rated or unrated, the
Investment Adviser 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. The Investment Adviser will attempt to reduce the risks of investing in
high yield obligations through active portfolio management, credit analysis and
attention to current developments and trends in the economy and the financial
markets. See Appendix A for a description of Moody's, S&P's and Fitch's rating
categories for municipal obligations. See Appendix B for a description of
National Portfolio's asset composition as of September 30, 1994.
DOWNGRADE AND DEFAULT. Each Portfolio may retain in its portfolio an
obligation whose rating, after acquisition, drops below B, if such retention is
considered desirable by the Portfolio's Investment
9
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Adviser; provided, however, that each Portfolio's holdings of obligations rated
below investment grade (including those obligations whose ratings drop below B)
will not exceed 35% of its net assets. Obligations rated B by S&P, Moody's or
Fitch are generally regarded as being vulnerable to default, and adverse
conditions are likely to impair the capacity to pay interest and principal.
Similarly, each Portfolio may retain defaulted obligations in their respective
portfolios when such retention is considered desirable by the Investment
Adviser. The National Portfolio may also acquire other securities issued in
exchange for such obligations or issued in connection with the debt
restructuring or reorganization of the issuers (or of the underlying sources of
funds for debt service) or where such acquisition, in the judgment of the
Investment Adviser, may enhance the value of such obligations or would otherwise
be consistent with such Portfolio's investment policies.
MATURITY. It is expected that each Portfolio's investments will normally
include substantial amounts of long-term municipal obligations with maturities
of ten years or more, because such long-term obligations generally produce
higher income than short-term obligations. Such long-term obligations are more
susceptible to market fluctuations resulting from changes in interest rates than
shorter term obligations. Since each Portfolio's objective is to provide current
income, the Portfolio will invest in municipal obligations with an emphasis on
income and not on stability of the Portfolio's net asset value. See "-- Other
Information Concerning The Portfolios -- Fluctuations in Net Asset Value and
Income" below. However, a Portfolio's average maturity may vary (generally
between 15 and 30 years) depending on anticipated market conditions.
NON-DIVERSIFIED STATUS. Each of the Massachusetts Portfolio, New York
Portfolio and Ohio Portfolio is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (Investment Company Act). A
non-diversified Portfolio may invest more of its assets in the securities of a
single issuer than a diversified Portfolio can. A diversified Portfolio is also
restricted in the amount of its assets that may be invested in a single issuer.
Each of these Portfolios, with respect to 50% of its assets, may invest more
than 5% of its assets in securities of a single issuer. Because of the
relatively small number of issues of obligations in their respective states,
these Portfolios are likely to invest a greater percentage of their assets in
securities of a single issuer than would a diversified fund. Therefore these
Portfolios would be more susceptible to adverse economic or political
occurrences affecting any of such issuers. These Portfolios will also be subject
to an increased risk of loss if such an issuer is unable to make interest or
principal payments or if the market value of such issuer's securities declines.
CONCENTRATION IN ISSUERS IN A SINGLE STATE AND OBLIGATIONS OF SAME TYPE. The
California, Massachusetts, New York and Ohio Portfolios will concentrate their
investments in issuers in their respective states. The National Portfolio may
invest more than 25% of its assets in issuers located in a single state. Each
Portfolio is, therefore, more susceptible to factors adversely affecting issuers
in one state than other mutual funds which do not concentrate in a specific
state. Municipal obligations of issuers in a single state may be adversely
affected by economic developments and by legislation and other governmental
activities in that state. To the extent that any Portfolio's assets are
concentrated in municipal obligations of issuers of a single state, that
Portfolio may be subject to an increased risk of loss. Each Portfolio may also
invest in the obligations of the governments of the Territories. See Appendix C
for a description of economic and other factors relating to California,
Massachusetts, New York, Ohio and the Territories.
10
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In addition, each Portfolio may concentrate 25% or more of its respective
assets in obligations of the same general type, including without limitation:
general obligations of a particular state and such state's political
subdivisions; lease rental obligations of state and local authorities;
obligations of state and local housing finance authorities, municipal utilities
systems or public housing authorities; obligations for 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 Portfolios more susceptible to adverse economic, political, or
regulatory occurrences affecting a particular category of issuers. As the
Portfolios' concentration in the securities of a particular category of issuer
increases, the potential for fluctuation in the value of the corresponding
Account's shares also increases.
MUNICIPAL LEASES. Each Portfolio may invest in municipal leases and
participations therein. These are obligations in the form of a lease or
installment purchase arrangement which is entered into by state and local
governments to acquire equipment and facilities. 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. A trustee is usually responsible for
administering the terms of the participation and enforcing the participants'
rights in the underlying lease.
Municipal leases frequently involve special risks not normally associated
with general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. Such arrangements,
therefore, are subject to the risk that the governmental issuer will not
appropriate funds for lease payments.
Certain municipal lease obligations may be considered illiquid for the
purpose of each Portfolio's 15% limitation on investments in illiquid
securities, while other municipal lease obligations owned by a Portfolio may be
determined by its Investment Adviser, pursuant to guidelines adopted by the
Trustees of the Portfolio, to be liquid securities for the purpose of such
limitation. In determining the liquidity of municipal lease obligations, each
Portfolio's Investment Adviser will consider a variety of factors including: (1)
the willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades and quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the Investment Adviser will
consider factors unique to particular lease obligations affecting the
marketability thereof. These include the general creditworthiness of the
municipality, the importance of the property covered by the lease to the
municipality, and the likelihood that the marketability of the obligation will
be maintained throughout the time the obligation is held by the Portfolio. In
the event a Portfolio acquires an unrated municipal lease obligation, the
Investment Adviser will be responsible for determining the credit quality of
such obligations on an ongoing basis, including an assessment of the likelihood
that the lease may or may not be cancelled.
11
<PAGE>
ZERO COUPON BONDS. Each Portfolio may invest in zero coupon bonds. Such
bonds are debt obligations which do not require the periodic payment of interest
and are issued at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity at a rate of interest reflecting the market rate
of the security at the time of issuance. Zero coupon bonds benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such bonds experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. Each Portfolio will accrue income on such bonds for tax and accounting
purposes, in accordance with applicable law, each corresponding Account's
proportionate share of which income is distributable to shareholders of that
Account. Because no cash is received at the time such income is accrued, a
Portfolio may be required to liquidate other portfolio securities to generate
cash that its corresponding Account may withdraw from the Portfolio to enable
the Account to satisfy its distribution obligations.
INVERSE FLOATERS. Each Portfolio may invest in various types of derivative
municipal securities whose interest rates bear an inverse relationship to the
interest rate on another security or the value of an index ("inverse floaters").
Derivatives are securities that provide for payments based on or derived from
the performance of an underlying asset, index or other economic benchmark. An
investment in derivative instruments, such as 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 Portfolio when short-term interest rates
rise, and increase the interest paid to the Portfolio when short-term interest
rates fall. Inverse floaters have varying degrees of liquidity, and the market
for these securities is new and relatively volatile. These securities tend to
underperform the market for fixed rate bonds in a rising interest rate
environment, but tend to outperform the market for fixed rate bonds when
interest rates decline. Shifts in long-term interest rates may alter this
tendency, however. In return for this volatility, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These securities usually
permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising interest rates if exercised at an opportune time. Inverse
floaters are leveraged because they provide two or more dollars of bond market
exposure for every dollar invested. As a matter of operating policy, each
Portfolio currently may invest up to 7.5% of its net assets in inverse floaters.
INSURED OBLIGATIONS. Each Portfolio may also purchase municipal bonds 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. Insured obligations held by a
Portfolio will be insured as to their scheduled payment of principal and
interest under either (i) an insurance policy obtained by the issuer or
underwriter of the obligation at the time of its original issuance or (ii) an
insurance policy obtained by the Portfolio or a third party subsequent to the
obligation's original issuance (which may not be reflected in the obligation's
market value). Although the insurance feature reduces certain financial risks,
the premiums for insurance and the higher market
12
<PAGE>
price paid for insured obligations may reduce the corresponding Account's
current yield. The insurance does not guarantee the market value of the insured
obligations or the net asset value of the corresponding Account.
VARIABLE RATE INSTRUMENTS. Each Portfolio may invest in variable rate
instruments, which provide for interest rate adjustments at specified intervals.
Rate adjustments on such securities are usually set at the issuer's discretion,
in which case the Portfolio would normally have the right to resell the security
to the issuer or its agent. Alternatively, rate revisions may be determined in
accordance with a prescribed formula or other contractual procedure. A Portfolio
may also acquire put options in combination with the purchase of underlying
securities or may separately acquire put options that relate to securities held
by the Portfolio. Such put options would give the Portfolio the right to require
the issuer or some other person to purchase the underlying security at an agreed
upon price.
SHORT-TERM TAXABLE OBLIGATIONS. Under normal market conditions, each
Portfolio may invest up to 20% of its net assets in short-term obligations the
interest on which is subject to regular Federal income tax, Federal alternative
minimum tax and/or state (and, in the case of the New York Portfolio, city)
personal income taxes. Such short-term taxable obligations may include, but are
not limited to, certificates of deposit, commercial paper, short-term notes and
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities. During periods of adverse market conditions as determined
by the Investment Adviser, each Portfolio may temporarily invest for defensive
purposes more than 20% of its assets in such short-term taxable obligations. All
of such short-term taxable obligations, other than U.S. Government securities,
will be (i) with respect to the California Portfolio, Massachusetts Portfolio,
New York Portfolio and Ohio Portfolio, high quality obligations which are rated
at least Aa or P-2 for notes and commercial paper by Moody's, which are rated at
least AA or A-2 for notes and commercial paper by S&P, or which are rated at
least AA or F-2 for notes and commercial paper by Fitch; (ii) with respect to
the National Portfolio, investment grade obligations which are rated Baa or
better for notes or P-3 or better for commercial paper by Moody's, BBB or better
for notes or A-3 or better for commercial paper by S&P, or which are rated at
least AA or F-2 for notes and commercial paper by Fitch; or (iii) with respect
to all Portfolios, if unrated, deemed to be of comparable quality by the
Investment Adviser.
THE PORTFOLIOS' INVESTMENT TECHNIQUES
WHEN-ISSUED SECURITIES. Each Portfolio may purchase securities on a
"when-issued" basis, which means that payment and delivery occur on a future
settlement date. The price and yield 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 a Portfolio agreed to pay for them. A Portfolio will not accrue
income in respect of a when-issued security prior to its stated delivery date.
Each Portfolio will maintain in a segregated account sufficient assets to cover
its purchase obligations.
FUTURES AND RELATED OPTIONS TRANSACTIONS. To hedge against changes in
interest rates, each Portfolio may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Portfolio may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. Futures
contracts and options on futures
13
<PAGE>
are derivative contracts and may pose additional risk to a Portfolio invested in
such contracts. The futures contracts may be based on various debt securities
(such as U.S. Government securities), securities indices and other financial
instruments and indices. Each Portfolio will engage in futures and related
options transactions for bona fide hedging or non-hedging purposes as defined in
and permitted by regulations of the Commodity Futures Trading Commission. Each
Portfolio will engage in such transactions for non-hedging purposes only in
order to enhance total return by using a futures position as a lower cost
substitute for a securities position that a Portfolio is otherwise entitled to
enter into.
A Portfolio may not purchase or sell futures contracts or purchase or sell
related options, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of margin deposits on the
Portfolio's outstanding positions in futures and related options and the amount
of premiums paid for outstanding positions in options on futures would exceed 5%
of the market value of the Portfolio's net assets. There are no percentage
limitations on a Portfolio's transactions in futures contracts or options on
futures except that 80% of each Portfolio's assets must be invested in tax-
exempt municipal obligations. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options requiring the
Portfolio to purchase securities, obligate the Portfolio to segregate liquid
high grade debt securities in an amount equal to the underlying value of such
contracts and options. In addition, while transactions in futures contracts and
options on futures may reduce certain risks, such transactions themselves
involve (1) liquidity risk that contractual positions cannot be easily closed
out in the event of market changes, (2) correlation risk that changes in the
value of hedging positions may not match the market fluctuations intended to be
hedged (especially given that the only futures contracts currently available to
hedge debt obligations are futures on various U.S. Government securities and on
municipal securities indices), (3) market risk that an incorrect prediction by
an Investment Adviser of interest rates may cause a Portfolio to perform less
well than if such positions had not been entered into, and (4) skills different
from those needed to select portfolio securities. Income or gains realized on a
Portfolio's transactions in futures and options on futures will be taxable. See
"Distributions and Taxes."
SECURITIES LENDING. Each Portfolio may also lend its portfolio securities.
Under present regulatory policies, such loans may be made to institutions, such
as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents or U.S. Government securities maintained on
a current basis at an amount at least equal to the market value of the
securities loaned held in a segregated account by the Portfolio's custodian. If
the Investment Adviser decides to make securities loans, the value of the
securities loaned would not exceed 30% of the value of the total assets of the
Portfolio. A Portfolio may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Portfolio.
SHORT-TERM TRADING. Each Portfolio may engage in short-term trading.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold. In addition, a security may be sold and another purchased
at approximately the same time to take advantage of what each Portfolio believes
to be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of various types of
debt obligations
14
<PAGE>
or changes in the investment objectives of investors. Such trading may be
expected to increase a Portfolio's portfolio turnover rate and the expenses
incurred in connection with such trading. Each Portfolio anticipates that its
annual portfolio turnover rate will generally not exceed 100% (excluding
turnover of securities having a maturity of one year or less).
OTHER INFORMATION CONCERNING THE PORTFOLIOS
FLUCTUATIONS IN NET ASSET VALUE AND INCOME. The net asset value of the
shares of an Account will change in response to fluctuations in prevailing
interest rates and changes in the value of the securities held by a
corresponding Portfolio. When interest rates rise, the value of securities held
by a Portfolio can generally be expected to decline. Conversely, when interest
rates decline, the value of securities held by a Portfolio can generally be
expected to rise. Furthermore, the tax-exempt income provided by the municipal
obligations held by a Portfolio will fluctuate over time. In addition, each
Portfolio may invest in zero coupon municipal obligations which may have
speculative characteristics and in inverse floater municipal obligations which
may be more speculative than other municipal obligations. These obligations are
subject to greater fluctuations in value due to changes in interest rates than
other tax-exempt obligations. An investment in shares of an Account does not
constitute a complete investment program.
MARKET CONDITIONS. The Investment Adviser believes that, in general, the
secondary market for municipal obligations is less liquid than that for taxable
debt obligations or for large issues of municipal obligations that trade in a
national market. No established resale market exists for certain of the
municipal obligations in which the Portfolios may invest. These considerations
may have the effect of restricting the availability of such obligations, may
affect the choice of securities sold to meet redemption requests and may have
the effect of limiting a Portfolio's ability to sell or dispose of such
securities. Also, valuation of such obligations may be more difficult. The SEC
has adopted a rule which will require issuers of municipal obligations to
provide financial information on an ongoing basis. This rule may reduce the
liquidity and value of some of the obligations held by a Portfolio to the extent
the issuers of such obligations fail to comply with the rule.
INVESTMENT RESTRICTIONS. Each Account and its corresponding Portfolio have
adopted certain fundamental investment restrictions which are enumerated in
detail in the SAI and which may not be changed unless authorized by a
shareholder vote and an investor vote, respectively, of the affected Account and
its corresponding Portfolio. Except for such enumerated restrictions and as
otherwise indicated in this Prospectus, the investment objective and policies of
each Account and its corresponding Portfolio are not fundamental and accordingly
may be changed by the Directors of the Company and the Trustees of the affected
Portfolio without obtaining the approval of the affected Account's shareholders
or of the investors in the corresponding Portfolio, as the case may be. If any
changes were made in an Account's investment objective, the Account might have
investment objectives different from the objectives which an investor considered
appropriate at the time the investor became a shareholder in the Account. See
"The Portfolios--Special Information on the Account/Portfolio Investment
Structure" below.
15
<PAGE>
THE COMPANY AND ITS ACCOUNTS
Each Account is a mutual fund: an entity that pools shareholders' money and
invests it toward specified goals. In technical terms, each Account is a
separate "series" of the Company, an open-end management investment company
which was organized as a corporation under the laws of Maryland on December 9,
1981.
The Company has authorized 3 billion shares of Common Stock, par value $.10
per share and may create and classify the Common Stock into separate mutual
funds (or investment series or portfolio of shares), without further approval of
the Company's shareholders. In addition to the Accounts, as of the date of this
Prospectus, the Company has established five other mutual funds which are
offered pursuant to a separate prospectus: the Connecticut Mutual Liquid
Account, the Connecticut Mutual Government Securities Account, the Connecticut
Mutual Income Account, the Connecticut Mutual Total Return Account and the
Connecticut Mutual Growth Account (together with the Accounts, the "Connecticut
Mutual Family of Accounts"). Additional series may be added in the future.
Shares of each Account have equal rights as to voting, redemption, dividends and
liquidation within their respective Accounts.
The Company is governed by a Board of Directors which is responsible for
protecting the interests of the shareholders. The directors are experienced
executives who meet at least quarterly to oversee the activities of each
Account, review contractual arrangements with companies that provide services to
the Accounts and review each Account's performance. The majority of the
Directors are not otherwise affiliated with the Company.
The Company does not hold annual meetings of shareholders. The Company may
hold shareholder meetings, however, to elect or remove directors, change the
fundamental policies of an Account or for other purposes. On matters affecting
only one Account, only the shareholders of that Account are entitled to vote. On
matters relating to all of the Accounts but affecting the Accounts differently,
separate votes by each Account are required. Shareholders holding more than 50%
of the Company's shares can elect all of the Company's directors if they so
choose. Each share is entitled to one vote within each Account.
The Portfolios do not hold annual meetings of investors but may hold investor
meetings to elect or remove Trustees, change fundamental policies, approve
investment advisory agreements or for other purposes. Whenever an Account, as an
investor in its corresponding Portfolio, is requested to vote on matters
pertaining to the Portfolio, that Account will hold a meeting of Account
shareholders and will vote its interest in the corresponding Portfolio for or
against such matters proportionately to the instructions to vote for or against
such matters received from Account shareholders. An Account shall vote shares
for which it receives no voting instructions in the same proportion as the
shares for which it receives voting instructions. For further information
concerning the directors and officers of the Company and the Trustees and
officers of each Portfolio, see the SAI.
16
<PAGE>
THE PORTFOLIOS
The Portfolios are organized as trusts under the laws of the State of New
York and are treated as partnerships for federal income tax purposes. A Board of
Trustees is responsible for supervising each Portfolio's investment program. The
Accounts and other entities eligible to invest in the Portfolios (E.G., other
U.S. and foreign investment companies and common and commingled trust funds)
will each be liable for all obligations of the respective Portfolio. However,
the risk of an Account incurring financial loss because of such liability is
limited to circumstances in which both inadequate insurance exists and the
respective Portfolio itself is unable to meet its obligations.
The Directors of the Company have considered the advantages and disadvantages
of investing the assets of an Account in its corresponding Portfolio, as well as
the advantages and disadvantages of the two-tier format. The Directors believe
that because the structure offers greater opportunities for substantial growth
in portfolio assets, it affords the potential for economies of scale to the
Accounts.
SPECIAL INFORMATION ON THE ACCOUNT/PORTFOLIO INVESTMENT STRUCTURE
Each Account, unlike other mutual funds which directly acquire and manage
their own portfolios of securities, seeks to achieve its investment objective by
investing its assets in an interest in a corresponding Portfolio, which is a
separate investment company with a substantially identical investment objective.
See, "Investment Objectives and Policies" and "The Portfolios' Investments." A
Portfolio may sell its interests to other mutual funds or institutional
investors unaffiliated with Eaton Vance or G. R. Phelps. All other investors
will invest in the Portfolio on the same terms and conditions as the Account and
will pay a proportionate share of the Portfolio's expenses. However, other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the corresponding Account due to variations in
sales commissions and other operating expenses. Different investors in a
Portfolio may receive different returns on their investments because of
different expenses. Call Eaton Vance Distributors at 1-800-225-6265 for
information about other investors in a Portfolio.
The investment objective of an Account may be changed by the Directors of the
Company and the investment objective of a Portfolio may be changed by the
Trustees of the Portfolio without obtaining the approval of the shareholders of
the Account or the investors in the Portfolio, respectively. An Account's
shareholders will be given 30 days' advance written notice of any change in the
Account's or its corresponding Portfolio's investment objective. If the Trustees
or the investors of a Portfolio were to vote to change the Portfolio's
investment objective and/or policies and the Directors or the shareholders of
the corresponding Account did not approve an identical change to that Account's
investment objective and/or policies, the Account might then have an investment
in a corresponding Portfolio whose investment objective and/or policies were not
substantially the same as those of the Account. At that time, the Board of
Directors of the Company would decide what action to take on behalf of the
Account, including withdrawing the Account's assets from the corresponding
Portfolio.
An Account may withdraw (completely redeem) all its assets from the
corresponding Portfolio at any time if the Board of Directors of the Company
determines that it is in the best interests of the Account to do so. At that
time, the Board would decide whether to invest all the assets of the Account in
another pooled investment entity or retain an investment adviser to manage the
Account's assets in
17
<PAGE>
accordance with its investment objective. An Account's investment performance
may be affected by a withdrawal of all its assets from the corresponding
Portfolio. An Account's performance and expenses may also be affected by the
withdrawal from its corresponding Portfolio of the assets of one or more of the
other entities investing in that Portfolio.
Accounts which invest all their assets in interests in a separate investment
company are a relatively new development in the mutual fund industry and,
therefore, the Accounts may be subject to more regulation than historically
structured mutual funds.
THE PORTFOLIOS' MANAGER
Each Portfolio has engaged Boston Management and Research ("BMR"), 24 Federal
Street, Boston, MA, a wholly owned subsidiary of Eaton Vance, as its investment
adviser. BMR, acting under the general supervision of the Board of Trustees of
the Portfolio, manages each Portfolio's investments and affairs. Eaton Vance,
its affiliates and its predecessor companies have been managing assets of
individuals and institutions since 1924 and managing investment companies since
1931. BMR or Eaton Vance acts as investment adviser to investment companies and
various individual and institutional clients with assets under management of
approximately $15 billion. Eaton Vance is a wholly owned subsidiary of Eaton
Vance Corp., a publicly held holding company. Eaton Vance Corp., through its
subsidiaries and affiliates, engages in investment management and marketing
activities, fiduciary and banking services, oil and gas operations, real estate
investment, consulting and management, and development of precious metals
properties.
The Company has not retained the services of an investment adviser on behalf
of any of the Accounts because the Company seeks to achieve the investment
objective of each Account by investing the Account's assets in its corresponding
Portfolio.
The persons primarily responsible for the day-to-day management of each
Portfolio are listed below. Each manager has managed the Portfolio indicated
since it commenced operations, except in the case of Ms. Anderes who began
managing the New York Portfolio in January, 1994.
<TABLE>
<CAPTION>
ACCOUNT MANAGER BUSINESS EXPERIENCE (LAST FIVE YEARS)
- -------------------------- ------------------------ -----------------------------------------------------
<S> <C> <C>
National Portfolio Thomas M. Metzold Vice President (since 1991) and Analyst (high yield
municipal bonds 1987-1991), Eaton Vance; and Vice
President, BMR (since 1992)
California Portfolio and Robert B. MacIntosh Vice President, Eaton Vance (since 1991) and BMR
Massachusetts Portfolio (since 1992); and Portfolio Manager, Fidelity
Portfolio Management and Research Company (1986-1991)
New York Portfolio Nicole Anderes Vice President, Eaton Vance and BMR (since January,
1994); Vice President and Portfolio Manager, Lazard
Freres Asset Management (1992-1994); and Vice
President and Manager of Municipal Research,
Roosevelt & Cross (1978-1992)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT MANAGER BUSINESS EXPERIENCE (LAST FIVE YEARS)
- -------------------------- ------------------------ -----------------------------------------------------
<S> <C> <C>
Ohio Portfolio Thomas J. Fetter Vice President, Eaton Vance (since 1987) and BMR
(since 1992); Chief Investment Officer, Lumberman's
Mutual Insurance Company (until 1987)
</TABLE>
G.R. Phelps is the national distributor of the Accounts. National Financial
Data Services (NFDS) performs transfer agent servicing and dividend disbursing
functions for each Account.
BREAKDOWN OF EXPENSES
Like all mutual funds, each Account pays fees and expenses related to its
daily operations. These fees and expenses are neither billed directly to
shareholders nor deducted from individual shareholder accounts but are paid out
of an Account's assets and are reflected in its share price or dividends.
Each Account bears its proportionate share of the advisory fee and other
expenses paid by its corresponding Portfolio. The Accounts also pay other
expenses, which are explained below.
MANAGEMENT FEES
Each Portfolio pays an advisory fee to BMR pursuant to the Portfolio's
investment advisory agreement with BMR equal to the aggregate of:
(a) a daily asset based fee computed by applying the annual asset rate
applicable to that portion of the Portfolio's total daily net assets in
each Category as indicated below, plus
(b) a daily income based fee computed by applying the daily income rate
applicable to that portion of the Portfolio's total daily gross income
(which portion shall bear the same relationship to the total daily gross
income on such day as that portion of the total daily net assets in the
same Category bears to the total daily net assets on such day) in each
Category as indicated in the charts below.
THE NATIONAL PORTFOLIO AND CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
- --------------- ------------------------------------------------------------- ---------- ------------
<C> <S> <C> <C>
1 up to $500 million........................................... 0.300% 3.00%
2 $500 million but less than $1 billion........................ 0.275% 2.75%
3 $1 billion but less than $1.5 billion........................ 0.250% 2.50%
4 $1.5 billion but less than $2 billion........................ 0.225% 2.25%
5 $2 billion but less than $3 billion.......................... 0.200% 2.00%
6 $3 billion and over.......................................... 0.175% 1.75%
</TABLE>
At December 31, 1994 and September 30, 1994, the National Portfolio had net
assets of $2,111,846,128 (unaudited) and $2,210,936,286, respectively. For the
period from October 1, 1994 to December 31, 1994 and for the fiscal year ended
September 30, 1994, the National Portfolio paid advisory fees of 0.45%
(annualized) and 0.44%, respectively, of the Portfolio's average daily net
assets.
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<PAGE>
At December 31, 1994 and September 30, 1994, the California Portfolio had
net assets of $405,773,195 (unaudited) and $445,131,401, respectively. For the
period from October 1, 1994 to December 31, 1994 and for the fiscal year ended
September 30, 1994, the California Portfolio paid advisory fees of 0.50%
(annualized) and 0.50% (annualized), respectively, of the Portfolio's average
daily net assets.
THE MASSACHUSETTS PORTFOLIO, NEW YORK PORTFOLIO AND OHIO PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
- --------------- ------------------------------------------------------------- ---------- ------------
<C> <S> <C> <C>
1 up to $20 million............................................ 0.100% 1.00%
2 $20 million but less than $40 million........................ 0.200% 2.00%
3 $40 million but less than $500 million....................... 0.300% 3.00%
4 $500 million but less than $1 billion........................ 0.275% 2.75%
5 $1 billion but less than $1.5 billion........................ 0.250% 2.50%
6 $1.5 billion but less than $2 billion........................ 0.225% 2.25%
7 $2 billion but less than $3 billion.......................... 0.200% 2.00%
8 $3 billion and over.......................................... 0.175% 1.75%
</TABLE>
At December 31, 1994 and September 30, 1994, the Massachusetts Portfolio had
net assets of $284,133,024 (unaudited) and $308,539,780, respectively. For the
period from October 1, 1994 to December 31, 1994 and for the fiscal year ended
September 30, 1994, the Massachusetts Portfolio paid advisory fees of 0.46%
(annualized) and 0.46%, respectively, of the Portfolio's average daily net
assets. At December 31, 1994 and September 30, 1994, the New York Portfolio had
net assets of $617,077,847 (unaudited) and $655,646,776, respectively. For the
period from October 1, 1994 to December 31, 1994 and for the fiscal year ended
September 30, 1994, the New York Portfolio paid advisory fees of 0.48%
(annualized) and 0.46%, respectively, of the Portfolio's average daily net
assets. At December 31, 1994 and September 30, 1994, the Ohio Portfolio had net
assets of $303,971,392 (unaudited) and $324,411,553, respectively. For the
period from October 1, 1994 to December 31, 1994 and for the fiscal year ended
September 30, 1994, the Ohio Portfolio paid advisory fees of 0.46% (annualized)
and 0.45%, respectively, of the Portfolio's average daily net assets.
The financial statements of each Portfolio are included in the Accounts' SAI.
The Company, on behalf of each Account, has retained the services of G.R.
Phelps under an agreement, as administrator of each Account. G.R. Phelps
provides each Account with general office facilities and supervises the overall
administration of each Account. G.R. Phelps also compiles information and
materials relating to each Account, the corresponding Portfolios, BMR and Eaton
Vance and provides such information to the Company's Board of Directors. For
these services, G.R. Phelps currently receives no compensation.
OTHER EXPENSES
Each Account and its corresponding Portfolio are also responsible for
expenses not expressly stated to be payable by BMR under the Portfolio's
investment advisory agreement. Each Account pays other expenses, such as legal,
audit and custodian fees, proxy solicitation costs and the compensation of
directors who are not affiliated with Connecticut Mutual. Investors Bank & Trust
Company (IBT)
20
<PAGE>
provides custodian services to each Portfolio and its corresponding Account.
Eaton Vance owns 77.3% of the outstanding stock of IBT. Each Account contracts
with NFDS to perform many shareholder transaction and accounting functions.
DISTRIBUTION PLAN
Each Account has adopted a distribution plan designed to meet the
requirements of Rule 12b-1 under the Investment Company Act (each, a
Distribution Plan) and the sales charge rules of the National Association of
Securities Dealers, Inc. ("NASD"). Each Account, pursuant to its Distribution
Plan, may make payments for personal services and/or the maintenance of
shareholder accounts to account executives of G.R. Phelps and other
broker-dealer firms with whom G.R. Phelps has agreements in amounts not
exceeding 0.25% of the Account's average daily net assets for any fiscal year.
Any unreimbursed expenses are not carried beyond one year from the date of
incurrence. Each Distribution Plan was approved, on behalf of the respective
Account, by a majority of the Company's Directors who are not interested persons
of the Company and who have no financial interest in the respective Plan. No
Distribution Plan may be amended to increase materially the annual percentage
limitation of average net assets that may be spent for the services described in
a Distribution Plan without the approval of the shareholders of the affected
Account. G.R. Phelps has voluntarily and temporarily agreed not to impose any
reimbursement to which it may be entitled pursuant to any Distribution Plan.
Distribution of each Account's shares by G.R. Phelps will also be encouraged
by the payment by BMR to G.R. Phelps of amounts equivalent to .15% of each
Account's annual average daily net assets. Such payments will be made from BMR's
own resources, not Account assets, and will be made in consideration of G.R.
Phelps' distribution efforts.
BROKERAGE
Municipal obligations are normally traded on a net basis (without commission)
through broker-dealers and banks acting for their own account. Such firms
attempt to profit from such transactions by buying at the bid price and selling
at the higher asked price of the market, and the difference is customarily
referred to as the spread. In selecting firms which will execute portfolio
transactions BMR judges their professional ability and quality of service and
uses its best efforts to obtain execution at prices which are advantageous to
the Portfolio and at reasonably competitive spreads. Subject to the foregoing,
BMR may consider sales of shares of the Account or of other investment companies
sponsored by BMR or Eaton Vance as a factor in the selection of firms to execute
portfolio transactions.
DIVIDENDS, CAPITAL GAINS AND TAXES
DISTRIBUTIONS
Substantially all of the net investment income allocated to an Account by the
corresponding Portfolio, less the Account's direct and allocated expenses, will
be declared daily as a distribution to Account shareholders of record at the
time of declaration. Such distribution, whether taken in cash or reinvested in
additional shares, will ordinarily be paid on the last business day of each
month or the next business day thereafter. Each Account's net realized capital
gains, if any, generally consist of net
21
<PAGE>
realized capital gains allocated to the Account by the corresponding Portfolio
for tax purposes; the Account's net realized capital gains, if any, after taking
into account any available capital loss carryovers, will be distributed at least
once a year, usually in December.
FEDERAL INCOME TAXES
In order to qualify as a regulated investment company under the Internal
Revenue Code (the "Code"), as each Account intends to do, each Account must
satisfy certain requirements relating to the sources of its income, the
distribution of its income, and the diversification of its assets. In satisfying
these requirements, each Account will treat itself as owning its proportionate
share of each of the corresponding Portfolio's assets and as entitled to the
income of the Portfolio properly attributable to such share.
As a regulated investment company under the Code, each Account will not pay
federal income or excise taxes to the extent that it distributes to its
shareholders its net investment income and net realized capital gains in
accordance with the timing requirements imposed by the Code. As a partnership
under the Code, each Portfolio also does not expect to pay federal income or
excise taxes.
The Accounts anticipate that each monthly distribution of net investment
income will constitute tax-exempt income to the shareholders for federal income
tax purposes, except for the proportionate part of the distribution that may be
considered taxable income if an Account has taxable income during the tax year.
Shareholders of an Account will receive timely federal income tax information as
to the tax-exempt or taxable status of all distributions made by that Account
for each calendar year.
Distributions of interest on certain municipal obligations, although exempt
from regular federal income tax, constitute a tax preference item under the
federal alternative minimum tax provisions applicable to individuals and
corporations. Distributions of taxable income (including a portion of any
original issue discount with respect to certain stripped municipal obligations
and stripped coupons and accretion of certain market discount) and net
short-term capital gains will be taxable to shareholders as ordinary income.
Distributions of long-term capital gains are taxable to shareholders as
long-term capital gains for federal income tax purposes, regardless of the
length of time Account shares have been owned by the shareholder. Distributions
are taxed in the manner described above whether paid in cash or reinvested in
additional shares of an Account. Tax-exempt distributions received from an
Account are includable in the tax base for determining the taxability of social
security and railroad retirement benefits.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of an Account is not deductible to the extent the Account's
distributions (not taking into account long-term capital gains) consist of
tax-exempt interest. Further, entities or persons who are "substantial users"
(or persons related to "substantial users") of facilities financed by industrial
development or private activity bonds should consult their tax advisers before
purchasing shares of an Account. "Substantial user" is defined in applicable
Treasury regulations to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of industrial
development bonds.
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<PAGE>
Redemptions and exchanges of shares are taxable transactions. Sales charges
paid upon a purchase of shares of an Account cannot be taken into account for
purposes of determining gain or loss on a redemption or exchange of the shares
before the 91st day after their purchase to the extent shares of such Account or
of another fund are subsequently acquired pursuant to the Account's reinvestment
or exchange privilege. In addition, losses realized on a redemption of an
Account's shares may be disallowed under certain "wash sale" rules if within a
period beginning 30 days before and ending 30 days after the date of redemption
other shares of the Account are acquired. Any disregarded or disallowed amounts
will result in an adjustment to the shareholder's tax basis in some or all of
any other shares acquired.
Shareholders will receive annually tax information, including Forms 1099 with
respect to taxable distributions, redemption or exchange proceeds, and federal
income tax (if any) withheld by NFDS, to assist in the preparation of their
federal and state income tax returns for the prior calendar year.
STATE INCOME TAXATION
Under current law, provided that each Account qualifies as a regulated
investment company for federal income tax purposes and the corresponding
Portfolio is treated as a partnership for Massachusetts and federal income tax
purposes, neither the Account nor the Portfolio is liable for any income,
corporate excise or franchise tax in the Commonwealth of Massachusetts.
CALIFORNIA
In the opinion of Brown & Wood, under California law, for individuals,
estates or trusts subject to the California personal income tax dividends paid
by the California Account and designated by the California Account as tax-exempt
are exempt from California personal income tax for individuals who reside in
California to the extent such dividends are derived from interest payments on
tax-exempt obligations issued by or on behalf of the State of California and its
political subdivisions and agencies or the government of Puerto Rico, the U.S.
Virgin Islands and Guam, provided that at least 50% of the value of the total
assets of the California Account (including its share of the assets of the
California Portfolio) at the close of each quarter of its taxable year are
invested in obligations which if held by individuals the interest on which would
be exempt under either federal or California law from income taxation by the
State of California. Other distributions from the California Account, including
distributions derived from short-term and long-term capital gains are generally
not exempt from the California personal income tax.
MASSACHUSETTS
The Massachusetts Portfolio has received a letter ruling (the "Ruling") from
the Department of Revenue of The Commonwealth of Massachusetts to the effect
that it will be classified as a partnership for Massachusetts tax purposes. The
Ruling provides that, consequently, interest income received by the
Massachusetts Portfolio on (1) debt obligations issued by The Commonwealth of
Massachusetts or its political subdivisions, including agencies or
instrumentalities thereof ("Massachusetts Obligations"), (2) the Governments of
Puerto Rico, Guam, or the United States Virgin Islands ("Possessions
Obligations"), or (3) the United States ("United States Obligations") will be
treated as if realized directly by investors in the Massachusetts Portfolio. The
Ruling concludes that, provided that an
23
<PAGE>
investor in the Massachusetts Portfolio qualifies as a regulated investment
company ("RIC") under the Code and satisfies certain notice requirements of
Massachusetts law, (1) dividends paid by such a RIC that are treated as
tax-exempt interest under the Code and that are directly attributable to
interest on Massachusetts Obligations (including the RIC's allocable share of
interest earned by the Massachusetts Portfolio on such obligations) and (2)
dividends paid by such a RIC that are directly attributable to interest on
Possessions Obligations or United States Obligations (including the RIC's
allocable share of interest earned by the Massachusetts Portfolio on such
obligations) will, in each case, be excluded from Massachusetts gross income.
Because the Massachusetts Fund intends to continue to invest in the
Massachusetts Portfolio, qualify for treatment as a RIC under the Code, and
satisfy the applicable notice requirements, the Massachusetts Fund's
distributions to its shareholders of its allocable share of the interest
received by the Massachusetts Portfolio that is attributable to Massachusetts
Obligations, Possessions Obligations or United States Obligations should
consequently be excluded from Massachusetts gross income for individuals,
estates and trusts that are subject to Massachusetts taxation. The Massachusetts
Account has been advised by its counsel, Hale and Dorr, that distributions
properly designated as capital gain dividends under the Code and attributable to
gains realized by the Massachusetts Portfolio and allocated to the Massachusetts
Account on the sale of certain Massachusetts tax-exempt obligations issued
pursuant to statutes that specifically exempt such gains from Massachusetts
taxation will also be exempt from Massachusetts personal income tax. Other
distributions from the Massachusetts Account included in a shareholder's federal
gross income, including distributions derived from net long-term capital gains
not described in the preceding sentence and net short-term capital gains, are
generally not exempt from Massachusetts personal income tax.
Beginning in 1996, long-term capital gains will generally be taxed in
Massachusetts on a sliding scale at rates ranging from 5% to 0%, with the
applicable tax rate declining as the tax holding period of the assets (beginning
on the later of January 1, 1995 or the date of actual acquisition) increases
from more than one year to more than six years. It is not clear what
Massachusetts tax rate will be applicable to capital gain dividends for taxable
years beginning after 1995.
Distributions from the Massachusetts Account will be included in net income,
and in the case of intangible property corporations, shares of the Massachusetts
Account will be included in net worth, for purposes of determining the
Massachusetts excise tax on corporations subject to Massachusetts taxation.
NEW YORK
In the opinion of Brown & Wood, under New York law, for individuals subject
to the New York State or New York City personal income tax, dividends paid by
the New York Account are exempt from New York State and New York City income tax
for individuals who reside in New York to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on tax-exempt obligations issued by or on behalf of New York State and
its political subdivisions and agencies, and the governments of Puerto Rico, the
U.S. Virgin Islands and Guam. Other distributions from the Account, including
distributions derived from taxable ordinary income and net short-term and
long-term capital gains, are generally not exempt from New York State or City
personal income tax.
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<PAGE>
OHIO
In the opinion of Squire, Sanders & Dempsey, special Ohio counsel to the Ohio
Account, under Ohio law, distributions made by the Ohio Account will be exempt
from the Ohio personal income tax to the extent such distributions are properly
attributable to interest payments on (1) obligations issued by or on behalf of
the State of Ohio and its political subdivisions or agencies or
instrumentalities of the foregoing ("Ohio Obligations"), or (2) the governments
of Puerto Rico, the U.S. Virgin Islands or Guam or their authorities or
municipalities ("Territorial Obligations"). Distributions made by the Ohio
Account also will be excluded from the net income base of the Ohio corporation
franchise tax to the extent such distributions are excluded from gross income
for federal income tax purposes or are properly attributable to interest
payments on Ohio Obligations or Territorial Obligations. Distributions of
profits, including capital gains, will be exempt from the Ohio personal income
tax and excluded from the net income base of the Ohio corporation franchise tax
to the extent such distributions are properly attributable to the disposition of
Ohio Obligations. However, the Ohio Account's shares will be included in the net
worth base of the Ohio corporation franchise tax. These conclusions regarding
Ohio taxation are based on the assumption that the Ohio Account will qualify,
elect to be treated, and continue to qualify as a regulated investment company
under the Code and that at all times at least 50% of the value of the total
assets of the Ohio Account will consist of Ohio Obligations or similar
obligations of other states or their subdivisions (but excluding Territorial
Obligations) determined by treating the Ohio Account as owning its proportionate
share of the assets owned by the Ohio Portfolio.
NATIONAL
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of such state
or local taxing authority. Shareholders of the National Account may be exempt
from state and local taxes on the National Account's distributions of tax-exempt
interest income derived from obligations of any state (and/or municipalities or
other political subdivisions, agencies or instrumentalities of any state) in
which they are subject to tax (if the laws of such state provide for such an
exemption and if the requirements, if any, for such an exemption are satisfied),
but such shareholders may be taxable generally on income derived from
obligations issued by other states or other political subdivisions, agencies or
instrumentalities. The National Account will report annually to shareholders,
with respect to net tax-exempt income earned, the percentages representing the
proportionate ratio of such income earned in each state.
PERFORMANCE
The Company may from time to time advertise yields and total returns for the
Accounts. Yields and total returns are based on past results and are not an
indication of future performance. Yield refers to the income generated by an
investment in an Account over a given period of time, expressed as an annual
percentage rate. Yields are calculated according to a standard formula
prescribed by the SEC. Because this differs from other accounting methods, the
quoted yield may not equal the income actually paid to shareholders. Yield is
computed by dividing the net investment income per share of an Account during a
base period of 30 days by the maximum offering price per share of the Account on
the last day of the base period. A taxable-equivalent yield is calculated using
the tax-exempt yield figure
25
<PAGE>
and dividing by 1 minus the applicable tax rate, which may combine federal,
state, and (if applicable) local tax rates for Accounts that concentrate in a
particular state's obligations. For a table of sample taxable equivalent yields,
please see Appendix B to the SAI.
Total return is the change in value of an investment in an Account over a
given period, assuming reinvestment of any dividends and capital gains. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same cumulative total return if performance had been
constant over the entire period. Average annual total returns smooth out
variations in performance; they are not the same as actual year-by-year results.
The average annual total return for each Account is computed in accordance with
a standardized formula prescribed by the SEC. The calculation assumes the
reinvestment of all dividends and distributions at net asset value. The periods
illustrated would normally include one, five and ten years (or since the
commencement of the public offering of the shares of an Account, if shorter)
through the most recent calendar quarter.
Yield and total return quotations for the Accounts will reflect the maximum
sales charges imposed on purchases of shares of the Account.
One or more additional measures and assumptions, including but not limited to
historical and cumulative total returns; distribution returns; results of actual
or hypothetical investments; changes in dividends, distributions or share
values; or any graphic illustration of such data may also be used. These data
may cover any period of existence and may or may not include the impact of sales
charges, taxes or other factors. Other investments or savings vehicles and/or
unmanaged market indexes, indicators or economic activity or averages of mutual
funds results, including but not limited to Standard & Poor's 500 Stock Index
and the Dow Jones Industrial Average, may be cited or compared with the
investment results of the Company. Rankings or listings by magazines, newspapers
or independent statistical or rating services, such as Lipper Analytical
Services, Inc., may also be referenced.
An Account's investment results will vary from time to time depending on
market conditions, the composition of the Account's portfolio and operating
expenses. For further information about the calculation methods and uses of an
Account's investment results, see the SAI.
26
<PAGE>
YOUR ACCOUNT
HOW TO BUY SHARES
Shares of the Accounts are not a suitable investment for retirement plans. If
you want information about investments for retirement plans, please call your
registered representative or 1-800-234-5606.
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
----------- ---------------
<S> <C> <C>
- - Automatic Investment Plans..................................... $ 0 $50
- - All Other Purchases............................................ $1,000* $50
</TABLE>
*Initial investments may be split among Accounts in amounts of $500 or more.
Minimums may be waived for certain automated payroll deduction plans.
You may purchase shares of an Account through registered representatives of
G.R. Phelps, the Company's underwriter, and any securities broker-dealer having
a sales agreement with G.R. Phelps. Certain minimum investment requirements may
apply as set forth above.
Shares are credited to your account and certificates are not issued unless
specifically requested. You may request share certificates by writing to the
transfer agent, NFDS, P.O. Box 419694 Kansas City, Missouri, 64179-0948. There
is no cost for issuing share certificates. Transfers, exchanges and redemptions
of shares will be more complicated if certificates have been issued. If your
share certificate is lost or misplaced you will be required to pay a fee and
furnish a bond satisfactory to the Company's transfer agent (usually in the
amount of 2% of the face value of the lost certificate) before the shares can be
transferred or redeemed, or a replacement certificate issued.
The sale of shares of any Account will be suspended during any period when
the determination of its net asset value is suspended pursuant to rules or
orders of the SEC.
IF YOU ARE NEW TO CONNECTICUT MUTUAL INVESTMENT ACCOUNTS, INC., complete and
sign an account application and mail it along with your check. All orders to
purchase shares are subject to acceptance or rejection by the Company or G.R.
Phelps. You may also open your account by wire as described on the next page. If
there is no application accompanying this prospectus, call 1-800-234-5606.
If you buy shares by check, and then redeem those shares by a method other
than by exchange to another CMIA fund, the payment of the proceeds of the
redemption may be delayed for up to fifteen calendar days to ensure that your
check has cleared. Checks must be drawn on U.S. banks. Checks are accepted
subject to collection at full value. If your check does not clear, your purchase
will be cancelled. There will be a $20.00 fee for any check returned for any
reason. You may not use a third party check to purchase shares for a new account
or an existing account.
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<PAGE>
To avoid the collection period for investments in any Account you can wire
federal funds from your bank, which may charge you a fee. "Wiring federal funds"
means that your bank sends money to the Company's bank through the Federal
Reserve System. To wire funds see "By Wire" in the chart below.
<TABLE>
<CAPTION>
BUYING SHARES TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ------------------ ------------------------------------------- --------------------------------------------
<S> <C> <C>
BY MAIL - Complete and sign the application. Make - Make your check payable to "CMIA."
your check payable to "CMIA." Mail to the Indicate your account number on your
address indicated on the application. check and mail to NFDS at P.O. Box
419694, Kansas City, MO 64179-0948.
- Exchange by mail: call 1-800-322-CMIA
(select option "2") for instructions
- -------------------------------------------------------------------------------------------------------------
BY WIRE - Call 1-800-322-CMIA by 12:00 noon Eastern - Call 1-800-322-CMIA by 12:00 noon Eastern
Time on the day of investment to set up Time on the day of investment to arrange
your account and arrange a wire a wire transaction.
transaction.
- Wire by 4:00 p.m. Eastern time to: - Wire by 4:00 p.m. Eastern time to:
State Street Bank and Trust State Street Bank and Trust
Company Company
Bank Routing #011000028 Bank Routing #011000028
NFDS Account #99042129 NFDS Account #99042129
Specify Account name and include your name Specify Account name and include your name
and new account number. and account number.
- -------------------------------------------------------------------------------------------------------------
BY PHONE - Exchange from another Account with the - Exchange from another Account with the
1-800-322-CMIA same registration, including name, same registration, including name,
(select option address and taxpayer ID number. address and taxpayer ID number.
"2")
- --------------------------------------------------------------------------------------------------------------
AUTOMATICALLY - You may not open an account - Establish an Automatic Investment Plan or
automatically, but you may complete and Dollar Cost Averaging (DCA) Investment
sign an application; make your check Program. Sign up for these services when
payable to CMIA; and mail to the address opening your account, or call
indicated on the application. 1-800-322-CMIA for information about
adding these services to your account.
</TABLE>
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<PAGE>
SHARE PRICE
An Account's net asset value (NAV) is calculated every business day, normally
at 4:00 p.m. Eastern time. See "Shareholder and Account Policies -- Transactions
Details," for a discussion of how the Account computes its NAV. Shares of each
Account are sold at the share price next calculated after your purchase order is
received and accepted, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGES AS % OF
-------------------------
DEALER
NET NET ALLOWANCE
AMOUNT OFFERING AS % OF
AMOUNT OF PURCHASE INVESTED PRICE OFFERING PRICE
- ----------------------------------------------------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Less than $100,000......................................... 4.17% 4.00% 3.50%
$100,000 but less than $250,000............................ 3.36% 3.25% 3.00%
$250,000 but less than $500,000............................ 2.83% 2.75% 2.50%
$500,000 or more........................................... 0% 0% 0%
</TABLE>
No sales charge is imposed on purchases of shares of an Account paid from
automatic reinvestment of dividends and capital gain distributions made by that
Account. The sales charge may be reduced and/or eliminated in certain cases as
further described under REDUCING OR ELIMINATING YOUR SALES CHARGE.
The entire sales charge for G.R. Phelps retail sales is payable to G.R.
Phelps and is used for sales and other distribution expenses. Upon notice to
broker-dealers with whom it has sales agreements, G.R. Phelps may pay an amount
up to the full applicable sales charge. G.R. Phelps may from time to time, at
its own expense, provide promotional incentives to certain broker-dealers whose
representatives have sold or are expected to sell significant amounts of shares
of one or more of the Accounts. Broker-dealers to whom substantially the entire
sales charge is paid may be deemed to be underwriters as that term is defined
under the Securities Act of 1933.
CONTINGENT DEFERRED SALES CHARGE
Purchases of $500,000 or more are sold without an initial sales charge, but a
sales charge of 1% may be imposed if you sell (or redeem) your shares within one
year of purchase. This charge is called a contingent deferred sales charge or a
CDSC. The 1% charge will be assessed on an amount equal to the current market
value or the original purchase price of the shares sold, whichever is smaller.
In determining whether a CDSC will be charged, it will be assumed that those
shares in your account which are not subject to a CDSC will be sold first. G.R.
Phelps may, in its discretion, pay a commission which may be up to the full
amount of the sales charge to its representatives or other broker-dealers who
initiate and are responsible for such purchases as follows: 1% on the first
$2,000,000 invested; .80% on the next $1,000,000; .20% on the next $2,000,000;
and .08% on the excess over $5,000,000. G.R. Phelps may pay a commission to
other broker-dealers who initiate and are responsible for such purchases as
follow: .9% on the first $2,000,000 invested; .75% on the next $1,000,000; .15%
on the next $2,000,000; and .075% on the excess over $5,000,000. Commissions
will be reclaimed by G.R. Phelps if the shares are redeemed within the first 12
months.
The CDSC is waived in the case of redemptions of shares made: (1) by the
estate of the deceased shareholder; (2) upon the disability of the shareholder,
as defined in Section 72(m)(7) of the Code;
29
<PAGE>
(3) in whole or in part, in connection with shares sold to any state, county, or
city, or any instrumentality, department, authority, or agency thereof, that is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
investment management company; (4) in connection with the redemption of shares
of the Company due to a combination with another investment company by virtue of
a merger, acquisition or similar reorganization transaction; (5) in connection
with the Company's right to involuntarily redeem or liquidate an Account; (6) in
connection with automatic redemptions pursuant to a SYSTEMATIC WITHDRAWAL PLAN
but limited to no more than 12% of the original value annually; and (7) as
involuntary redemptions of shares by operation of law, or under procedures set
forth in the Company's Articles of Incorporation, or as adopted by the Board of
Directors of the Company.
REDUCING OR ELIMINATING YOUR SALES CHARGE
REDUCING YOUR SALES CHARGE. You may qualify for a reduced sales charge on
your investments through COMBINED PURCHASES, STATEMENT OF INTENTION AND RIGHTS
OF ACCUMULATION.
COMBINED PURCHASES
You may aggregate purchases of shares of the Accounts and shares of other
accounts in the Connecticut Mutual Family of Accounts with the purchases of the
other persons listed below to achieve discounts in the applicable sales charges.
The sales charge applicable to a current purchase of shares of each Account by a
person listed below is determined by adding the value of shares to be purchased
to the aggregate value (at current offering price) of shares of any of the other
accounts in the Connecticut Mutual Family of Accounts previously purchased and
then owned, provided that G.R. Phelps is notified by you or your broker-dealer
each time a purchase is made which would qualify. For example, if you are
investing $100,000 in the Massachusetts Account and your spouse owns shares of
other accounts in the Connecticut Mutual Family of Accounts with a value of
$75,000, you would pay a sales charge of 3.25% of the offering price of the new
investment. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their own
account(s), which may include tax qualified plans, such as an IRA or single
participant Keogh-type plan, or by a company solely controlled by such
individuals as defined in the Investment Company Act. Reduced sales charges also
apply to purchases by a trustee or other fiduciary if the investment is for a
single trust, estate or single fiduciary account, including pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under the Code. Reduced sales charges apply to combined purchases by
or for qualified employee benefit plans of a single corporation, or of
corporations affiliated with each other in accordance with the Investment
Company Act.
STATEMENT OF INTENTION (SOI)
You may combine the current value of all shares held in one or more accounts
with the investment amounts intended over the next 13-month period to qualify
for a reduced sales charge. The SOI may be backdated 90 days. See the SAI for
the terms of the SOI. You must identify on the Application all accounts whose
values are to be combined. If the intended investment is not made within the
13-month period, you must remit the additional sales charges, or sufficient
shares will be redeemed from your account to cover the sales charge.
30
<PAGE>
RIGHTS OF ACCUMULATION
The sales charge for new purchases of shares of an Account will be determined
by aggregating the net asset value of all the CMIA accounts owned by the
shareholder at the time of the new purchase. The rules listed under COMBINED
PURCHASES may apply. You must identify on the Application all accounts to be
linked for RIGHTS OF ACCUMULATION.
ELIMINATING YOUR SALES CHARGE. THERE ARE VARIOUS METHODS BY WHICH YOU MAY
ELIMINATE SALES CHARGES ON YOUR INVESTMENTS.
Shares of an Account may be purchased without a sales charge by (1) any
purchaser, provided the total initial amount invested in any Account or Accounts
totals $500,000 or more, including investments made pursuant to the COMBINED
PURCHASES, STATEMENT OF INTENTION AND RIGHTS OF ACCUMULATION features described
in this prospectus; (2) Directors of the Company and members of their immediate
family; (3) NASD registered representatives whose employer consents to such
purchases, and by the spouses and immediate family members of such
representatives, (4) one or more members of a group of at least 1,000 persons
(and persons who are retirees from such group) engaged in a common business,
profession, civic or charitable endeavor or other activity, and the spouses and
minor dependent children of such persons, pursuant to a marketing program
between G.R. Phelps and such group; and (5) an institution acting as a fiduciary
on behalf of an individual or individuals, where such institution is directly
compensated by the individual(s) for recommending the purchase of the shares of
the Company, provided the institution has an agreement with G.R. Phelps.
Purchases made pursuant to (1) above may be subject to a CDSC.
REINSTATEMENT PRIVILEGE
A shareholder who has made a partial or complete redemption from an Account
may reinvest all or part of the redemption proceeds in the same Account without
imposition of a sales charge with respect to the amount invested, provided such
reinvestment is effected within 30 days after the date of the redemption. NFDS
must receive from the shareholder both a written request for reinvestment and a
check. The reinvestment will be made at the next calculated net asset value
after receipt. Redemptions are taxable transactions, and special tax rules may
apply if a reinvestment occurs. Each shareholder should consult his/her own tax
adviser as to the tax consequences of any redemption and/or reinvestment.
HOW TO SELL SHARES
You can arrange to take money out of your share account(s) at any time by
selling (redeeming) some or all of your shares. Your shares will be sold at the
next share price calculated after your order is received in good form and
accepted. Share price is normally calculated at 4:00 p.m. Eastern time.
TO SELL SHARES IN AN ACCOUNT, you may use any of the methods described below.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR SHARES, leave at least $1,000
worth of shares in the account to keep it open.
TO SELL SHARES BY WIRE OR TELEPHONE, you will need to sign up for these
services in advance by completing the appropriate sections in the Application.
31
<PAGE>
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. Signature guarantees are
designed to protect you and the Company from fraud. Your request to sell shares
must be made in writing and include a signature guarantee if any of the
following situations apply:
- You request in writing to redeem more than $50,000 worth of shares,
- Your account registration has changed within the last 30 days,
- The check is being mailed to a different address than the one on our
account (record address),
- The check is being made payable to someone other than the account owner, or
- The redemption proceeds are being transferred to an Account with a
different registration.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange or
association, clearing agency or savings association. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
SELLING SHARES IN WRITING BY MAIL
Write a "letter of instruction" with:
- Your name,
- The Account's name,
- Your account number,
- The dollar amount or number of shares to be redeemed, and
- Any other applicable requirements listed in the table below.
- Mail the letter of instruction to the Company's transfer agent at:
Connecticut Mutual Investment Accounts, Inc.
P.O. Box 419694
Kansas City, Missouri 64179-0948
32
<PAGE>
Unless otherwise instructed, the Company will send a check to the record
address.
<TABLE>
<CAPTION>
SELLING SHARES ACCOUNT TYPE SPECIAL REQUIREMENTS
- ------------------ ------------------------------------------- -------------------------------------------
<S> <C> <C>
BY MAIL Individual, Joint Tenant Sole - The letter of instruction must be signed
Proprietorship, UGMA, UTMA by all persons required to sign for
transactions, exactly as their names
appear on the account.
Trust - The trustee must sign the letter
indicating capacity as trustee. If the
trustee's name is not in the account
registration, provide a copy of the trust
document certified within the last 60
days.
Business or Organization - At least one person authorized by
corporate resolution to act on the
account must sign the letter.
- Include a corporate resolution with
corporate seal or a signature guarantee.
Executor, Administrator, Conservator, - Call 1-800-322-CMIA for instructions.
Guardian
- ------------------------------------------------------------------------------------------------------------
BY PHONE All account types except retirement - Minimum request: $500, unless closing an
1-800-322-CMIA account.
All account types - You may exchange to other Accounts if
both accounts are registered with the
same name(s), address and taxpayer ID
number.
- ------------------------------------------------------------------------------------------------------------
BY WIRE All account types - Minimum wire: $1,000.
- A voided check and your signature, which
must be signature guaranteed, must
accompany a wire redemption request
unless you elected Telephone Redemption
by wire on the initial application.
- Your wire redemption request must be
received before 4:00 p.m. Eastern time
for money to be wired on the next
business day.
</TABLE>
33
<PAGE>
INVESTOR SERVICES
Connecticut Mutual provides a variety of services to help you manage your
account.
24-HOUR SERVICE
Call 1-800-322-CMIA (select option "1") for the following automated services.
After normal business hours, please leave a message and someone will return your
call during normal business hours.
- Account balance
- Last distribution
- Prices
- Account distributions
- Service representative
- Duplicate statement
- Change PIN (Personal Identification Number)
- Duplicate tax forms
INFORMATION SERVICES
TELEPHONE REPRESENTATIVES are available during normal business hours to
provide the information and services you need.
STATEMENTS AND REPORTS sent to you include the following:
- Confirmation statements (after every transaction, except reinvestments,
automatic investments and automatic payroll investments, that affects your
account balance or your account registration)
- Quarterly consolidated account statements which summarize all account
activity year-to-date
- Financial reports (every six months)
Call 1-800-322-CMIA (select option "2") if you need additional copies of
financial reports or historical account information.
INVESTOR SERVICES
One easy way to pursue your financial goals is to invest money regularly. The
Company offers convenient services that let you transfer money into your
account, or between accounts, automatically. While regular investment plans do
not guarantee a profit and will not protect you against loss in a declining
market, they can be an excellent way to invest for retirement, a home,
educational expenses, and other long-term financial goals. Certain restrictions
apply. Call 1-800-322-CMIA for more information.
34
<PAGE>
AUTOMATIC INVESTMENT PLAN lets you make regular monthly investments through
an automatic withdrawal from your bank account ($100 minimum per Account). Forms
are available to initiate this program from your registered representative, or
by calling 1-800-322-CMIA.
DOLLAR COST AVERAGING (DCA) INVESTMENT PROGRAMS let you set up monthly
exchanges in amounts of $100 or more from one Account to any other Account.
Sales charges may apply. Use of the DCA PROGRAM permits the purchase of shares
of an Account on a scheduled basis which disregards fluctuations in net asset
value. Dollar cost averaging does not assure a profit and does not protect
against loss in declining markets. Since the DCA PROGRAM involves continuous
investment in securities regardless of the fluctuation of price levels of such
securities, you should consider your financial ability to continue your
purchases through periods of low price levels before deciding to invest this
way.
AUTOMATIC DIVIDEND DIVERSIFICATION (ADD) lets you automatically reinvest
dividends and capital gain distributions paid by one Account into shares of
another Account. The number of shares reinvested will be determined using the
price in effect for the receiving Account on the dividend payment date for the
Account whose dividend is to be invested. Sales charges may apply.
EXCHANGE PRIVILEGE. You may exchange your shares of an Account for shares of
any other account in the Connecticut Mutual Family of Accounts by writing to
NFDS or calling 1-800-322-CMIA. To obtain a current prospectus for other
accounts, please call 1-800-322-CMIA (select option "3"). You should consider
the differences in investment objectives and expenses of an account as described
in its prospectus before making an exchange. The Account you are exchanging into
must be registered for sale in your state.
Exchanges are taxable transactions and may be subject to special tax rules
about which you should consult your own tax adviser. For complete policies and
restrictions governing exchanges, including circumstances under which a
shareholder's exchange privilege may be suspended or revoked, see "Shareholder
and Account Policies -- Exchange Restrictions."
SYSTEMATIC WITHDRAWAL PLANS let you set up monthly redemptions from any
account with a value of $10,000 or more. You may direct the Company to make
regular payments in fixed dollar amounts of $50 or more, or in an amount equal
to the value of a fixed number of shares. If these payments are to go to someone
other than the registered owner(s) of the account, a signature guarantee is
required on the SYSTEMATIC WITHDRAWAL PLAN application. The Company reserves the
right to institute a charge for this service.
Maintaining a SYSTEMATIC WITHDRAWAL PLAN at the same time regular additional
investments are being made into any Account is not recommended because a sales
charge will be imposed on the new shares at the same time shares are being
redeemed to make the periodic payments under the SYSTEMATIC WITHDRAWAL PLAN.
The Company may amend or terminate the SYSTEMATIC WITHDRAWAL PLAN on 30 days'
prior written notice to any participating shareholders.
35
<PAGE>
SHAREHOLDER AND ACCOUNT POLICIES
TRANSACTION DETAILS
THE COMPANY IS OPEN FOR BUSINESS each day that the New York Stock Exchange
(NYSE) is open. The Company normally calculates an Account's net asset value as
of the close of business of the NYSE, normally 4:00 p.m. Eastern time.
AN ACCOUNT'S NAV is the value of a single share. The NAV is computed by
adding the value of the Account's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding. Because an Account invests substantially all of its assets
in its corresponding Portfolio, an Account's NAV will reflect the value of its
interest in that Portfolio (which, in turn, reflects the underlying value of the
Portfolio's assets and liabilities).
A PORTFOLIO'S NAV is computed by subtracting the liabilities of the Portfolio
from the value of its total assets. Because the market for municipal obligations
is a dealer market with no central trading location or continuous quotation,
municipal obligations generally are valued on the basis of valuations furnished
by a pricing service. The pricing service uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities, various relationships between securities and yield to
maturity in determining value. Taxable obligations for which price quotations
are readily available normally will be valued at the mean between the latest
available bid and asked prices. Other assets are valued at fair value using
methods determined in good faith by a Portfolio's Trustees.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that
your Social Security or other taxpayer identification number is correct and that
you are not subject to 31% backup withholding for failing to report income to
the IRS. If you are subject to backup withholding, the IRS can require the
Company to withhold 31% of your taxable distributions and the proceeds of
redemptions (including exchanges).
YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Note that the Company will
not be responsible for any losses resulting from unauthorized transactions if it
follows reasonable procedures designed to verify the identity of the caller.
Telephone representatives will request personalized security codes or other
information and will also record calls. You should verify the accuracy of your
confirmation statements immediately after you receive them. IF YOU DO NOT WANT
THE ABILITY TO REDEEM AND EXCHANGE BY TELEPHONE, CALL 1-800-322-CMIA FOR
INSTRUCTIONS.
IF YOU ARE UNABLE TO REACH THE COMPANY BY PHONE (for example, during periods
of unusual market activity), consider placing your order by mail or by overnight
mail.
EACH ACCOUNT RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a
period of time. Each Account also reserves the right to reject any specific
purchase order, including certain purchases by exchange. See "Exchange
Restrictions." Purchase orders may be refused if, in the Company's opinion, they
are of a size that would disrupt management of an Account.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the
next offering price calculated after your order is received and accepted. Note
the following:
36
<PAGE>
- All of your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks. You may not purchase shares with a third party
check.
- If your check does not clear, your purchase will be cancelled and you
could be liable for any losses or fees the Account or its transfer agent
has incurred.
TO AVOID THE COLLECTION PERIOD associated with checks, consider buying shares
by bank wire, U.S. Postal money order, U.S. Treasury check, Federal Reserve
check, or direct deposit instead.
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next
NAV calculated after your request is received and accepted. Note the following:
- Normally, redemption proceeds will be mailed to you on the next business
day, but if making immediate payment could adversely affect an Account,
it may take up to seven days to pay you.
- As mentioned above, an Account may hold payment on redemptions until it
is reasonably satisfied that investments made by check have been
collected, which can take up to 15 calendar days.
- Redemptions may be suspended or payment dates postponed when the NYSE is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
The Company's Board of Directors reserves the right to close your account if
it has a current net asset value of less than $1,000 by redeeming all remaining
shares in your account. No such redemption will be effected unless you have been
given at least 60 days' notice and your account has existed at least 24 months.
EXCHANGE RESTRICTIONS
As a shareholder, you have the privilege of exchanging shares of an Account
for shares of any other account in the Connecticut Mutual Family of Accounts.
However, you should note the following:
- The Account you are exchanging into must be registered for sale in your
state.
- You may only exchange between accounts that are registered in the same
name, address and taxpayer identification number.
- The minimum amount you may exchange from one Account into another is
$500 or the total value of the Account if less than $500.
- If you wish to make more than 12 exchanges in a 12-month period, an
exchange fee of .75% of the net asset value of the shares redeemed will
be charged. Exchanges made pursuant to the DCA Program are not subject
to this fee.
37
<PAGE>
- You may exchange your shares for shares of any Account in the
Connecticut Mutual Family of Accounts without the imposition of a sales
charge at the time of the exchange.
- Exchanges may have tax consequences for you. Consult your tax adviser
for advice.
- An Account reserves the right to refuse exchange purchases by any person
or group if, in the Company's judgment, an Account would be unable to
invest the money effectively in accordance with its investment objective
and policies, or would otherwise potentially be adversely affected.
- Your exchanges may be restricted or refused if an Account receives or
anticipates simultaneous orders affecting significant portions of the
Account's assets. In particular, a pattern of exchanges that coincides
with a "market timing" strategy may be disruptive to the Account.
- Although an Account will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
Each Account reserves the right to terminate or modify the exchange
privilege in the future.
38
<PAGE>
(This page has been left blank intentionally.)
39
<PAGE>
CMIA SHAREHOLDER SERVICES AGENT
National Financial Data Services
P.O. Box 419694
Kansas City, Missouri 64179-0948
1-800-322-CMIA
YOUR REPRESENTATIVE IS:
Principal Underwriter
G.R. Phelps & Co., Inc.
140 Garden Street
Hartford, Connecticut 06154
[LOGO] CONNECTICUT
MUTUAL
The Blue Chip Company
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Public Accountants
Arthur Andersen, LLP
One Financial Plaza
Hartford, Connecticut 06103
C M I A
CONNECTICUT MUTUAL INVESTMENT ACCOUNTS, INC.
Prospectus dated March 31, 1995
P R O S P E C T U S
&
A P P L I C A T I O N
[LOGO] CONNECTICUT
MUTUAL
The Blue Chip Company
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS+
MOODY'S INVESTORS SERVICE, INC.
MUNICIPAL BONDS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
- -------------------
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Prospectus for the securities listed. Ratings
are generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of a Portfolio's
fiscal year end.
A-1
<PAGE>
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
MUNICIPAL SHORT-TERM OBLIGATIONS
RATINGS: Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade or (MIG). Such rating recognizes the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk, long-
term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand feature,
variable rate demand obligation (VRDO). Such ratings will be designated as VMIG,
SG or if the demand feature is not rated, NR. A short-term rating on issues with
demand features are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Additionally, investors should be
alert to the fact that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the event the
demand is not met.
A-2
<PAGE>
COMMERCIAL PAPER
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.
Issuers (or supporting institutions) rated PRIME-1 or P-1 have a superior
ability for repayment of senior short-term debt obligations. Prime-I or P-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2
Issuers (or supporting institutions) rated PRIME-2 (P-2) have a strong
ability for repayment of senior short-term debt 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.
PRIME-3
Issuers (or supporting institutions) rated PRIME-3 (P-3) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions 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.
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A-3
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
A-4
<PAGE>
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "P" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is insured
by the Federal Deposit Insurance Corp. and interest is adequately
collateralized. In the case of certificates of deposit the letter "L" indicates
that the deposit, combined with other deposits, being held in the same right and
capacity will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MUNICIPAL NOTES
S&P's note ratings reflect the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Sources of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
A-5
<PAGE>
COMMERCIAL PAPER
S&P's commercial paper ratings are a current assessment of the likelihood of
timely payment of debts considered short-term in the relevant market.
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely safe
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 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 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 had not expired, unless Standard & Poor's believes
that such payments will be made during such grace period.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1 +".
A: Bonds considered to be investment grade and of high credit quality. The
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
A-6
<PAGE>
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified that could assist
the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in actual or imminent default of interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these bonds,
and "D" represents the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a credit
within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a Specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1 +: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the "F-1 +" and "F-1" categories.
A-7
<PAGE>
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
NOTES: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. A Portfolio is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-8
<PAGE>
APPENDIX B
NATIONAL MUNICIPALS PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
MUNICIPAL BONDS
MOODY'S RATING
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
Aaa................................... 17.10
Aa.................................... 5.08
Aa2................................... 3.29
A1.................................... 4.53
A..................................... 2.64
A2.................................... 0.97
Baa1.................................. 7.92
Baa................................... 7.00
Baa2.................................. 3.88
Baa3.................................. 3.95
Ba1................................... 4.48
Ba.................................... 0.20
Ba3................................... 0.45
B2.................................... 0.55
B3.................................... 0.97
Unrated............................... 34.59
Cash & Equiv.......................... 2.40
----------
100.00%
</TABLE>
MUNICIPAL BONDS
S&P'S RATING
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
AAA................................... 17.17
AA+................................... 0.13
AA.................................... 6.08
AA-................................... 4.63
A+.................................... 2.41
A..................................... 2.59
A-.................................... 2.23
BBB+.................................. 3.74
BBB................................... 8.05
BBB-.................................. 3.00
BB+................................... 4.09
BB.................................... 8.92
BB-................................... 0.97
B..................................... 0.45
Unrated............................... 33.14
Cash & Equiv.......................... 2.40
----------
100.00%
</TABLE>
The chart above indicates the weighted average composition of the securities
held by the Portfolio for the period ended September 30, 1994, with the debt
securities rated by Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group separated into the indicated categories. The weighted average
indicated above was calculated on a dollar weighted basis and was computed as at
the end of each month during the fiscal year. The chart does not necessarily
indicate what the composition of the securities held by the Portfolio will be in
the current and subsequent fiscal years.
For a description of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group ratings of municipal bonds, see the Appendix to the Statement of
Additional Information.
B-1
<PAGE>
APPENDIX C
SUMMARIES OF RECENT ECONOMIC DEVELOPMENTS IN
CALIFORNIA, MASSACHUSETTS, NEW YORK, OHIO AND THE TERRITORIES
Because each State Portfolio will normally invest at least 65% of its assets
in the obligations of its corresponding State, it is susceptible to factors
affecting that State. Each Portfolio (except the California Portfolio) may also
invest up to 5% of its net assets in obligations issued by the governments of
Guam and the U.S. Virgin Islands and up to 35% of its assets in obligations
issued by the government of Puerto Rico. The California Portfolio will not
invest more than 5% of its net assets in the obligations of each of the U.S.
Virgin Islands and Guam and, under normal circumstances, the California
Portfolio will not invest in the aggregate more than 20% of its assets in the
obligations of the Territories. Set forth below is certain economic and tax
information concerning the States in which the Portfolios invest and the
Territories.
CALIFORNIA. California has experienced severe economic and fiscal stress
over the past four years. The recession that began in the U.S. in 1990 marked
the start of the deepest recession in California since the Great Depression.
Between 1990 and 1993, California lost 3% of its total employment base and
nearly 16% of higher paying manufacturing jobs. This was during a period when
population increased 6%. The unemployment rate in California was 9.1% in 1992
and 9.2% in 1993, well above the U.S. rates of 7.4% and 6.8% for the same
periods, respectively. California's economic weakness has continued into 1994;
unemployment was 7.7% in November, compared to a U.S. rate of 5.6%.
The weak economy has seriously undermined the government's ability to
accurately estimate tax revenues and has increased social service expenditures
for recession-related welfare case loads. In addition, the continued influx of
illegal immigrants has strained the State's welfare and health care systems. The
result of these various problems is a $2 billion accumulated budget deficit and
a heavy reliance on short-term borrowing for day-to-day operations. Short-term
borrowing increased from 7.8% of general fund receipts in 1990 to 12.4% in 1992
to a projected 16% in 1995. In July, 1994, the State issued $7 billion in
short-term debt, an unprecedented amount for a state.
The $2 billion budget deficit built up during the 1991 and 1992 fiscal years
and was not adequately addressed during the 1993 or 1994 fiscal years, despite a
Deficit Retirement and Reduction Plan put in place in June, 1993. The budget for
fiscal year 1995 (which commenced on July 1, 1994) includes general fund
expenditures of $40.9 billion, a 4.2% increase over 1993-94, and general fund
revenues of $41.9 billion, a 5.2% increase. A revised Deficit Retirement and
Reduction Plan was adopted which anticipated the elimination of the deficit by
April, 1996. Key to this revised plan is the assumed receipt of $2.8 billion in
Federal aid from the Federal government to offset the mounting costs associated
with illegal immigrants. As this money is in no way assured, the budget includes
a "trigger" mechanism that would require automatic spending cuts should actual
cash flow deviate significantly from projections. There can be no assurances
that bonds, some of which may be held by the Portfolio, issued by California
entities would not be adversely affected should this "trigger" be used.
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<PAGE>
On January 17, 1994, a major earthquake struck the Los Angeles area causing
significant property damage. Preliminary estimates of total property damage
approximate $15 billion. The Federal government has approved $9.5 billion for
earthquake relief. The Governor has estimated that the State will have to pay
approximately $1.9 billion for relief not otherwise covered by the Federal aid.
The Governor has proposed to cover $1.05 billion of relief costs from a general
obligation bond issue, but that proposal was rejected by California voters in
June 1994. The Governor subsequently announced that funds earmarked for other
projects would be used for earthquake relief.
On December 7, 1994, Orange County, California (the "County"), together with
its pooled investment fund (the "Fund") filed for protection under Chapter 9 of
the Federal Bankruptcy Code, after reports that the Fund had suffered
significant market losses in its investments caused a liquidity crisis for the
Fund and the County. More than 180 other public entities, most but not all
located in the County, were also depositors in the Fund. As of December 13,
1994, the County estimated the Fund's loss at about $2 billion, or 27% or its
initial deposits of around $7.4 billion. These losses could increase as the
County sells investments to restructure the Fund, or if interest rates rise.
Many of the entities which kept moneys in the Fund, including the County, are
facing cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. The County and some of these
entities have, and others may in the future, default in payment of their
obligations. Moody's and S&P have suspended, reduced to below investment grade
levels, or placed on "Credit Watch" various securities of the County and the
entities participating in the Fund. As of December 1994, the Portfolio did not
hold any direct obligations of the County. However, the Portfolio did hold bonds
of some of the governmental units that had money invested with the County; the
impact of the loss of access to these funds, the loss of expected investment
earnings and the potential loss of some of the principal invested is not known
at this point. There can be no assurances that these holdings will maintain
their current ratings and/or liquidity in the market.
Although the State of California has no obligation with respect to any
obligations or securities of the County or any of the other participating
entities, under existing legal precedents, the State may be obligated to ensure
that school districts have sufficient funds to operate. Longer term, this
financial crisis could have an adverse impact on the economic recovery that has
only recently taken hold in Southern California.
California voters have approved a series of amendments to the California
State constitution which have imposed certain limits on the taxing and spending
powers of the State and local governments. While the State legislature has, in
the past, enacted legislation designed to assist California issuers in meeting
their debt service obligations, other laws limiting the State's authority to
provide financial assistance to localities have also been enacted. Because of
the uncertain impact of such constitutional amendments and statutes, the
possible inconsistencies in their respective terms and the impossibility of
reducing the level of future appropriations and applicability of related statute
to such questions, it is not currently possible to assess the impact of such
legislation and policies on the ability of California issuers to pay interest or
repay principal on their obligations.
As of the date of this Prospectus, as a result of the significant economic
and fiscal problems described above, the State's debt has been downgraded by all
three rating agencies from Aa to A-1 by Moody's, from A+ to A by S&P, and from
AA to A by Fitch. There can be no assurance that the economic
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<PAGE>
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political or
other conditions. California's political subdivisions may have different ratings
which are unrelated to those of the State.
MASSACHUSETTS. In recent years, the Commonwealth has experienced a
significant economic slowdown, and has experienced shifts in employment from
labor-intensive manufacturing industries to technology and service-based
industries. The unemployment rate was 6.4% as of October 1994, while the
national unemployment rate was 5.8%.
Effective July 1, 1990, limitations were placed on the amount of direct
bonds the Commonwealth could have outstanding in a fiscal year, and the amount
of the total appropriation in any fiscal year that may be expended for debt
service on general obligation debt of the Commonwealth (other than certain debt
incurred to pay the fiscal 1990 deficit and certain Medicaid reimbursement
payments for prior years) was limited to 10%. In addition, the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of debt service, is limited. Property taxes are virtually
the only source of tax revenues available to cities and towns to meet local
costs. This limitation on cities and towns to generate revenues could create a
demand for increases in state-funded local aid. The recent difficulties
experienced by the Commonwealth have resulted in a substantial reduction in
local aid from the Commonwealth, which may create financial difficulties for
certain municipalities.
General obligations of Massachusetts are rated A, A+ and A+ by Moody's, S&P
and Fitch, respectively. There can be no assurance that the economic conditions
on which these ratings are based will continue or that particular bond issues
may not be adversely affected by changes in economic, political or other
conditions.
NEW YORK. New York is the second most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a comparatively small share of the
nation's farming and mining activity. The State's general credit standing has
historically reflected its diverse and substantial economic base. However, as
the result of a recession ending in the first quarter of 1993, 560,000 jobs were
lost statewide (equal to 6.7% of the peak employment figure for 1989). Since the
first quarter of 1993, 100,130 jobs have been added, with nearly half of such
jobs occurring in the first quarter of 1994. In fiscal year 1993, however, the
State began the process of financial reform. The 1993 and 1994 financial plans
exceeded expectations and produced operating surpluses in both years.
The fiscal stability of New York State is related, at least in part, to the
fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State. In some cases, the State has had to
provide special assistance in recent years to enable such agencies, authorities
and localities to meet their financial obligations and, in some cases, to
prevent or cure defaults. To the extent State agencies and local governments
require State assistance to meet their financial obligations, the ability of the
State to meet its own obligations as they become due or to obtain additional
financing could be adversely affected.
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<PAGE>
Like the State, New York City has experienced financial difficulties in
recent years and continues to experience such difficulties owing, in part, to
lower than anticipated revenues. Because New York City taxes comprise 40% of the
State's tax base, the City's difficulties adversely affect the State. Both the
State and the City will be constrained in addressing future fiscal problems by
their high current level of taxes.
In June 1994, the Governor approved the 1994-1995 budget, which reduces
taxes by $476 million in the 1994-1995 fiscal year and by more than $1.6 billion
when fully implemented. A reduction in both State and City personal income taxes
scheduled to take effect in 1994 has been deferred for one year as a part of the
1994-1995 budget.
Constitutional challenges to State laws have limited the amount of taxes
which political subdivisions can impose on real property, which may have an
adverse effect on the ability of issuers to pay obligations supported by such
taxes. A variety of additional court actions have been brought against the State
and certain agencies and municipalities relating to financings, amount of real
estate tax, use of tax revenues and other matters which could adversely affect
the ability of the State or such agencies or municipalities to pay their
obligations.
New York's general obligations are rated A, A- and A+ by Moody's, S&P and
Fitch, respectively. S&P currently assesses the rating outlook for New York
obligations as "positive." New York City obligations are rated Baa1, A- and A-
by Moody's, S&P and Fitch, respectively. On January 17, 1995, S&P placed the
City's general obligation bonds on CreditWatch with negative implications as the
result of plans by the City to refund some of its debt to provide budget savings
in its 1995 fiscal year. S&P stated that, by April 1995, if the City continues
to use budget devices such as debt refundings or fails to get ongoing budget
relief from the State, S&P would lower the rating on New York City general
obligation debt to the "BBB" category. Any such downward revision could have an
adverse effect on the obligations held by the New York Portfolio.
OHIO. The State's economy is reliant in part on durable goods manufacturing,
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, economic activity in Ohio tends to be more
cyclical than in some other states and in the nation as a whole. Unemployment
declined from 6.5% to 4.2% between November 1993 and November 1994. The national
unemployment rate in November 1994 was 5.6%. In fiscal 1993, a projected $520
million budget gap was addressed through tax increases and appropriation cuts.
The fiscal year 1994 budget was balanced, and the State's General Revenue Fund
had an ending fund balance of $560 million.
General obligations of Ohio are rated Aa and AA by S&P and Moody's,
respectively (except that highway obligations are rated Aaa by S&P). Fitch does
not currently rate the State's general obligations.
PUERTO RICO, GUAM AND THE U.S. VIRGIN ISLANDS. Currently, S&P rates Puerto
Rico general obligations debt A, while Moody's rates it Baa1; these ratings have
been in place since 1956 and 1976, respectively. Reliance on nonrecurring
revenues and economic weakness led S&P to change its outlook from stable to
negative. A Portfolio may be adversely affected by local political and economic
conditions and developments within Puerto Rico affecting the issuers of such
obligations. The economy of Puerto Rico is dominated by the manufacturing and
service sectors. Although the economy of Puerto Rico expanded significantly from
fiscal 1984 through fiscal 1990, the rate of this expansion slowed during fiscal
years 1991, 1992 and 1993. Growth in fiscal 1994 will depend on several factors,
including the state of the U.S.
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<PAGE>
economy and the relative stability in the price of oil, the exchange rate of the
U.S. dollar and the cost of borrowing. Although the Puerto Rico unemployment
rate has declined substantially since 1985, the seasonally adjusted unemployment
rate for August 1994 was approximately 14.5%. The North American Free Trade
Agreement (NAFTA), which became effective January 1, 1994, could lead to the
loss of Puerto Rico's lower salaried or labor intensive jobs to Mexico.
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